SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended June 30, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the transition period from to .
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Commission file number 1-12259
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TIME WARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3527249
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and
telephone number, including area code,
of registrant's principal executive
offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - $.01 par value 1,179,328,870
Series LMCN-V Common Stock - $.01 par value 114,123,884
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Description of Class Shares Outstanding
as of July 31, 1999
<PAGE>
TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO FORM 10-Q
Page
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Time
Warner TWE
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PART I. FINANCIAL INFORMATION
Management's discussion and analysis of results of
operations and financial condition.................... 1 43
Consolidated balance sheet at June 30, 1999 and
December 31, 1998..................................... 20 54
Consolidated statement of operations for the three
and six months ended June 30, 1999 and 1998........... 21 55
Consolidated statement of cash flows for the six months
ended June 30, 1999 and 1998.......................... 22 56
Consolidated statement of shareholders' equity and
partnership capital................................... 23 57
Notes to consolidated financial statements............ 24 58
Supplementary information............................. 35
PART II. OTHER INFORMATION................................ 64
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Description of Business
Time Warner Inc. ("Time Warner" or the "Company"), together with its
consolidated and unconsolidated subsidiaries, is the world's largest media and
entertainment company. Time Warner's principal business objective is to create
and distribute branded information and entertainment copyrights throughout the
world. Time Warner classifies its business interests into four fundamental
areas: Cable Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; Entertainment, consisting
principally of interests in recorded music and music publishing, filmed
entertainment, television production and television broadcasting; and Cable,
consisting principally of interests in cable television systems.
Investment in TWE
A majority of Time Warner's interests in filmed entertainment, television
production, television broadcasting and cable television systems, and a portion
of its interests in cable television programming, are held through Time Warner
Entertainment Company, L.P. ("TWE"). Time Warner owns general and limited
partnership interests in TWE consisting of 74.49% of the pro rata priority
capital ("Series A Capital") and residual equity capital ("Residual Capital"),
and 100% of the junior priority capital ("Series B Capital"). The remaining
25.51% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by a subsidiary of MediaOne Group, Inc. ("MediaOne").
Time Warner has not consolidated TWE and certain related companies (the
"Entertainment Group") for financial reporting purposes because of certain
limited partnership approval rights held by MediaOne related to TWE's cable
television business.
At the time of this filing, MediaOne had agreed to be acquired by AT&T
Corp. ("AT&T"). On August 3, 1999, TWE received a notice from MediaOne
concerning the termination of its covenant not to compete with TWE. As a result
of the termination notice and the operation of the partnership agreement
governing TWE, MediaOne's rights to participate in the management of TWE's
businesses have terminated immediately and irrevocably. MediaOne has retained
only certain protective governance rights pertaining to certain limited matters
affecting TWE as a whole. Because of this significant reduction in MediaOne's
rights, Time Warner will consolidate TWE's operating results, cash flows and
financial position for accounting purposes beginning no later than the filing of
the third quarter Form 10-Q.
In addition, in connection with the proposed acquisition of MediaOne by
AT&T, Time Warner and AT&T are engaged in discussions concerning the overall
relationship of the companies following that acquisition. Among the subjects
included in those discussions are the structure of TWE, the structure of
AT&T/MediaOne's investment in TWE, as well as potential changes to the proposed
cable telephony joint venture discussed on page F-17 of Time Warner's Annual
Report on Form 10-K for the year ended December 31, 1998.
The proposed acquisition of MediaOne by AT&T is subject to customary
closing conditions, including regulatory approvals. Accordingly, there is no
assurance that it will occur.
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Columbia House-CDnow Merger
In July 1999, Time Warner announced an agreement with Sony Corporation
of America ("Sony") to merge their jointly owned Columbia House operations with
CDnow, Inc. ("CDnow"), a leading music and video e-commerce company. Time Warner
and Sony will each own 37% of the combined entity and the existing CDnow
shareholders will own 26% of the combined entity. This investment is expected to
be accounted for using the equity method of accounting.
With a combined reach of nearly 10% of all Internet users(1), the
combined entity is expected to create a significant platform for Time Warner's
music and video e-commerce initiatives and position the Company for incremental
growth opportunities relating to online sales of music and video product and the
digital distribution of music. In addition, management believes that the use of
Columbia House's existing active club members and the cross-promotional
opportunities to be offered by Time Warner and Sony will lower customer
acquisition costs and increase the combined entity's customer base.
As part of this transaction, Time Warner and Sony each have made
certain strategic and financial commitments to the combined entity. Among the
strategic commitments, which have a term of five years and are subject to
certain conditions and qualifications, Time Warner and Sony will provide the
combined entity with opportunities to purchase advertising and promotional
support from their diverse media properties. In addition, as part of their
commitment to make the combined entity their primary vehicle to pursue the
packaged music e-commerce business, Time Warner and Sony will link their own
music-controlled web sites in the U.S. and Canada to the combined entity's web
sites. This will enable consumers to sample content from their favorite artists
and genres and then immediately make a purchase. Time Warner and Sony have also
each agreed to guarantee, for a three-year period, one-half of the borrowings
under a new credit facility to be entered into by the combined entity upon the
closing of the merger. The credit facility is expected to provide for up to $450
million of borrowings, which will be used to support the ongoing growth and
capital needs of the business and to refinance approximately $300 million of
existing debt and liabilities of Columbia House.
The merger is expected to close by the end of 1999 and is subject to
customary closing conditions, including regulatory approvals and approval by
existing CDnow shareholders. There can be no assurance that such approvals will
be obtained.
Use of EBITA
Time Warner evaluates operating performance based on several factors,
including its primary financial measure of operating income before noncash
amortization of intangible assets ("EBITA"). Consistent with management's
financial focus on controlling capital spending, EBITA measures operating
performance after charges for depreciation. In addition, EBITA eliminates the
uneven effect across all business segments of considerable amounts of noncash
amortization of intangible assets recognized in business combinations accounted
for by the purchase method. These business combinations, including the $14
billion acquisition of Warner Communications Inc. in 1989, the $6.2 billion
acquisition of Turner Broadcasting System, Inc. ("TBS") in 1996 and the $2.3
billion of cable
(1) As measured by MediaMetrix as of June 1999.
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acquisitions in 1996 and 1995, created over $25 billion of intangible assets
that generally are being amortized over a twenty to forty year period. The
exclusion of noncash amortization charges also is consistent with management's
belief that Time Warner's intangible assets, such as cable television and sports
franchises, music catalogues and copyrights, film and television libraries and
the goodwill associated with its brands, generally are increasing in value and
importance to Time Warner's business objective of creating, extending and
distributing recognizable brands and copyrights throughout the world. As such,
the following comparative discussion of the results of operations of Time Warner
and the Entertainment Group includes, among other factors, an analysis of
changes in business segment EBITA. However, EBITA should be considered in
addition to, not as a substitute for, operating income, net income and other
measures of financial performance reported in accordance with generally accepted
accounting principles.
Transactions Affecting Comparability of Results of Operations
As more fully described herein, the comparability of Time Warner's and
the Entertainment Group's operating results has been affected by certain
significant transactions and nonrecurring items in each period.
In 1999, these nonrecurring items consisted of (i) an approximate $215
million net pretax gain recognized by TWE in the first quarter of 1999 in
connection with the early termination and settlement of a long-term home video
distribution agreement, (ii) an approximate $115 million pretax gain recognized
by Time Warner in the second quarter of 1999 in connection with the initial
public offering of a 20% interest in Time Warner Telecom Inc. (the "Time Warner
Telecom IPO"), a competitive local exchange carrier that provides telephony
services to businesses and (iii) net pretax gains in the amount of $771 million
in the second quarter of 1999 relating to the sale or exchange of various cable
television systems and investments by Time Warner and TWE. This compares to net
pretax gains in the first half of 1998 of $84 million also relating to the sale
or exchange of cable television systems by Time Warner and TWE.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed after
excluding the effects of these significant nonrecurring gains. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of these unusual items. However, unusual items may occur in
any period. Accordingly, investors and other financial statement users
individually should consider the types of events and transactions for which
adjustments have been made.
In addition, the comparability of Time Warner's and the Entertainment
Group's Cable division results has been affected further by certain
cable-related transactions, as described more fully under the caption
"Summarized Financial Information of the Entertainment Group" in Note 2 to the
accompanying consolidated financial statements. While these transactions had a
significant effect on the comparability of the Cable division's EBITA and
operating income principally due to the deconsolidation of the related
operations, they did not have a significant effect on the comparability of Time
Warner's net income and per share results.
Finally, per common share amounts have been restated to give effect to
a two-for-one common stock split that occurred on December 15, 1998.
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RESULTS OF OPERATIONS
EBITA and operating income are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
EBITA Operating Income EBITA Operating Income
----- ---------------- ----- ----------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(millions)
Time Warner:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Publishing............................... $ 196 $176 $ 186 $168 $ 290 $261 $ 270 $244
Music.................................... 101 96 31 25 203 189 66 50
Cable Networks-TBS....................... 235 198 184 148 419 351 318 251
Filmed Entertainment-TBS................. 71 38 53 18 100 23 63 (17)
Cable(1)................................. 81 74 39 26 147 148 61 46
Intersegment elimination................. 2 (1) 2 (1) 12 (20) 12 (20)
----- ---- ----- --- ----- ---- ----- -----
Total.................................... $ 686 $581 $ 495 $384 $1,171 $952 $ 790 $554
===== ==== ===== ==== ====== ==== ===== ====
Entertainment Group:
Filmed Entertainment-Warner Bros.(2)..... $ 132 $122 $ 101 $ 89 $ 478 $ 241 $ 417 $175
Broadcasting-The WB Network.............. (30) (23) (31) (24) (71) (61) (73) (63)
Cable Networks-HBO....................... 131 113 131 113 256 222 256 222
Cable(3)................................. 1,099 374 1,011 278 1,436 681 1,263 491
------ ---- ------ ---- ------ ---- ------ ----
Total.................................... $1,332 $586 $1,212 $456 $2,099 $1,083 $1,863 $825
====== ==== ====== ==== ====== ====== ====== ====
</TABLE>
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(1) Includes net pretax gains relating to the sale or exchange of certain cable
television systems and investments of $11 million in the second quarter
of 1999.
(2) Includes a net pretax gain of approximately $215 million recognized in the
first quarter of 1999 in connection with the early termination
and settlement of a long-term home video distribution agreement.
(3) Includes net pretax gains relating to the sale or exchange of certain cable
television systems and investments of $760 million in the second quarter
of 1999 and $70 million in the second quarter of 1998. Similarly,
six-month results include net pretax gains of $760 million in
1999 and $84 million in 1998.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Time Warner had revenues of $3.574 billion and net income of $593
million for the three months ended June 30, 1999, compared to revenues of $3.672
billion and net income of $101 million for the three months ended June 30, 1998.
After preferred dividend requirements, Time Warner had basic net income per
common share of $.46 in 1999, compared to $.02 per common share in 1998. On a
diluted basis, net income per common share was $.43 in 1999, compared to $.02
per common share in 1998.
As previously described, the comparability of Time Warner's and the
Entertainment Group's operating results for 1999 and 1998 has been affected by
certain significant, nonrecurring items recognized in each period. These
nonrecurring items consisted of approximately $886 million of net pretax gains
in 1999, compared to $70 million of net pretax gains in 1998. The aggregate net
effect of these items was an increase in
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basic net income per common share of $.34 in 1999, compared to an increase of
$.03 in 1998. On a diluted basis, the net effect was an increase of $.31 per
common share in 1999, compared to an increase of $.03 in 1998.
Time Warner's net income increased to $593 million in 1999, compared to
$101 million in 1998. However, excluding the significant effect of the
nonrecurring items referred to earlier, net income increased by $94 million to
$163 million in 1999 from $69 million in 1998. As discussed more fully below,
this improvement principally resulted from an overall increase in Time Warner's
business segment operating income and higher income from Time Warner's equity in
the pretax income of the Entertainment Group, offset in part by higher equity
losses from certain investments accounted for under the equity method of
accounting and higher income taxes due to the increase in Time Warner's income.
Similarly, excluding the effect of these nonrecurring items, normalized basic
and diluted net income per common share increased to $.12 in 1999, compared to a
net loss of $.01 per common share in 1998. In addition to the factors discussed
above, the improvement in 1999 normalized per share results reflects a $60
million reduction in preferred dividend requirements principally relating to the
redemption of Time Warner's Series M exchangeable preferred stock ("Series M
Preferred Stock") in late 1998.
Time Warner's equity in the pretax income of the Entertainment Group
was $793 million for the three months ended June 30, 1999, compared to $166
million for the three months ended June 30, 1998. The Entertainment Group had
revenues of $3.060 billion and net income of $767 million in 1999, compared to
revenues of $2.853 billion and net income of $156 million in 1998. Similarly,
excluding the portion of the nonrecurring items referred to above that was
recognized by the Entertainment Group, net income increased by $64 million to
$165 million in 1999 from $101 million in 1998. As discussed more fully below,
this improvement principally resulted from an overall increase in operating
income generated by its business segments.
The relationship between income before income taxes and income tax
expense of Time Warner is principally affected by the amortization of goodwill
and certain other financial statement expenses that are not deductible for
income tax purposes. Income tax expense of Time Warner includes all income taxes
related to its allocable share of partnership income and its equity in the
income tax expense of corporate subsidiaries of the Entertainment Group.
Time Warner
Publishing. Revenues increased to $1.153 billion, compared to $1.136
billion in the second quarter of 1998. EBITA increased to $196 million from $176
million. Operating income increased to $186 million from $168 million. Revenues
in 1999 were affected negatively by the deconsolidation of a direct-marketing
operation, which is now being accounted for under the equity method of
accounting. Excluding this change, revenues increased primarily from significant
growth in magazine advertising revenues, offset in part by lower circulation
revenues. The increase in advertising revenues was principally due to a strong
overall advertising market for most of the division's magazines, primarily led
by Sports Illustrated, In Style, Teen People, Money and Entertainment Weekly.
The decline in circulation revenues was principally due to lower newsstand sales
and lower net subscription revenues generated by third-party agencies. EBITA and
operating income increased principally as a result of the revenue gains and
increased cost savings. These increases were offset in part by lower results
from direct-marketing activities, including Book-of-the-Month Club and American
Family Enterprises ("AFE"), a 50% owned equity investee.
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Music. Revenues decreased to $828 million, compared to $905 million in
the second quarter of 1998. EBITA increased to $101 million from $96 million.
Operating income increased to $31 million from $25 million. Revenues decreased
primarily due to lower international recorded music sales and, to a lesser
extent, lower domestic recorded music sales. The revenue decline principally
related to lower sales of new releases in comparison to the prior year, which
benefited from popular releases by established artists, like Madonna and Eric
Clapton. Despite the revenue decrease, EBITA and operating income increased due
to higher results from domestic recorded music operations, which benefited from
increased cost savings, lower artist royalty costs and improved results from
joint ventures that had successful releases during the period. The improvements
in domestic recorded music operations were offset in part by lower results from
international recorded music operations relating to lower international sales.
Management expects that the revenue decline relating to lower worldwide sales
levels will continue into the third quarter of 1999, which could negatively
affect operating results.
Cable Networks-TBS. Revenues increased to $1.065 billion, compared to
$906 million in the second quarter of 1998. EBITA increased to $235 million from
$198 million. Operating income increased to $184 million from $148 million.
Revenues benefited from increases in advertising and subscription revenues. The
increase in advertising revenues was principally due to a strong overall
advertising market for most of the division's networks, including CNN, TBS
Superstation, TNT, Cartoon Network and Headline News. The increase in
subscription revenues principally related to an increase in subscriptions and
higher rates, primarily led by revenue increases at CNN, TBS Superstation, TNT
and Turner Classic Movies. EBITA and operating income increased principally as a
result of the revenue gains, offset in part by higher programming costs.
Filmed Entertainment-TBS. Revenues decreased to $337 million, compared
to $504 million in the second quarter of 1998. EBITA increased to $71 million
from $38 million. Operating income increased to $53 million from $18 million.
Revenues decreased principally as a result of fewer theatrical releases and the
absence of revenues from the sale of second-cycle broadcasting rights for
Seinfeld in 1998. Despite the decline in revenues, EBITA and operating income
increased principally due to the theatrical success of New Line Cinema's Austin
Powers-The Spy Who Shagged Me and the absence of film write-offs relating to
disappointing results for theatrical releases of Castle Rock Entertainment in
1998.
Cable. Revenues decreased to $216 million, compared to $242 million in
the second quarter of 1998. EBITA increased to $81 million from $74 million.
Operating income increased to $39 million from $26 million. The Cable division's
1999 operating results were affected by certain cable-related transactions that
occurred in 1998 (the "1998 Cable Transactions") and by net pretax gains of $11
million recognized in 1999 related to the sale or exchange of various cable
television systems and investments. The 1998 Cable Transactions principally
resulted in the deconsolidation of certain operations and are described more
fully in Note 2 to the accompanying consolidated financial statements. Excluding
the effect of the 1998 Cable Transactions, revenues increased due to growth in
basic cable subscribers, increases in basic cable rates and an increase in
advertising revenues. Similarly, excluding the effect of the 1998 Cable
Transactions and the one-time gains, EBITA and operating income increased
principally as a result of the revenue increases, offset in part by higher
programming costs.
Interest and Other, Net. Interest and other, net, decreased to an
expense of $202 million in the second quarter of 1999, compared to an expense of
$283 million in the second quarter of 1998. Interest expense increased to $236
million, compared to $222 million in the second quarter of 1998. Interest
expense increased principally
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because of higher interest costs incurred in connection with the $2.1 billion of
borrowings used to redeem the Company's Series M Preferred Stock in December
1998, offset in part by interest savings associated with the Company's 1998 debt
reduction efforts. Other income, net, was $34 million in the second quarter of
1999, compared to other expense, net, of $61 million in the second quarter of
1998. The change principally related to the recognition of an approximate $115
million pretax gain in 1999 in connection with the Time Warner Telecom IPO,
offset in part by higher losses from certain investments accounted for under the
equity method of accounting.
Entertainment Group
Filmed Entertainment-Warner Bros. Revenues increased to $1.446 billion,
compared to $1.330 billion in the second quarter of 1998. EBITA increased to
$132 million from $122 million. Operating income increased to $101 million from
$89 million. Revenues benefited from increases in worldwide theatrical and
television distribution operations, offset in part by lower revenues from
consumer products operations. Also contributing to the revenue increase were
marginally higher revenues from worldwide home video operations, which benefited
from increased sales of DVDs. EBITA and operating income benefited principally
from improved results from worldwide theatrical and television distribution
operations, offset in part by lower gains on the sale of assets and lower
results from consumer products operations.
Broadcasting-The WB Network. Revenues increased to $83 million,
compared to $61 million in the second quarter of 1998. EBITA decreased to a loss
of $30 million from a loss of $23 million. Operating losses increased to $31
million from $24 million. Revenues increased as a result of improved television
ratings and the addition of a fifth night of prime-time programming in September
1998. Operating losses increased principally because the revenue gains were more
than offset by the combination of higher programming costs associated with the
expanded programming schedule and higher start-up costs associated with The WB
Network 100+ station group, a distribution alliance for The WB Network in
smaller markets.
Cable Networks-HBO. Revenues increased to $546 million, compared to
$509 million in the second quarter of 1998. EBITA and operating income increased
to $131 million from $113 million. Revenues benefited primarily from an increase
in subscriptions. EBITA and operating income increased principally as a result
of the revenue gains, increased cost savings and higher income from Comedy
Central, a 50%-owned equity investee.
Cable. Revenues increased to $1.114 billion, compared to $1.084 billion
in the second quarter of 1998. EBITA increased to $1.099 billion from $374
million. Operating income increased to $1.011 billion from $278 million. The
Cable division's 1999 operating results were affected by the 1998 Cable
Transactions and by net pretax gains of $760 million in 1999 and $70 million in
1998 relating to the sale or exchange of various cable television systems and
investments. The 1998 Cable Transactions principally resulted in the
deconsolidation or transfer of certain operations and are described more fully
in Note 2 to the accompanying consolidated financial statements. Excluding the
effect of the 1998 Cable Transactions, revenues increased due to growth in basic
cable subscribers, increases in basic cable rates, an increase in advertising
revenues and an increase in revenues from providing Road Runner-branded,
high-speed online services. Similarly, excluding the effect of the 1998 Cable
Transactions and the one-time gains, EBITA and operating income increased
principally as a result of the revenue increases, offset in part by higher
programming costs.
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Interest and Other, Net. Interest and other, net, decreased to an
expense of $167 million in the second quarter of 1999, compared to an expense of
$183 million in the second quarter of 1998. Interest expense increased to $136
million, compared to $132 million in the second quarter of 1998, principally due
to higher average debt levels. Other expense, net, decreased to $31 million in
the second quarter of 1999, compared to $51 million in the second quarter of
1998. The decrease principally related to lower losses from certain investments
accounted for under the equity method of accounting and a gain on the sale of an
investment.
Minority Interest. Minority interest expense increased to $233 million,
compared to $82 million in the second quarter of 1998. Minority interest expense
increased primarily due to the allocation of a portion of the net pretax gains
relating to the sale or exchange of various cable television systems and
investments owned by the TWE-Advance/Newhouse Partnership ("TWE-A/N"), a
majority owned partnership of TWE, to the minority owners of that partnership.
Excluding the significant effect of the gains recognized in each period,
minority interest expense for 1999 and 1998 was comparable in amount and did not
have any significant effect on operating trends.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Time Warner had revenues of $6.840 billion and net income of $731
million for the six months ended June 30, 1999, compared to revenues of $6.809
billion and net income of $39 million for the six months ended June 30, 1998.
After preferred dividend requirements, Time Warner had basic net income per
common share of $.56 in 1999, compared to a net loss of $.10 per common share in
1998. On a diluted basis, net income per common share was $.54 in 1999, compared
to a net loss of $.10 per common share in 1998.
As previously described, the comparability of Time Warner's and the
Entertainment Group's operating results for 1999 and 1998 has been affected by
certain significant, nonrecurring items recognized in each period. These
nonrecurring items consisted of approximately $1.1 billion of net pretax gains
in 1999, compared to $84 million of net pretax gains in 1998. The aggregate net
effect of these items was an increase in basic net income per common share of
$.44 in 1999, compared to an increase of $.03 in 1998. On a diluted basis, the
net effect was an increase of $.40 per common share in 1999, compared to an
increase of $.03 in 1998.
Time Warner's net income increased to $731 million in 1999, compared to
$39 million in 1998. However, excluding the significant effect of the
nonrecurring items referred to earlier, net income increased by $172 million to
$174 million in 1999 from $2 million in 1998. This improvement principally
resulted from an overall increase in Time Warner's business segment operating
income and higher income from Time Warner's equity in the pretax income of the
Entertainment Group, offset in part by higher equity losses from certain
investments accounted for under the equity method of accounting and higher
income taxes due to the increase in Time Warner's income. Similarly, excluding
the effect of these nonrecurring items, normalized basic net income per common
share increased to $.12 in 1999, compared to a net loss of $.13 per common share
in 1998. On a diluted basis, net income per common share increased to $.14 in
1999, compared to a net loss of $.13 per common share in 1998. In addition to
the factors discussed above, the improvement in 1999 normalized per share
results reflects a $124 million reduction in preferred dividend requirements
principally relating to the redemption of Time Warner's Series M Preferred Stock
in late 1998.
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Time Warner's equity in the pretax income of the Entertainment Group
was $1.135 billion for the six months ended June 30, 1999, compared to $273
million for the six months ended June 30, 1998. The Entertainment Group had
revenues of $5.994 billion and net income of $1.079 billion in 1999, compared to
revenues of $5.765 billion and net income of $264 million in 1998. Similarly,
excluding the portion of the nonrecurring items referred to above that was
recognized by the Entertainment Group, net income increased by $62 million to
$262 million in 1999 from $200 million in 1998. As discussed more fully below,
this improvement principally resulted from an overall increase in operating
income generated by its business segments, offset in part by higher equity
losses from certain investments accounted for under the equity method of
accounting.
The relationship between income before income taxes and income tax
expense of Time Warner is principally affected by the amortization of goodwill
and certain other financial statement expenses that are not deductible for
income tax purposes. Income tax expense of Time Warner includes all income taxes
related to its allocable share of partnership income and its equity in the
income tax expense of corporate subsidiaries of the Entertainment Group.
Time Warner
Publishing. Revenues increased to $2.127 billion, compared to $2.084
billion in the first six months of 1998. EBITA increased to $290 million from
$261 million. Operating income increased to $270 million from $244 million.
Revenues in 1999 were affected negatively by the deconsolidation of a
direct-marketing operation, which is now being accounted for under the equity
method of accounting. Excluding this change, revenues increased primarily from
significant growth in magazine advertising revenues, offset in part by lower
circulation revenues. The increase in advertising revenues was principally due
to a strong overall advertising market for most of the division's magazines,
primarily led by Time, People, In Style, Fortune, and Entertainment Weekly. The
decline in circulation revenues was principally due to lower newsstand sales and
lower net subscription revenues generated by third-party agencies. EBITA and
operating income increased principally as a result of the revenue gains,
increased cost savings and a one-time gain on the sale of an asset. These
increases were offset in part by lower results from direct-marketing activities,
including Book-of-the-Month Club and AFE.
Music. Revenues decreased to $1.764 billion, compared to $1.793 billion
in the first six months of 1998. EBITA increased to $203 million from $189
million. Operating income increased to $66 million from $50 million. Revenues
decreased primarily due to lower international recorded music sales and a
decline in music publishing revenues, offset in part by a marginal increase in
domestic recorded music revenues. The international revenue decline principally
related to lower sales of new releases in comparison to the prior year, which
benefited from popular releases by established artists, like Madonna and Eric
Clapton. Despite the revenue decrease, EBITA and operating income increased due
to higher results from domestic recorded music operations, which benefited from
increased cost savings, lower artist royalty costs and improved results from
joint ventures that had successful releases during the period. The improvements
in domestic recorded music operations were offset in part by lower results from
international recorded music operations relating to lower international sales
levels and less licensing income from direct-marketing activities. Management
expects that the revenue decline relating to lower worldwide sales levels will
continue into the third quarter of 1999, which could negatively affect operating
results.
Cable Networks-TBS. Revenues increased to $1.903 billion, compared to
$1.634 billion in the first six months of 1998. EBITA increased to $419 million
from $351 million. Operating income increased to $318 million
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from $251 million. Revenues benefited from increases in advertising and
subscription revenues. The increase in advertising revenues was principally due
to a strong overall advertising market for most of the division's networks,
including, CNN, TBS Superstation, TNT, Cartoon Network and Headline News. The
increase in subscription revenues principally related to an increase in
subscriptions and higher rates, primarily led by revenue increases at CNN, TBS
Superstation, TNT and Turner Classic Movies. EBITA and operating income
increased principally as a result of the revenue gains, offset in part by higher
programming costs.
Filmed Entertainment-TBS. Revenues decreased to $654 million, compared
to $876 million in the first six months of 1998. EBITA increased to $100 million
from $23 million. Operating income increased to $63 million from a loss of $17
million. Revenues decreased principally as a result of fewer theatrical releases
and the absence of revenues from the sale of second-cycle broadcasting rights
for Seinfeld in 1998, offset in part by increased worldwide home video revenues.
Despite the decline in revenues, EBITA and operating income increased
principally due to the theatrical success of New Line Cinema's Austin Powers-The
Spy Who Shagged Me, improved results from worldwide home video operations and
the absence of film write-offs relating to disappointing results for theatrical
releases of Castle Rock Entertainment in 1998.
Cable. Revenues decreased to $438 million, compared to $490 million in
the first six months of 1998. EBITA decreased to $147 million from $148 million.
Operating income increased to $61 million from $46 million. The Cable division's
1999 operating results were affected by the 1998 Cable Transactions and by net
pretax gains of $11 million recognized in 1999 related to the sale or exchange
of various cable television systems and investments. The 1998 Cable Transactions
principally resulted in the deconsolidation of certain operations and are
described more fully in Note 2 to the accompanying consolidated financial
statements. Excluding the effect of the 1998 Cable Transactions, revenues
increased due to growth in basic cable subscribers, increases in basic cable
rates and an increase in advertising and pay-per-view revenues. Similarly,
excluding the effect of the 1998 Cable Transactions and the one-time gains,
EBITA and operating income increased principally as a result of the revenue
increases, offset in part by higher programming costs.
Interest and Other, Net. Interest and other, net, decreased to an
expense of $513 million in the first six months of 1999, compared to an expense
of $566 million in the first six months of 1998. Interest expense increased to
$469 million, compared to $455 million in the first six months of 1998. Interest
expense increased principally because of higher interest costs incurred in
connection with the $2.1 billion of borrowings used to redeem the Company's
Series M Preferred Stock in December 1998, offset in part by interest savings
associated with the Company's 1998 debt reduction efforts. Other expense, net,
decreased to $44 million in the first six months of 1999 from $111 million in
the first six months of 1998. The decrease principally related to the
recognition of an approximate $115 million pretax gain in 1999 in connection
with the Time Warner Telecom IPO, offset in part by higher losses from certain
investments accounted for under the equity method of accounting.
Entertainment Group
Filmed Entertainment-Warner Bros. Revenues increased to $2.826 billion,
compared to $2.642 billion in the first six months of 1998. EBITA increased to
$478 million from $241 million. Operating income increased to $417 million from
$175 million. Revenues benefited from increases in worldwide theatrical and
television distribution operations, offset in part by lower revenues from
consumer products operations. Also contributing to the revenue
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increase were higher revenues from worldwide home video operations, which
benefited from increased sales of DVDs. EBITA and operating income increased
primarily from the inclusion of an approximate $215 million net pretax gain
recognized in the first quarter of 1999 in connection with the early termination
and settlement of a long-term home video distribution agreement. In addition,
EBITA and operating income benefited principally from improved results from
worldwide theatrical and home video operations and an increase in
investment-related income, offset in part by lower results from consumer
products operations.
Broadcasting-The WB Network. Revenues increased to $162 million,
compared to $106 million in the first six months of 1998. EBITA decreased to a
loss of $71 million from a loss of $61 million. Operating losses increased to
$73 million from $63 million. Revenues increased as a result of improved
television ratings and the addition of a fifth night of prime-time programming
in September 1998. Operating losses increased principally because the revenue
gains were more than offset by the combination of higher programming costs
associated with the expanded programming schedule, a lower allocation of losses
to a minority partner in the network and higher start-up costs associated with
The WB Network 100+ station group, a distribution alliance for The WB Network in
smaller markets.
Cable Networks-HBO. Revenues increased to $1.072 billion, compared to
$1.021 billion in the first six months of 1998. EBITA and operating income
increased to $256 million from $222 million. Revenues benefited primarily from
an increase in subscriptions. EBITA and operating income increased principally
as a result of the revenue gains, increased cost savings, one-time gains from
the sale of certain investments and higher income from Comedy Central, a
50%-owned equity investee. These increases were offset in part by higher
marketing expenses.
Cable. Revenues decreased to $2.188 billion, compared to $2.237 billion
in the first six months of 1998. EBITA increased to $1.436 billion from $681
million. Operating income increased to $1.263 billion from $491 million. The
Cable division's 1999 operating results were affected by the 1998 Cable
Transactions and by net pretax gains of $760 million in 1999 and $84 million in
1998 relating to the sale or exchange of various cable television systems and
investments. The 1998 Cable Transactions principally resulted in the
deconsolidation or transfer of certain operations and are described more fully
in Note 2 to the accompanying consolidated financial statements. Excluding the
effect of the 1998 Cable Transactions, revenues increased due to growth in basic
cable subscribers, increases in basic cable rates, increases in advertising and
pay-per-view revenues and an increase in revenues from providing Road
Runner-branded, high-speed online services. Similarly, excluding the effect of
the 1998 Cable Transactions and the one-time gains, EBITA and operating income
increased principally as a result of the revenue increases, offset in part by
higher programming costs.
Interest and Other, Net. Interest and other, net, increased to an
expense of $392 million in the first six months of 1999, compared to an expense
of $347 million in the first six months of 1998. Interest expense was $273
million in both periods. Other expense, net, increased to $119 million in the
first six months of 1999, compared to $74 million in the first six months of
1998. This increase principally related to higher losses from certain
investments accounted for under the equity method of accounting, offset in part
by a gain on the sale of an investment.
Minority Interest. Minority interest expense was $301 million in the
first six months of 1999, compared to $146 million in the first six months of
1998. Minority interest expense increased primarily due to the allocation of a
portion of the net pretax gains relating to the sale or exchange of various
cable television systems and investments
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owned by TWE-A/N to the minority owners of that partnership. Excluding the
significant effect of the gains recognized in each period, minority interest
expense for 1999 and 1998 was comparable in amount and did not have any
significant effect on operating trends.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1999
Time Warner
Financial Condition
At June 30, 1999, Time Warner had $10.8 billion of debt, $304 million
of cash and equivalents (net debt of $10.5 billion), $1.2 billion of borrowings
against future stock option proceeds, $575 million of mandatorily redeemable
preferred securities of a subsidiary and $9.1 billion of shareholders' equity.
This compares to $10.9 billion of debt, $442 million of cash and equivalents
(net debt of $10.5 billion), $895 million of borrowings against future stock
option proceeds, $575 million of mandatorily redeemable preferred securities of
a subsidiary and $8.9 billion of shareholders' equity at December 31, 1998.
Debt Refinancings
In July 1999, Time Warner Companies, Inc., a wholly owned subsidiary of
Time Warner, redeemed all of its $600 million principal amount of Floating Rate
Reset Notes due July 29, 2009. The aggregate redemption cost of approximately
$620 million was funded with borrowings under Time Warner's bank credit
agreement. In connection with this redemption, an extraordinary loss of $12
million will be recognized in the third quarter of 1999.
Preferred Stock Conversion
In July 1999, Time Warner issued approximately 46 million shares of
common stock in connection with the conversion of all outstanding 11 million
shares of its Series D convertible preferred stock. Because holders of Series D
preferred stock were entitled to cash dividends at a preferential rate through
July 1999, Time Warner's historical cash dividend requirements will be reduced,
going forward, by approximately $30 million on an annualized basis.
Common Stock Repurchase Program
In January 1999, Time Warner's Board of Directors authorized a new
common stock repurchase program that allows the Company to repurchase, from time
to time, up to $5 billion of common stock. This program is expected to be
completed over a three-year period; however, actual repurchases in any period
will be subject to market conditions. Along with stock option exercise proceeds
and borrowings under Time Warner's $1.3 billion stock option proceeds credit
facility, additional funding for this program is expected to be provided by
future free cash flow and financial capacity.
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During the first six months of 1999, Time Warner acquired 13.7 million
shares of its common stock at an aggregate cost of $926 million. These
repurchases increased the cumulative shares purchased under this and its
previous common stock repurchase program begun in 1996 to approximately 108.8
million shares at an aggregate cost of $3.97 billion.
Cash Flows
During the first six months of 1999, Time Warner's cash provided by
operations amounted to $595 million and reflected $1.171 billion of EBITA from
its Publishing, Music, Cable Networks-TBS, Filmed Entertainment-TBS and Cable
businesses, $179 million of noncash depreciation expense, $78 million of
proceeds from Time Warner's asset securitization program and $280 million of
distributions from TWE, less $446 million of interest payments, $145 million of
income taxes, $44 million of corporate expenses and $478 million related to an
aggregate increase in working capital requirements, other balance sheet accounts
and noncash items. Cash provided by operations of $889 million for the first six
months of 1998 reflected $952 million of EBITA from its Publishing, Music, Cable
Networks-TBS, Filmed Entertainment-TBS and Cable businesses, $191 million of
noncash depreciation expense, $132 million of proceeds from Time Warner's asset
securitization program and $298 million of distributions from TWE, less $404
million of interest payments, $79 million of income taxes, $38 million of
corporate expenses and $163 million related to an aggregate increase in working
capital requirements, other balance sheet accounts and noncash items.
Cash used by investing activities was $302 million in the first six
months of 1999, compared to cash provided by investing activities of $93 million
in the first six months of 1998. The increase in cash used by investing
activities principally resulted from higher capital expenditures and a decrease
in investment proceeds. Capital expenditures increased to $314 million in the
first six months of 1999, compared to $228 million in the first six months of
1998.
Cash used by financing activities was $431 million in the first six
months of 1999, compared to $1.283 billion in the first six months of 1998. The
use of cash in 1999 principally resulted from the repurchase of approximately
13.7 million shares of Time Warner common stock at an aggregate cost of $926
million and the payment of $149 million of dividends, offset in part by a $33
million increase in net borrowings, $324 million of borrowings against future
stock option proceeds and $287 million of proceeds received principally from the
exercise of employee stock options. During the first six months of 1998, Time
Warner had additional borrowings that offset the noncash reduction of $1.15
billion of debt relating to the conversion of its zero-coupon convertible notes
into common stock. Time Warner principally used the proceeds from such
borrowings, together with $460 million of proceeds received from the exercise of
employee stock options, to repurchase approximately 23.2 million shares of Time
Warner common stock at an aggregate cost of $1.661 billion. Time Warner also
paid $265 million of dividends in the first six months of 1998. The decrease in
dividends paid in 1999 reflects the effect of Time Warner's redemption of its
Series M Preferred Stock in December 1998 and the conversion of approximately 15
million shares of preferred stock into shares of common stock that also occurred
during 1998.
The assets and cash flows of TWE are restricted by certain borrowing
and partnership agreements and are unavailable to Time Warner except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to limitations. Under its bank credit agreement, TWE is permitted to
incur additional indebtedness
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to make loans, advances, distributions and other cash payments to Time Warner,
subject to its individual compliance with the cash flow coverage and leverage
ratio covenants contained therein.
Management believes that Time Warner's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to fund its capital
and liquidity needs for the foreseeable future without distributions and loans
from TWE above those permitted by existing agreements.
Entertainment Group
Financial Condition
At June 30, 1999, the Entertainment Group had $6.5 billion of debt,
$117 million of cash and equivalents (net debt of $6.4 billion), $627 million of
Time Warner General Partners' senior priority capital and $5.7 billion of
partners' capital. This compares to $6.6 billion of debt, $87 million of
cash and equivalents (net debt of $6.5 billion), $217 million of preferred
stock of a subsidiary, $603 million of Time Warner General Partners' senior
priority capital and $5.2 billion of partners' capital at December 31, 1998.
Senior Capital Distributions
In July 1999, TWE paid a $627 million distribution to the Time Warner
General Partners to redeem the remaining portion of their senior priority
capital interests, including a priority capital return of $173 million. Time
Warner used a portion of the proceeds received from this distribution to repay
all $400 million of outstanding borrowings under its credit agreement with TWE.
Redemption of REIT Preferred Stock
In March 1999, a subsidiary of TWE (the "REIT") redeemed all of its
shares of preferred stock ("REIT Preferred Stock") at an aggregate cost of $217
million, which approximated net book value. The redemption was funded with
borrowings under TWE's bank credit agreement. Pursuant to its terms, the REIT
Preferred Stock was redeemed as a result of proposed changes to federal tax
regulations that substantially increased the likelihood that dividends paid by
the REIT or interest paid to the REIT under a mortgage note of TWE would not be
fully deductible for federal income tax purposes.
Cash Flows
During the first six months of 1999, the Entertainment Group's cash
provided by operations amounted to $1.519 billion and reflected $2.099 billion
of EBITA from its Filmed Entertainment-Warner Bros., Broadcasting-The WB
Network, Cable Networks-HBO and Cable businesses, $406 million of noncash
depreciation expense and $21 million of proceeds from TWE's asset securitization
program, less $242 million of interest payments, $49 million of income taxes,
$36 million of corporate expenses and $680 million related to an aggregate
increase in working capital requirements, other balance sheet accounts and
noncash items. Cash provided by operations of $586 million in the first six
months of 1998 reflected $1.083 billion of EBITA from its Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses, $469 million of noncash depreciation
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expense and $135 million of proceeds from TWE's asset securitization program,
less $260 million of interest payments, $39 million of income taxes, $36 million
of corporate expenses and $766 million related to an aggregate increase in
working capital requirements, other balance sheet accounts and noncash items.
Cash used by investing activities was $662 million in the first six
months of 1999, compared to $493 million in the first six months of 1998. The
increase principally resulted from a $296 million decrease in investment
proceeds relating to the 1998 sale of TWE's remaining interest in Six Flags
Entertainment Corporation. The decrease in investment proceeds was partially
offset by lower capital expenditures. Capital expenditures decreased to $649
million in the first six months of 1999, compared to $734 million in the first
six months of 1998.
Cash used by financing activities was $827 million in the first six
months of 1999, compared to $343 million in the first six months of 1998. The
use of cash in 1999 principally resulted from the redemption of REIT Preferred
Stock at an aggregate cost of $217 million, the payment of $280 million of
capital distributions to Time Warner and $229 million of debt reduction. The use
of cash in 1998 principally resulted from the payment of $298 million of capital
distributions to Time Warner, offset in part by an $11 million increase in net
borrowings.
Management believes that the Entertainment Group's operating cash flow,
cash and equivalents and additional borrowing capacity are sufficient to fund
its capital and liquidity needs for the foreseeable future.
Cable Capital Spending
Time Warner Cable has been engaged in a plan to upgrade the
technological capability and reliability of its cable television systems and
develop new services, which it believes will position the business for
sustained, long-term growth. Capital spending by Time Warner Cable, including
the cable operations of both Time Warner and TWE, amounted to $704 million in
the six months ended June 30, 1999, compared to $776 million in the six months
ended June 30, 1998. Cable capital spending is expected to approximate $900
million for the remainder of 1999. Capital spending by Time Warner Cable is
expected to continue to be funded by cable operating cash flow.
Filmed Entertainment Backlog
Backlog represents the amount of future revenue not yet recorded from
cash contracts for the licensing of theatrical and television product for pay
cable, basic cable, network and syndicated television exhibition. Backlog of
TWE's Filmed Entertainment-Warner Bros. division amounted to $2.663 billion at
June 30, 1999, compared to $2.298 billion at December 31, 1998 (including
amounts relating to the licensing of film product to Time Warner's and TWE's
cable television networks of $1.014 billion at June 30, 1999 and $769 million at
December 31, 1998). In addition, backlog of Time Warner's Filmed
Entertainment-TBS division amounted to $587 million at June 30, 1999 and $636
million at December 31, 1998 (including amounts relating to the licensing of
film product to Time Warner's and TWE's cable television networks of $222
million at June 30, 1999 and $226 million at December 31, 1998).
Because backlog generally relates to contracts for the licensing of
theatrical and television product which have already been produced, the
recognition of revenue for such completed product principally is dependent only
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement.
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Cash licensing fees are collected periodically over the term of the related
licensing agreements or on an accelerated basis using TWE's $500 million
securitization facility. The portion of backlog for which cash has not already
been received has significant off-balance sheet asset value as a source of
future funding. The backlog excludes advertising barter contracts, which are
also expected to result in the future realization of revenues and cash through
the sale of advertising spots received under such contracts.
Year 2000 Technology Preparedness
Time Warner, together with its Entertainment Group and like most large
companies, depends on many different computer systems and other chip-based
devices for the continuing conduct of its business. Older computer programs,
computer hardware and chip-based devices may fail to recognize dates beginning
on January 1, 2000 as being valid dates, and as a result may fail to operate or
may operate improperly when such dates are introduced.
Time Warner's exposure to potential Year 2000 problems arises both in
technological operations under the control of the Company and in those dependent
on one or more third parties. These technological operations include information
technology ("IT") systems and non-IT systems, including those with embedded
technology, hardware and software. Most of Time Warner's potential Year 2000
exposures are dependent to some degree on one or more third parties. Failure to
achieve high levels of Year 2000 compliance could have a material adverse impact
on Time Warner and its financial statements.
The Company's Year 2000 initiative is being conducted at the
operational level by divisional project managers and senior technology
executives overseen by senior divisional executives, with assistance internally
as well as from outside professionals. The progress of each division through the
different phases of remediation--inventorying, assessment, remediation planning,
implementation and final testing--is actively overseen and reviewed on a regular
basis by an executive oversight group that reports through the Company's Chief
Financial Officer to the Audit Committee of the Board of Directors.
The Company has generally completed the process of identifying,
assessing and planning the remediation of potential Year 2000 difficulties in
its technological operations, including IT applications, IT technology and
support, desktop hardware and software, non-IT systems and important third party
operations, and distinguishing those that are "mission critical" from those that
are not. An item is considered "mission critical" if its Year 2000-related
failure would significantly impair the ability of one of the Company's major
business units to (1) produce, market and distribute the products or services
that generate significant revenues for that business, (2) meet its obligations
to pay its employees, artists, vendors and others or (3) meet its obligations
under regulatory requirements and internal accounting controls. The Company and
its divisions, including the Entertainment Group, have identified approximately
1,000 worldwide, "mission critical" potential exposures. Of these, as of June
30, 1999, approximately 73% have been identified by the divisions as Year 2000
compliant and approximately 27% as in the remediation implementation or final
testing stages. The Company currently expects that remediation with respect to
well over 90% of all these identified operations will be substantially completed
in all material respects by the end of the third quarter of 1999. The Company,
however, could experience unexpected delays. The Company is currently planning
to impose a "quiet" period at some point during the fourth quarter of 1999
during which any remaining remediation involving installation or modification of
systems that interface with other systems will be minimized to permit the
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Company to conduct testing in a stable environment and to focus on its
contingency and transition plans, as necessary.
As stated above, however, the Company's business is heavily dependent
on third parties and these parties are themselves heavily dependent on
technology. For example, in a situation endemic to the cable industry, much of
the Company's headend equipment that controls cable set-top boxes was not Year
2000 compliant. The box manufacturers and cable industry groups together
developed solutions that the Company has been installing and successfully
testing in its headend equipment at its various geographic locations. The few
remaining installations are currently scheduled during the third quarter of
1999. In addition, if a television broadcaster or cable programmer encounters
Year 2000 problems that impede its ability to deliver its programming, the
Company will be unable to provide that programming to its cable customers.
Because the Company is also a programming supplier, third-party signal delivery
problems would affect its ability to deliver its programming to its customers.
The Company has attempted to include in its "mission critical" inventory
significant service providers, vendors, suppliers, customers and governmental
entities that are believed to be critical to business operations and is in
various stages of completing its determination of their state of Year 2000
readiness through various means, including questionnaires, interviews, on-site
visits, system interface testing and industry group participation. The Company
continues to monitor these situations. Moreover, Time Warner is dependent, like
all large companies, on the continued functioning, domestically and
internationally, of basic, heavily computerized services such as banking,
telephony, water and power, and various distribution mechanisms ranging from the
mail, railroads and trucking to high-speed data transmission. Time Warner is
taking steps to attempt to satisfy itself that the third parties on which it is
heavily reliant are Year 2000 compliant, are developing satisfactory contingency
plans or that alternate means of meeting its requirements are available, but
cannot predict the likelihood of such compliance nor the direct or indirect
costs to the Company of non-compliance by those third parties or of securing
such services from alternate compliant third parties. In areas in which the
Company is uncertain about the anticipated Year 2000 readiness of a significant
third party, the Company is investigating available alternatives, if any.
The Company, including the Entertainment Group, currently estimates
that the aggregate cost of its Year 2000 remediation program, which started in
1996, will be approximately $125 to $175 million, of which an estimated 70% to
80% has been incurred through June 30, 1999. These costs include estimates of
the costs of assessment, replacement, repair and upgrade, both planned and
unplanned, of certain IT and non-IT systems and their implementation and
testing. The Company anticipates that its remediation program, and related
expenditures, may continue into 2001 as temporary solutions to Year 2000
problems are replaced with upgraded equipment. These expenditures have been and
are expected to continue to be funded from the Company's operating cash flow and
have not and are not expected to impact materially the Company's financial
statements.
Management believes that it has established an effective program to
resolve all significant Year 2000 issues in its control in a timely manner. As
noted above, however, the Company has not yet completed all phases of its
program and is dependent on third parties whose progress is not within its
control. In the event that the Company experiences unanticipated failures of the
systems within its control, management believes that the Company could
experience significant difficulty in producing and delivering its products and
services and conducting its business in the Year 2000 as it has in the past.
More importantly, disruptions experienced by third parties with which the
Company does business as well as by the economy generally could materially
adversely affect the Company. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
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The Company continues to focus its efforts on remediation of its Year
2000 exposures. Simultaneously, it is examining its existing standard business
interruption strategies to evaluate whether they would satisfactorily meet the
demands of failures arising from Year-2000 related problems. It is also
developing and refining specific transition schedules and contingency plans in
the event it does not successfully complete its remaining remediation as
anticipated or experiences unforeseen problems outside the scope of these
standard strategies. The Company intends to examine its status periodically to
determine the necessity of implementing such contingency plans or additional
strategies, which could involve, among other things, manual workarounds,
adjusting staffing strategies and sharing resources across divisions.
Caution Concerning Forward-Looking Statements
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document, together
with management's public commentary related thereto, contains such
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future
growth in revenues, EBITA and cash flow. Words such as "anticipate", "estimate",
"expects", "projects", "intends", "plans", "believes" and words and terms of
similar substance used in connection with any discussion of future operating or
financial performance identify such forward-looking statements. Those
forward-looking statements are management's present expectations of future
events. As with any projection or forecast, they are inherently susceptible to
uncertainty and changes in circumstances, and the Company is under no obligation
to (and expressly disclaims any such obligation to) update or alter its
forward-looking statements whether as a result of such changes, new information,
future events or otherwise.
Time Warner operates in highly competitive, consumer driven and rapidly
changing media and entertainment businesses that are dependent on government
regulation and economic, political and social conditions in the countries in
which they operate, consumer demand for their products and services,
technological developments and (particularly in view of technological changes)
protection of their intellectual property rights. Time Warner's actual results
could differ materially from management's expectations because of changes in
such factors. Some of the other factors that also could cause actual results to
differ from those contained in the forward-looking statements include those
identified in Time Warner's other filings and:
o For Time Warner's cable business, more aggressive than expected competition
from new technologies and other types of video programming distributors,
including DBS; increases in government regulation of cable or equipment
rates or other terms of service (such as "digital must-carry" or
"unbundling" requirements); increased difficulty in obtaining franchise
renewals; the failure of new equipment (such as digital set-top boxes) or
services (such as high-speed on-line services or telephony over cable or
video on demand) to function properly, to appeal to enough consumers or to
be available at reasonable prices and to be delivered in a timely fashion;
and greater than expected increases in programming or other costs.
o For Time Warner's cable programming and television businesses, greater than
expected programming or production costs; public and cable operator
resistance to price increases (and the negative impact on premium
programmers of increases in basic cable rates); increased regulation of
distribution agreements; the sensitivity of advertising to economic
cyclicality; and greater than expected fragmentation of consumer viewership
due to
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an increased number of programming services or the increased popularity
of alternatives to television.
o For Time Warner's film and television businesses, their ability to continue
to attract and select desirable talent and scripts at manageable costs;
increases in production costs generally; fragmentation of consumer leisure
and entertainment time (and its possible negative effects on the broadcast
and cable networks, which are significant customers of these businesses);
continued popularity of merchandising; and the uncertain impact of
technological developments such as DVD and the Internet.
o For Time Warner's music business, its ability to continue to attract and
select desirable talent at manageable costs; the timely completion of
albums by major artists; the popular demand for particular artists and
albums; its ability to continue to enforce and capitalize on its
intellectual property rights in digital environments; and the overall
strength of global music sales.
o For Time Warner's print media and publishing businesses, increases in paper
and distribution costs; the introduction and increased popularity of
alternative technologies for the provision of news and information, such as
the Internet; and fluctuations in advertiser and consumer spending.
o For Time Warner's digital media businesses, their ability to develop
products and services that are attractive, accessible and commercially
viable in terms of content, technology and cost, their ability to manage
costs and generate revenues, aggressive competition from existing and
developing technologies and products, the resolution of issues concerning
commercial activities via the Internet, including security, reliability,
cost, ease of use and access, and the possibility of increased government
regulation of new media services.
o The ability of the Company and its key service providers, vendors,
suppliers, customers and governmental entities to replace, modify or
upgrade computer systems in ways that adequately address the Year 2000
issue, including their ability to identify and correct all relevant
computer codes and embedded chips, unanticipated difficulties or delays in
the implementation of the Company's remediation plans and the ability of
third parties to address adequately their own Year 2000 issues.
In addition, Time Warner's overall financial strategy, including growth
in operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions,
consequences of the euro conversion and changes in Time Warner's plans,
strategies and intentions.
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TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
(millions, except
per share amounts)
ASSETS
Current assets
<S> <C> <C>
Cash and equivalents.................................................................. $ 304 $ 442
Receivables, less allowances of $875 million and $1.007 billion....................... 2,397 2,885
Inventories........................................................................... 923 946
Prepaid expenses...................................................................... 1,279 1,176
------ ------
Total current assets.................................................................. 4,903 5,449
Noncurrent inventories................................................................ 1,838 1,900
Investments in and amounts due to and from Entertainment Group........................ 6,252 4,980
Other investments..................................................................... 924 794
Property, plant and equipment......................................................... 2,027 1,991
Music catalogues, contracts and copyrights............................................ 824 876
Cable television and sports franchises................................................ 2,662 2,868
Goodwill.............................................................................. 11,647 11,919
Other assets.......................................................................... 816 863
------ ------
Total assets.......................................................................... $31,893 $31,640
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable...................................................................... $ 823 $ 996
Participations, royalties and programming costs payable............................... 1,172 1,199
Debt due within one year.............................................................. 20 19
Other current liabilities............................................................. 2,121 2,404
------ ------
Total current liabilities............................................................. 4,136 4,618
Long-term debt ....................................................................... 10,765 10,925
Borrowings against future stock option proceeds....................................... 1,219 895
Deferred income taxes................................................................. 3,704 3,491
Unearned portion of paid subscriptions................................................ 755 741
Other liabilities..................................................................... 1,647 1,543
Company-obligated mandatorily redeemable preferred securities of a subsidiary
holding solely subordinated debentures of a subsidiary of the Company.............. 575 575
Shareholders' equity
Preferred stock, $.10 par value, 19.4 and 22.6 million shares outstanding,
$1.940 and $2.260 billion liquidation preference................................... 2 2
Series LMCN-V common stock, $.01 par value, 114.1 million shares outstanding.......... 1 1
Common stock, $.01 par value, 1.133 and 1.118 billion shares outstanding.............. 11 11
Paid-in capital....................................................................... 13,289 13,134
Accumulated deficit................................................................... (4,211) (4,296)
------- -------
Total shareholders' equity............................................................ 9,092 8,852
------- ------
Total liabilities and shareholders' equity............................................ $31,893 $31,640
======= =======
</TABLE>
See accompanying notes.
20
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1999 1998 1999 1998
------ ------ ------ ------
(millions, except per share amounts)
<S> <C> <C> <C> <C>
Revenues (a)....................................................... $3,574 $3,672 $6,840 $6,809
------ ------ ------ ------
Cost of revenues (a)(b)............................................ 1,899 2,077 3,685 3,964
Selling, general and administrative (a)(b)......................... 1,180 1,211 2,365 2,291
------ ------ ------ ------
Operating expenses................................................. 3,079 3,288 6,050 6,255
------ ------ ------ ------
Business segment operating income.................................. 495 384 790 554
Equity in pretax income of Entertainment Group (a)................. 793 166 1,135 273
Interest and other, net (a)(c)..................................... (202) (283) (513) (566)
Corporate expenses (a)............................................. (22) (19) (44) (38)
------ ------ ------ -----
Income before income taxes......................................... 1,064 248 1,368 223
Income tax provision............................................... (471) (147) (637) (184)
------ ----- ----- ----
Net income......................................................... 593 101 731 39
Preferred dividend requirements.................................... (18) (78) (36) (160)
------ ----- ------ ----
Net income (loss) applicable to common shares...................... $ 575 $ 23 $ 695 $(121)
===== ==== ===== =====
Net income (loss) per common share:
Basic........................................................... $ 0.46 $ 0.02 $ 0.56 $(0.10)
====== ====== ====== ======
Diluted......................................................... $ 0.43 $ 0.02 $ 0.54 $(0.10)
====== ====== ====== ======
Average common shares
Basic........................................................... 1,249.3 1,192.6 1,246.2 1,174.6
======= ======= ======= =======
Diluted......................................................... 1,403.7 1,192.6 1,401.6 1,174.6
======= ======= ======= =======
- --------------
(a)Includes the following income (expenses) resulting from transactions with the
Entertainment Group and other related companies for the three and six months
ended June 30, 1999, respectively, and for the corresponding periods in the
prior year: revenues-$105 million and $239 million in 1999, $102 million and
$214 million in 1998; cost of revenues-$(104) million and $(190) million in
1999, $(70) million and $(137) million in 1998; selling, general and
administrative-$(17) million and $(26) million in 1999, $(11) million and
$(20) million in 1998; equity in pretax income of Entertainment Group-$34
million and $18 million in 1999, $(15) million and $(20) million in 1998;
interest and other, net-$(10) million and $(20) million in 1999, $(3) million
and $(6) million in 1998; and corporate expenses-$(18) million and $(36)
million in each of 1999 and 1998.
(b)Includes depreciation and amortization expense of: $283 $293 $560 $589
==== ==== ==== ====
(c)Includes an approximate $115 million pretax gain recognized in the second
quarter of 1999 in connection with the initial public offering of a 20%
interest in Time Warner Telecom Inc.
</TABLE>
See accompanying notes.
21
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------
1999 1998
---- ----
(millions)
OPERATIONS
<S> <C> <C>
Net income...................................................................... $731 $ 39
Adjustments for noncash and nonoperating items:
Depreciation and amortization................................................... 560 589
Noncash interest expense........................................................ 2 29
Excess (deficiency) of distributions over equity in pretax income of
Entertainment Group.......................................................... (855) 25
Changes in operating assets and liabilities..................................... 157 207
---- -----
Cash provided by operations..................................................... 595 889
---- -----
INVESTING ACTIVITIES
Investments and acquisitions.................................................... (101) (74)
Capital expenditures............................................................ (314) (228)
Investment proceeds............................................................. 113 395
---- -----
Cash provided (used) by investing activities.................................... (302) 93
------ -----
FINANCING ACTIVITIES
Borrowings...................................................................... 341 1,603
Debt repayments................................................................. (308) (1,377)
Borrowings against future stock option proceeds................................. 324 525
Repayments of borrowings against future stock option proceeds................... - (533)
Repurchases of Time Warner common stock......................................... (926) (1,661)
Dividends paid.................................................................. (149) (265)
Proceeds received from stock option and dividend reinvestment plans............. 287 460
Other, principally financing costs.............................................. - (35)
----- ------
Cash used by financing activities............................................... (431) (1,283)
----- ------
DECREASE IN CASH AND EQUIVALENTS................................................ (138) (301)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD..................................... 442 645
---- ----
CASH AND EQUIVALENTS AT END OF PERIOD........................................... $304 $344
==== ====
</TABLE>
See accompanying notes.
22
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------
1999 1998
---- ----
(millions)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD.............................................. $8,852 $9,356
Net income.................................................................. 731 39
Other comprehensive income (loss)........................................... (10) (22)
------ -----
Comprehensive income(a)..................................................... 721 17
Common stock dividends...................................................... (113) (106)
Preferred stock dividends................................................... (36) (160)
Repurchases of Time Warner common stock..................................... (926) (1,661)
Issuance of common stock in connection with the conversion of the
zero-coupon convertible notes due 2013................................... - 1,150
Other, principally shares issued pursuant to stock option, dividend
reinvestment and benefit plans........................................... 594 724
----- -----
BALANCE AT END OF PERIOD.................................................... $9,092 $9,320
====== ======
- ---------------
(a)Comprehensive income for the three months ended June 30, 1999 and 1998 was
$580 million and $103 million, respectively.
</TABLE>
See accompanying notes.
23
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Inc. ("Time Warner" or the "Company"), together with its
consolidated and unconsolidated subsidiaries, is the world's leading media and
entertainment company. Time Warner's principal business objective is to create
and distribute branded information and entertainment copyrights throughout the
world. Time Warner classifies its business interests into four fundamental
areas: Cable Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; Entertainment, consisting
principally of interests in recorded music and music publishing, filmed
entertainment, television production and television broadcasting; and Cable,
consisting principally of interests in cable television systems.
A majority of Time Warner's interests in filmed entertainment,
television production, television broadcasting and cable television systems, and
a portion of its interests in cable television programming are held through
Time Warner Entertainment Company, L.P. ("TWE"). Time Warner owns general
and limited partnership interests in TWE consisting of 74.49% of the pro rata
priority capital ("Series A Capital") and residual equity capital ("Residual
Capital"), and 100% of the junior priority capital ("Series B Capital"). The
remaining 25.51% limited partnership interests in the Series A Capital and
Residual Capital of TWE are held by a subsidiary of MediaOne Group, Inc.
("MediaOne"). Time Warner has not consolidated TWE and certain related
companies (the "Entertainment Group") for financial reporting purposes because
of certain limited partnership approval rights held by MediaOne related to
TWE's cable television business.
Each of the business interests within Cable Networks, Publishing,
Entertainment and Cable is important to management's objective of increasing
shareholder value through the creation, extension and distribution of
recognizable brands and copyrights throughout the world. Such brands and
copyrights include (1) leading cable television networks, such as HBO, Cinemax,
CNN, TNT and TBS Superstation, (2) magazine franchises such as Time, People and
Sports Illustrated and direct marketing brands such as Time Life Inc. and
Book-of-the-Month Club, (3) copyrighted music from many of the world's leading
recording artists that is produced and distributed by a family of established
record labels such as Warner Bros. Records, Atlantic Records, Elektra
Entertainment and Warner Music International, (4) the unique and extensive film,
television and animation libraries of Warner Bros. and Turner Broadcasting
System, Inc. ("TBS"), and trademarks such as the Looney Tunes characters, Batman
and The Flintstones, (5) The WB Network, a national broadcasting network
launched in 1995 as an extension of the Warner Bros. brand and as an additional
distribution outlet for the Company's collection of children's cartoons and
television programming, and (6) Time Warner Cable, currently the largest
operator of cable television systems in the U.S.
The operating results of Time Warner's various business interests are
presented herein as an indication of financial performance (Note 7). Except for
start-up losses incurred in connection with The WB Network, Time Warner's
principal business interests generate significant operating income and cash flow
from operations. The cash flow from operations generated by such business
interests is considerably greater than their operating income due to significant
amounts of noncash amortization of intangible assets recognized in various
acquisitions accounted for by the purchase method of accounting. Noncash
amortization of intangible assets recorded by Time Warner's business interests,
including the unconsolidated business interests of the Entertainment Group,
amounted to $311 million and
24
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
$327 million for the three months ended June 30, 1999 and 1998,
respectively, and $617 million and $656 million in the six months ended June 30,
1999 and 1998, respectively.
Basis of Presentation
The accompanying consolidated financial statements are unaudited but,
in the opinion of management, contain all the adjustments (consisting of those
of a normal recurring nature) considered necessary to present fairly the
financial position and the results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles applicable
to interim periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of Time
Warner included in its Annual Report on Form 10-K for the year ended December
31, 1998, as amended on June 28, 1999 (the "1998 Form 10-K"). Certain
reclassifications have been made to the prior year's financial statements to
conform to the 1999 presentation.
Per common share and average common share amounts for all prior periods
have been restated to give effect to a two-for-one common stock split that
occurred on December 15, 1998.
2. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the Entertainment
Group at June 30, 1999 and December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------ --------
(millions)
<S> <C> <C>
Investment in TWE............................................................... $4,497 $3,850
Stock option related distributions due from TWE................................. 1,347 1,130
Credit agreement debt due to TWE................................................ (400) (400)
Other net amounts due to TWE, principally related to home video distribution.... (104) (395)
----- -----
Investment in and amounts due to and from TWE................................... 5,340 4,185
Investment in TWE-A/N and other Entertainment Group companies................... 912 795
----- -----
Total........................................................................... $6,252 $4,980
====== ======
</TABLE>
Partnership Structure and Allocation of Income
TWE is a Delaware limited partnership that was capitalized on June 30,
1992 to own and operate substantially all of the Filmed Entertainment-Warner
Bros., Cable Networks-HBO and Cable businesses previously owned by subsidiaries
of Time Warner. Time Warner, through its wholly owned subsidiaries, collectively
owns general and limited partnership interests in TWE consisting of 74.49% of
the Series A Capital and Residual Capital, and 100% of the Series B Capital. The
remaining 25.51% limited partnership interests in the Series A Capital and
Residual Capital of TWE are owned by MediaOne. Certain Time Warner subsidiaries
are the general partners of TWE (the "Time Warner General Partners").
The TWE partnership agreement provides for special allocations of
income, loss and distributions of partnership capital, including priority
distributions in the event of liquidation. TWE reported net income of $1.079
25
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
billion and $263 million for the six months ended June 30, 1999 and 1998,
respectively, no portion of which was allocated to the limited partnership
interests.
Summarized Financial Information of the Entertainment Group
Set forth below is summarized financial information of the
Entertainment Group. This information reflects (i) the transfer of Time Warner
Cable's direct broadcast satellite operations to Primestar, Inc. ("Primestar"),
a separate holding company, effective as of April 1, 1998, (ii) the formation of
the Road Runner joint venture to operate and expand Time Warner Cable's and
MediaOne's existing high-speed online businesses, effective as of June 30, 1998,
(iii) the reorganization of Time Warner Cable's business telephony operations
into a separate entity now named Time Warner Telecom Inc. ("Time Warner
Telecom"), effective as of July 1, 1998 and (iv) the formation of a joint
venture in Texas that owns cable television systems serving approximately 1.1
million subscribers, effective as of December 31, 1998 (collectively, the "1998
Cable Transactions"). These transactions are described more fully in Time
Warner's 1998 Form 10-K.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Operating Statement Information
<S> <C> <C> <C> <C>
Revenues...................................... $3,060 $2,853 $5,994 $5,765
Depreciation and amortization................. (334) (356) (642) (727)
Business segment operating income(1)(2)....... 1,212 456 1,863 825
Interest and other, net....................... (167) (183) (392) (347)
Minority interest............................. (233) (82) (301) (146)
Income before income taxes ................... 794 173 1,134 296
Net income.................................... 767 156 1,079 264
</TABLE>
- ------------------
(1) Includes net pretax gains relating to the sale or exchange of certain cable
television systems and investments of $760 million in the second quarter of
1999 and $70 million in the second quarter of 1998. Similarly, six-month
results include net pretax gains of $760 million in 1999 and $84 million in
1998.
(2) Includes a net pretax gain of approximately $215 million recognized in the
first quarter of 1999 in connection with the early termination
and settlement of a long-term home video distribution agreement.
Six Months
Ended June 30,
---------------
1999 1998
-------- ---------
(millions)
Cash Flow Information
Cash provided by operations.......................... $1,519 $ 586
Capital expenditures................................. (649) (734)
Investments and acquisitions......................... (223) (265)
Investment proceeds.................................. 210 506
Borrowings........................................... 1,310 503
Debt repayments...................................... (1,539) (492)
Redemption of preferred stock of subsidiary.......... (217) -
Capital distributions................................ (280) (298)
Other financing activities, net...................... (101) (56)
Increase (decrease) in cash and equivalents.......... 30 (250)
26
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
June 30, December 31,
1999 1998
------ ------
(millions)
Balance Sheet Information
Cash and equivalents................................ $ 117 $ 87
Total current assets................................ 4,223 4,187
Total assets........................................ 22,889 22,241
Total current liabilities........................... 4,745 4,940
Long-term debt...................................... 6,535 6,578
Minority interests.................................. 1,744 1,522
Preferred stock of subsidiary....................... - 217
Time Warner General Partners' Senior Capital........ 627 603
Partners' capital .................................. 5,711 5,210
Capital Distributions
The assets and cash flows of TWE are restricted by the TWE partnership
and credit agreements and are unavailable for use by the partners except through
the payment of certain fees, reimbursements, cash distributions and loans, which
are subject to limitations. At June 30, 1999 and December 31, 1998, the Time
Warner General Partners had recorded $1.347 billion and $1.130 billion,
respectively, of stock option related distributions due from TWE, based on
closing prices of Time Warner common stock of $72.63 and $62.06, respectively.
Time Warner is paid when the options are exercised. The Time Warner General
Partners also receive tax-related distributions from TWE on a current basis.
During the six months ended June 30, 1999, the Time Warner General Partners
received distributions from TWE in the amount of $280 million, consisting of
$138 million of tax-related distributions and $142 million of stock option
related distributions. During the six months ended June 30, 1998, the Time
Warner General Partners received distributions from TWE in the amount of $298
million, consisting of $138 million of tax-related distributions and $160
million of stock option related distributions.
In July 1999, TWE paid a $627 million distribution to the Time Warner
General Partners to redeem the remaining portion of their senior priority
capital interests, including a priority capital return of $173 million. Time
Warner used a portion of the proceeds received from this distribution to repay
all $400 million of outstanding borrowings under its credit agreement with TWE.
Gain on Termination of MGM Video Distribution Agreement
In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ("MGM")
terminated a long-term distribution agreement under which Warner Bros. had
exclusive worldwide distribution rights for MGM/United Artists home video
product. In connection with the early termination and settlement of this
distribution agreement, Warner Bros. recognized a net pretax gain of
approximately $215 million ($0.10 per basic common share), which has been
included in Time Warner's equity in the pretax income of the Entertainment Group
in the accompanying consolidated statement of operations.
27
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Gain on Sale or Exchange of Cable Television Systems and Investments
In 1999 and 1998, largely in an effort to enhance their geographic
clustering of cable television properties, Time Warner and TWE sold or exchanged
various cable television systems and investments. The 1999 transactions included
a large exchange of cable television systems serving approximately 575,000
subscribers for other cable television systems of comparable size owned by TCI
Communications, Inc., a subsidiary of AT&T Corp. As a result of these
transactions, the operating results of Time Warner's and TWE's Cable division
include net pretax gains for the second quarter of $771 million in 1999 and $70
million in 1998. Net pretax gains for the first half of the year amounted to
$771 million in 1999 and $84 million in 1998. Of such amounts, $11 million of
net pretax gains recognized in the second quarter of 1999 relate to Time
Warner's wholly owned Cable division.
Primestar
TWE owns an approximate 24% equity interest in Primestar. In January
1999, Primestar, an indirect wholly owned subsidiary of Primestar and the
stockholders of Primestar entered into an agreement to sell Primestar's
medium-power direct broadcast satellite business and assets to DirecTV, a
competitor of Primestar owned by Hughes Electronics Corp. In addition, a second
agreement was entered into with DirecTV, pursuant to which DirecTV agreed to
purchase Primestar's rights with respect to the use or acquisition of certain
high-power satellites from a wholly owned subsidiary of one of the stockholders
of Primestar. In April 1999, Primestar closed on the sale of its medium-power
direct broadcast satellite business to DirecTV. Then, in June 1999, Primestar
completed the sale of its high-power satellite rights to DirecTV.
As a result of those transactions, Primestar began to substantially
wind down its operations during the first quarter of 1999. TWE recognized its
share of Primestar's 1999 losses under the equity method of accounting. Such
losses are included in interest and other, net, in TWE's consolidated statement
of operations. Future wind-down losses are not expected to be material to Time
Warner's or TWE's operating results.
3. GAIN ON TIME WARNER TELECOM'S INITIAL PUBLIC OFFERING
In May 1999, Time Warner Telecom, a competitive local exchange carrier
that provides telephony services to businesses, completed an initial public
offering of 20% of its common stock (the "Time Warner Telecom IPO"). Time Warner
Telecom raised net proceeds of approximately $270 million, of which $180 million
was paid to Time Warner and TWE in satisfaction of certain obligations. In turn,
Time Warner and TWE used those proceeds principally to reduce bank debt. In
connection with the Time Warner Telecom IPO and certain related transactions,
Time Warner's ownership interest in Time Warner Telecom was diluted from 61.98%
to 48.21%. As a result, Time Warner recognized a pretax gain of approximately
$115 million ($.05 per basic common share after taxes). This gain has been
included in interest and other, net, in Time Warner's 1999 consolidated
statement of operations.
28
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
(millions)
Film costs:
<S> <C> <C> <C> <C>
Released, less amortization................. $ 74 $ 226 $ 51 $ 308
Completed and not released.................. 28 5 20 -
In process and other........................ - 246 2 240
Library, less amortization.................. - 979 - 1,007
Programming costs, less amortization........... 403 382 457 345
Magazines, books and recorded music............ 418 - 416 -
---- ------- ---- ------
Total ........................................ $923 $1,838 $946 $1,900
==== ====== ==== ======
</TABLE>
5. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In December 1995, Time Warner Companies, Inc. ("TW Companies"), a
wholly owned subsidiary of Time Warner, issued approximately 23 million
Company-obligated mandatorily redeemable preferred securities of a wholly owned
subsidiary ("Preferred Trust Securities") for aggregate gross proceeds of $575
million. The sole assets of the subsidiary that is the obligor on the Preferred
Trust Securities are $592 million principal amount of 8-7/8% subordinated
debentures of TW Companies due December 31, 2025. Cumulative cash distributions
are payable on the Preferred Trust Securities at an annual rate of 8-7/8%. The
Preferred Trust Securities are mandatorily redeemable for cash on December 31,
2025, and TW Companies has the right to redeem the Preferred Trust Securities,
in whole or in part, on or after December 31, 2000, or in other certain
circumstances. If TW Companies elects to redeem these securities, the redemption
amount would be in each case at an amount per Preferred Trust Security equal to
$25 per security, plus accrued and unpaid distributions thereon.
Time Warner has certain obligations relating to the Preferred Trust
Securities which amount to a full and unconditional guaranty (on a subordinated
basis) of its subsidiary's obligations with respect thereto.
6. SHAREHOLDERS' EQUITY
Preferred Stock Conversion
In July 1999, Time Warner issued approximately 46 million shares of
common stock in connection with the conversion of all outstanding 11 million
shares of its Series D convertible preferred stock. Because holders of Series D
preferred stock were entitled to cash dividends at a preferential rate through
July 1999, Time Warner's historical cash dividend requirements will be reduced,
going forward, by approximately $30 million on an annualized basis.
Series LMCN-V Stock Split
In May 1999, Time Warner amended the terms of its Series LMCN-V common
stock, which effectively resulted in a two-for-one stock split and the issuance
of approximately 57 million shares of Series LMCN-V common
29
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
stock. As a result, each share of Series LMCN-V common stock now is equivalent
effectively to one share of common stock instead of two. Because the equivalent
number of shares of common stock did not change, the split did not have any
effect on Time Warner's consolidated financial statements. Shares of Series
LMCN-V common stock continue to have limited voting rights.
Common Stock Repurchase Program
In January 1999, Time Warner's Board of Directors authorized a new
common stock repurchase program that allows the Company to repurchase, from time
to time, up to $5 billion of common stock. This program is expected to be
completed over a three-year period; however, actual repurchases in any period
will be subject to market conditions. Along with stock option exercise proceeds
and borrowings under Time Warner's $1.3 billion stock option proceeds credit
facility, additional funding for this program is expected to be provided by
anticipated future free cash flow and financial capacity.
During the first six months of 1999, Time Warner acquired 13.7 million
shares of its common stock at an aggregate cost of $926 million. These
repurchases increased the cumulative shares purchased under this and its
previous common stock repurchase program begun in 1996 to approximately 108.8
million shares at an aggregate cost of $3.97 billion.
Net Income (Loss) Per Common Share
Set forth below is a reconciliation of basic and diluted net income
(loss) per common share for each period.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998(1) 1999 1998(1)
---- ------ ---- ------
(millions, except per share amounts)
<S> <C> <C> <C> <C>
Net income (loss) applicable to common shares - basic.......... $ 575 $ 23 $ 695 $ (121)
Interest savings, net of tax(2)................................ 10 - 19 -
Preferred dividends............................................ 18 - 36 -
----- ----- ----- -------
Net income (loss) applicable to common shares - diluted........ $ 603 $ 23 $ 750 $ (121)
===== ==== ===== =======
Average number of common shares outstanding - basic............ 1,249.3 1,192.6 1,246.2 1,174.6
Dilutive effect of stock options............................... 73.3 - 74.0 -
Dilutive effect of convertible preferred shares................ 81.1 - 81.4 -
-------- ------- -------- -------
Average number of common shares outstanding - diluted.......... 1,403.7 1,192.6 1,401.6 1,174.6
======= ======= ======= =======
Net income (loss) per common share:
Basic..................................................... $ 0.46 $ 0.02 $ 0.56 $ (0.10)
====== ====== ====== =======
Diluted................................................... $ 0.43 $ 0.02 $ 0.54 $ (0.10)
====== ====== ====== =======
</TABLE>
- ---------------
(1) 1998 basic and diluted net income (loss) per common share are the same
because the effect of Time Warner's stock options and convertible preferred
stock was antidilutive.
(2) Reflects the required use of a portion of the proceeds from the future
exercise of employee stock options to repay all outstanding borrowings
under Time Warner's stock option proceeds credit facility.
30
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
7. SEGMENT INFORMATION
Time Warner classifies its business interests into four fundamental
areas: Cable Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; Entertainment, consisting
principally of interests in recorded music and music publishing, filmed
entertainment, television production and television broadcasting; and Cable,
consisting principally of interests in cable television systems. A majority of
Time Warner's interests in filmed entertainment, television production,
television broadcasting and cable television systems, and a portion of its
interests in cable television programming are held by the Entertainment Group.
The Entertainment Group is not consolidated for financial reporting purposes.
Information as to the operations of Time Warner and the Entertainment
Group in different business segments is set forth below based on the nature of
the products and services offered. Time Warner evaluates performance based on
several factors, of which the primary financial measure is business segment
operating income before noncash amortization of intangible assets ("EBITA"). The
operating results of Time Warner's and the Entertainment Group's cable segments
reflect the 1998 Cable Transactions.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Revenues
Time Warner:
<S> <C> <C> <C> <C>
Publishing............................... $1,153 $1,136 $2,127 $2,084
Music.................................... 828 905 1,764 1,793
Cable Networks-TBS....................... 1,065 906 1,903 1,634
Filmed Entertainment-TBS................. 337 504 654 876
Cable.................................... 216 242 438 490
Intersegment elimination................. (25) (21) (46) (68)
------ ---- ------ -----
Total.................................... $3,574 $3,672 $6,840 $6,809
====== ====== ====== ======
Entertainment Group:
Filmed Entertainment-Warner Bros......... $1,446 $1,330 $2,826 $2,642
Broadcasting-The WB Network.............. 83 61 162 106
Cable Networks-HBO....................... 546 509 1,072 1,021
Cable.................................... 1,114 1,084 2,188 2,237
Intersegment elimination................. (129) (131) (254) (241)
----- ------ ----- ------
Total.................................... $3,060 $2,853 $5,994 $5,765
====== ====== ====== ======
</TABLE>
31
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
EBITA(1)
Time Warner:
<S> <C> <C> <C> <C>
Publishing.................................. $ 196 $ 176 $ 290 $ 261
Music....................................... 101 96 203 189
Cable Networks-TBS.......................... 235 198 419 351
Filmed Entertainment-TBS.................... 71 38 100 23
Cable(2).................................... 81 74 147 148
Intersegment elimination.................... 2 (1) 12 (20)
----- ----- ----- -----
Total....................................... $ 686 $ 581 $1,171 $ 952
===== ====== ====== ======
Entertainment Group:
Filmed Entertainment-Warner Bros.(3)........ $ 132 $ 122 $ 478 $ 241
Broadcasting-The WB Network................. (30) (23) (71) (61)
Cable Networks-HBO.......................... 131 113 256 222
Cable(2).................................... 1,099 374 1,436 681
------ ----- ------ ------
Total....................................... $1,332 $ 586 $2,099 $1,083
====== ====== ====== ======
</TABLE>
- ---------------
(1)EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of intangible
assets, Time Warner's business segment operating income for the three and six
months ended June 30, 1999, respectively, and for the corresponding periods
in the prior year was $495 million and $790 million in 1999, $384 million and
$554 million in 1998. Similarly, business segment operating income of the
Entertainment Group for the three and six months ended June 30, 1999,
respectively, and for the corresponding periods in the prior year was $1.212
billion and $1.863 billion in 1999, $456 million and $825 million in 1998.
(2)Includes net pretax gains relating to the sale or exchange of certain cable
television systems and investments of $771 million in the second quarter of
1999 and $70 million in the second quarter of 1998. Similarly, six-month
results include net pretax gains of $771 million in 1999 and $84 million in
1998. Of such amounts, $11 million of net pretax gains recognized in the
second quarter of 1999 relate to Time Warner's wholly owned Cable division.
(3)Includes a net pretax gain of approximately $215 million recognized in the
first quarter of 1999 in connection with the early termination and settlement
of a long-term home video distribution agreement.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Depreciation of Property, Plant and Equipment
Time Warner:
<S> <C> <C> <C> <C>
Publishing........................................ $ 19 $ 19 $ 38 $ 38
Music............................................. 18 19 35 38
Cable Networks-TBS................................ 26 25 50 47
Filmed Entertainment-TBS.......................... 2 1 3 3
Cable............................................. 27 32 53 65
--- ---- --- ----
Total............................................. $ 92 $ 96 $179 $191
==== ==== ==== ====
Entertainment Group:
Filmed Entertainment-Warner Bros.................. $ 36 $ 38 $ 65 $ 78
Broadcasting-The WB Network....................... 1 - 1 -
Cable Networks-HBO................................ 6 5 13 10
Cable............................................. 171 183 327 381
---- ---- ---- ----
Total............................................. $214 $226 $406 $469
==== ==== ==== ====
</TABLE>
32
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Amortization of Intangible Assets(1)
Time Warner:
<S> <C> <C> <C> <C>
Publishing........................................ $ 10 $ 8 $ 20 $ 17
Music............................................. 70 71 137 139
Cable Networks-TBS................................ 51 50 101 100
Filmed Entertainment-TBS.......................... 18 20 37 40
Cable............................................. 42 48 86 102
--- --- --- ----
Total............................................. $191 $197 $381 $398
==== ==== ==== ====
Entertainment Group:
Filmed Entertainment-Warner Bros.................. $ 31 $ 33 $ 61 $ 66
Broadcasting-The WB Network....................... 1 1 2 2
Cable Networks-HBO................................ - - - -
Cable............................................. 88 96 173 190
--- ---- ---- ----
Total............................................. $120 $130 $236 $258
==== ==== ==== ====
</TABLE>
(1) Amortization includes amortization relating to all business combinations
accounted for by the purchase method, including the $14 billion acquisition
of Warner Communications Inc. in 1989, the $6.2 billion acquisition of
Turner Broadcasting System, Inc. in 1996 and the $2.3 billion of cable
acquisitions in 1996 and 1995.
8. COMMITMENTS AND CONTINGENCIES
Time Warner is subject to numerous legal proceedings. In management's
opinion and considering established reserves, the resolution of these matters
will not have a material effect, individually and in the aggregate, on Time
Warner's consolidated financial statements.
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
Six Months
Ended June 30,
--------------
1999 1998
---- ----
(millions)
Interest expense.................................. $469 $455
Cash payments made for interest................... 446 404
Cash payments made for income taxes............... 159 122
Tax-related distributions received from TWE....... 138 138
Income tax refunds received....................... 14 43
Noncash investing activities include the exchange of certain cable
television systems in 1999 and 1998 (see Note 2). Noncash investing activities
in the first six months of 1998 also included the transfer of cable television
systems (or interests therein) serving approximately 650,000 subscribers that
were formerly owned by subsidiaries of Time Warner to the TWE-Advance/Newhouse
Partnership, subject to approximately $1 billion of debt, in
33
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
exchange for common and preferred partnership interests therein, as well as
certain related transactions (collectively, the "TWE-A/N Transfers"). For a more
comprehensive description of the TWE-A/N Transfers, see Time Warner's 1998 Form
10-K.
34
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(unaudited)
Time Warner Companies, Inc. ("TW Companies") and Turner Broadcasting
System, Inc. ("TBS" and, together with TW Companies, the "Guarantor
Subsidiaries") are wholly owned subsidiaries of Time Warner Inc. ("Time
Warner"). Time Warner, TW Companies and TBS have fully and unconditionally
guaranteed all of the outstanding publicly traded indebtedness of each other.
Set forth below are condensed consolidating financial statements of Time Warner,
including each of the Guarantor Subsidiaries, presented for the information of
each company's public debtholders. Separate financial statements and other
disclosures relating to the Guarantor Subsidiaries have not been presented
because management has determined that this information would not be material to
such debtholders. The following condensed consolidating financial statements
present the results of operations, financial position and cash flows of (i) Time
Warner, TW Companies and TBS (in each case, reflecting investments in its
consolidated subsidiaries under the equity method of accounting), (ii) the
direct and indirect non-guarantor subsidiaries of Time Warner and (iii) the
eliminations necessary to arrive at the information for Time Warner on a
consolidated basis. These condensed consolidating financial statements should be
read in conjunction with the accompanying consolidated financial statements of
Time Warner.
Consolidating Statement of Operations
For The Three Months Ended June 30, 1999
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ -------- ------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................... $ - $ - $ 242 $3,333 $ (1) $3,574
----- ------ ------ ------ ------- ------
Cost of revenues (1)........................ - - 132 1,768 (1) 1,899
Selling, general and administrative (1)..... - - 48 1,132 - 1,180
----- ------ ------ ------ ------- ------
Operating expenses.......................... - - 180 2,900 (1) 3,079
----- ------ ------ ------ ------- ------
Business segment operating income........... - - 62 433 - 495
Equity in pretax income of consolidated
subsidiaries............................. 1,156 1,162 158 - (2,476) -
Equity in pretax income of Entertainment
Group ................................... - - - 794 (1) 793
Interest and other, net..................... (70) (163) (35) 94 (28) (202)
Corporate expenses.......................... (22) (14) (4) (16) 34 (22)
----- ------ ------ ------ ------- ------
Income before income taxes.................. 1,064 985 181 1,305 (2,471) 1,064
Income tax provision........................ (471) (436) (89) (581) 1,106 (471)
----- ------ ------ ------ ------- ------
Net income.................................. $ 593 $ 549 $ 92 $ 724 $(1,365) $ 593
===== ====== ====== ====== ======= ======
(1) Includes depreciation and amortization
expense of:.......................... $ - $ - $ 3 $ 280 $ - $ 283
===== ====== ====== ====== ======= ======
</TABLE>
35
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(unaudited)
Consolidating Statement of Operations
For The Three Months Ended June 30, 1998
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ------- ------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................... $ - $ - $ 198 $3,474 $ - $3,672
----- ------ ------ ------ ------- ------
Cost of revenues (1)........................ - - 100 1,977 - 2,077
Selling, general and administrative (1)..... - - 47 1,164 - 1,211
----- ------ ------ ------ ------- ------
Operating expenses.......................... - - 147 3,141 - 3,288
----- ------ ------ ------ ------- ------
Business segment operating income........... - - 51 333 - 384
Equity in pretax income of consolidated
subsidiaries............................. 279 397 99 - (775) -
Equity in pretax income of Entertainment
Group ................................... - - - 173 (7) 166
Interest and other, net..................... (12) (202) (40) (11) (18) (283)
Corporate expenses.......................... (19) (13) (4) (15) 32 (19)
----- ------ ------ ------ ------- ------
Income before income taxes.................. 248 182 106 480 (768) 248
Income tax provision........................ (147) (117) (60) (261) 438 (147)
----- ------ ------ ------ ------- ------
Net income.................................. $ 101 $ 65 $ 46 $ 219 $ (330) $ 101
===== ====== ====== ====== ======= ======
(1) Includes depreciation and amortization
expense of:.......................... $ - $ - $ 2 $ 291 $ - $ 293
===== ====== ====== ====== ======= ======
</TABLE>
36
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(unaudited)
Consolidating Statement of Operations
For The Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ------- ------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................... $ - $ - $ 426 $6,417 $ (3) $6,840
----- ------ ------ ------ ------- ------
Cost of revenues (1)........................ - - 200 3,488 (3) 3,685
Selling, general and administrative (1)..... - - 104 2,261 - 2,365
----- ------ ------ ------ ------- ------
Operating expenses.......................... - - 304 5,749 (3) 6,050
----- ------ ------ ------ ------- ------
Business segment operating income........... - - 122 668 - 790
Equity in pretax income of consolidated
subsidiaries............................. 1,534 1,636 234 - (3,404) -
Equity in pretax income of Entertainment
Group ................................... - - - 1,134 1 1,135
Interest and other, net..................... (122) (346) (69) 69 (45) (513)
Corporate expenses.......................... (44) (28) (8) (32) 68 (44)
----- ------ ------ ------ ------- ------
Income before income taxes.................. 1,368 1,262 279 1,839 (3,380) 1,368
Income tax provision........................ (637) (587) (145) (845) 1,577 (637)
----- ------ ------ ------ ------- ------
Net income.................................. $ 731 $ 675 $ 134 $ 994 $(1,803) $ 731
===== ====== ====== ====== ======= ======
(1) Includes depreciation and amortization
expense of:.......................... $ - $ - $ 5 $ 555 $ - $ 560
====== ====== ====== ====== ======= ======
</TABLE>
37
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(unaudited)
Consolidating Statement of Operations
For The Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ -------- ------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................... $ - $ - $ 366 $6,443 $ - $6,809
----- ------ ------ ------ ------- ------
Cost of revenues (1)........................ - - 161 3,803 - 3,964
Selling, general and administrative (1)..... - - 97 2,194 - 2,291
----- ----- ------ ------ ------- ------
Operating expenses.......................... - - 258 5,997 - 6,255
----- ----- ------ ------ ------- ------
Business segment operating income........... - - 108 446 - 554
Equity in pretax income of consolidated
subsidiaries............................. 283 614 78 - (975) -
Equity in pretax income of Entertainment
Group ................................... - - - 296 (23) 273
Interest and other, net..................... (22) (387) (84) (51) (22) (566)
Corporate expenses.......................... (38) (26) (8) (31) 65 (38)
----- ------ ------ ------ ------- ------
Income before income taxes.................. 223 201 94 660 (955) 223
Income tax provision........................ (184) (135) (73) (367) 575 (184)
----- ----- ------ ------ ------- ------
Net income.................................. $ 39 $ 66 $ 21 $ 293 $ (380) $ 39
===== ====== ====== ====== ======= ======
(1) Includes depreciation and amortization
expense of:......................... $ - $ - $ 4 $ 585 $ - $ 589
===== ====== ====== ====== ======= ======
</TABLE>
38
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(unaudited)
Consolidating Balance Sheet
June 30, 1999
<TABLE>
<CAPTION>
T
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------- --------- --- ------------ ------- -----------
(millions)
ASSETS
Current assets
<S> <C> <C> <C> <C> <C> <C>
Cash and equivalents..........................$ - $ - $ 8 $ 296 $ - $ 304
Receivables, net.............................. 10 28 89 2,270 - 2,397
Inventories................................... - - 134 789 - 923
Prepaid expenses.............................. 52 - - 1,227 - 1,279
------- ------- ------- ------- ------- ------
Total current assets.......................... 62 28 231 4,582 - 4,903
Noncurrent inventories........................ - - 141 1,697 - 1,838
Investments in and amounts due to and from
consolidated subsidiaries.................. 15,928 14,425 9,455 - (39,808) -
Investments in and amounts due to and
from Entertainment Group................... - 899 - 5,460 (107) 6,252
Other investments............................. 230 27 24 1,333 (690) 924
Property, plant and equipment................. 41 - 45 1,941 - 2,027
Music catalogues, contracts and copyrights.... - - - 824 - 824
Cable television and sports franchises........ - - - 2,662 - 2,662
Goodwill...................................... - - - 11,647 - 11,647
Other assets.................................. 65 105 66 580 - 816
------- ------- ------- ------- ------- ------
Total assets................................. $16,326 $15,484 $ 9,962 $30,726 $(40,605) $31,893
======= ======= ======= ======= ======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable..............................$ 12 $ 37 $ 2 $ 772 $ - $ 823
Participations, royalties and programming
costs payable.............................. - - 34 1,138 - 1,172
Debt due within one year...................... - - - 20 - 20
Other current liabilities..................... 248 187 145 1,584 (43) 2,121
------- ------- ------- ------- ------- ------
Total current liabilities..................... 260 224 181 3,514 (43) 4,136
Long-term debt ............................... 1,585 7,391 747 1,042 - 10,765
Debt due to affiliates........................ - - 1,647 158 (1,805) -
Borrowings against future stock
option proceeds............................ 1,219 - - - - 1,219
Deferred income taxes......................... 3,704 3,499 285 3,784 (7,568) 3,704
Unearned portion of paid subscriptions........ - - - 755 - 755
Other liabilities............................. 466 - 121 1,060 - 1,647
TW Companies-obligated mandatorily
redeemable preferred securities of
a subsidiary holding solely
subordinated debentures of
TW Companies............................... - - - 575 - 575
Shareholders' equity
Due from Time Warner and subsidiaries......... - (2,623) (642) (2,692) 5,957 -
Other shareholders' equity.................... 9,092 6,993 7,623 22,530 (37,146) 9,092
------ ------ ------ ------- ------- ------
Total shareholders' equity.................... 9,092 4,370 6,981 19,838 (31,189) 9,092
------ ------ ------ ------- ------- ------
Total liabilities and shareholders' equity....$16,326 $15,484 $ 9,962 $30,726 $(40,605) $31,893
======= ======= ======= ======= ======== =======
</TABLE>
39
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(unaudited)
Consolidating Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ------- ------------
(millions)
ASSETS
Current assets
<S> <C> <C> <C> <C> <C> <C>
Cash and equivalents..........................$ - $ 66 $ 25 $ 351 $ - $ 442
Receivables, net.............................. 10 56 78 2,750 (9) 2,885
Inventories................................... - - 131 815 - 946
Prepaid expenses.............................. 17 5 - 1,166 (12) 1,176
------- ------- ------- ------- ------- -----
Total current assets.......................... 27 127 234 5,082 (21) 5,449
Noncurrent inventories........................ - - 156 1,744 - 1,900
Investments in and amounts due to and from
consolidated subsidiaries.................. 15,222 13,745 9,465 - (38,432) -
Investments in and amounts due to and
from Entertainment Group................... - 919 - 4,169 (108) 4,980
Other investments............................. 211 15 24 1,194 (650) 794
Property, plant and equipment................. 55 - 44 1,892 - 1,991
Music catalogues, contracts and copyrights.... - - - 876 - 876
Cable television and sports franchises........ - - - 2,868 - 2,868
Goodwill...................................... - - - 11,919 - 11,919
Other assets.................................. 65 116 59 631 (8) 863
------- ----- ------ ------- ------- ------
Total assets..................................$15,580 $14,922 $ 9,982 $30,375 $(39,219) $31,640
======= ======= ======= ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable..............................$ 20 $ - $ 11 $ 965 $ - $ 996
Participations, royalties and programming
costs payable.............................. - - 31 1,168 - 1,199
Debt due within one year...................... - - - 19 - 19
Other current liabilities..................... 308 229 176 1,705 (14) 2,404
------ ------ ------ ------- ------- ------
Total current liabilities..................... 328 229 218 3,857 (14) 4,618
Long-term debt ............................... 1,584 7,346 747 1,248 - 10,925
Debt due to affiliates........................ - - 1,647 158 (1,805) -
Borrowings against future stock
option proceeds........................... 895 - - - - 895
Deferred income taxes......................... 3,491 3,324 246 3,570 (7,140) 3,491
Unearned portion of paid subscriptions........ - - - 741 - 741
Other liabilities............................. 430 - 116 997 - 1,543
TW Companies-obligated mandatorily
redeemable preferred securities of a
subsidiary holding solely subordinated
debentures of TW Companies................. - - - 575 - 575
Shareholders' equity
Due from Time Warner and subsidiaries......... - (2,313) (479) (2,317) 5,109 -
Other shareholders' equity.................... 8,852 6,336 7,487 21,546 (35,369) 8,852
------ ------- ------ ------- ------- ------
Total shareholders' equity.................... 8,852 4,023 7,008 19,229 (30,260) 8,852
------- ------- ------- ------- ------- ------
Total liabilities and shareholders' equity....$15,580 $14,922 $ 9,982 $30,375 $(39,219) $31,640
======= ======= ======= ======= ======== =======
</TABLE>
40
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(unaudited)
Consolidating Statement of Cash Flows
For The Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ------ -----------
(millions)
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net income................................................. $ 731 $ 675 $ 134 $ 994 $(1,803) $ 731
Adjustments for noncash and nonoperating items:
Depreciation and amortization.............................. - - 5 555 - 560
Noncash interest expense................................... - 2 - - - 2
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries.............. (174) (502) 147 - 529 -
Deficiency of distributions over equity in pretax
income of Entertainment Group........................... - - - (854) (1) (855)
Changes in operating assets and liabilities................ (89) (53) (134) 452 (19) 157
------ ------ ------ ----- ------ ------
Cash provided by operations................................ 468 122 152 1,147 (1,294) 595
------ ------ ------ ----- ------ ------
INVESTING ACTIVITIES
Investments and acquisitions............................... - - - (101) - (101)
Advances to parents and consolidated subsidiaries.......... - - - (228) 228 -
Repayments of advances from consolidated subsidiaries...... - 71 - 232 (303) -
Capital expenditures....................................... - - (6) (308) - (314)
Investment proceeds........................................ - - - 113 - 113
------ ----- ------ ------ ------ ------
Cash provided (used) by investing activities............... - 71 (6) (292) (75) (302)
------ ------ ------ ------ ------ ------
FINANCING ACTIVITIES
Borrowings................................................. - 115 - 226 - 341
Debt repayments............................................ - (65) - (243) - (308)
Change in due to/from parent............................... (4) (309) (163) (893) 1,369 -
Borrowings against future stock option proceeds............ 324 - - - - 324
Repurchases of Time Warner common stock.................... (926) - - - - (926)
Dividends paid............................................. (149) - - - - (149)
Proceeds received from stock option and
dividend reinvestment plans............................. 287 - - - - 287
------ ------ ------ ------ ------ ------
Cash used by financing activities.......................... (468) (259) (163) (910) 1,369 (431)
------ ------ ------ ------ ------ ------
DECREASE IN CASH AND EQUIVALENTS............ .............. - (66) (17) (55) - (138)
------ ------ ------ ------ ------ ------
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD..................................... - 66 25 351 - 442
------ ------ ------ ------ ------ ------
CASH AND EQUIVALENTS AT END OF PERIOD...................... $ - $ - $ 8 $ 296 $ - $ 304
======= ======= ======= ======= ======= =======
</TABLE>
41
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(unaudited)
Consolidating Statement of Cash Flows
For The Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
----- --------- --- ----------- ------- ------------
(millions)
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net income................................................. $ 39 $ 66 $ 21 $ 293 $ (380) $ 39
Adjustments for noncash and nonoperating items:
Depreciation and amortization.............................. - - 4 585 - 589
Noncash interest expense................................... - 29 - - - 29
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries.............. 838 (313) 145 - (670) -
Excess of distributions over equity in pretax
income of Entertainment Group........................... - - - 2 23 25
Changes in operating assets and liabilities................ 160 91 (81) 81 (44) 207
----- ----- ----- ------ ------ -----
Cash provided (used) by operations......................... 1,037 (127) 89 961 (1,071) 889
----- ----- ----- ------ ------ -----
INVESTING ACTIVITIES
Investments and acquisitions............................... (213) - - 139 - (74)
Advances to parents and consolidated subsidiaries.......... - (187) - (26) 213 -
Repayments of advances from consolidated subsidiaries...... 75 - - - (75) -
Capital expenditures....................................... - - (7) (221) - (228)
Investment proceeds........................................ - - - 395 - 395
----- ----- ----- ------ ----- -----
Cash provided (used) by investing activities............... (138) (187) (7) 287 138 93
----- ----- ----- ------ ----- -----
FINANCING ACTIVITIES
Borrowings................................................. 597 496 - 514 (4) 1,603
Debt repayments............................................ - (500) (75) (877) 75 (1,377)
Change in due to/from parent............................... - 21 - (883) 862 -
Borrowings against future stock option proceeds............ 525 - - - - 525
Repayments of borrowings against future stock
option proceeds......................................... (533) - - - - (533)
Repurchases of Time Warner common stock.................... (1,661) - - - - (1,661)
Dividends paid............................................. (265) - - - - (265)
Proceeds received from stock option and
dividend reinvestment plans............................. 460 - - - - 460
Other, principally financing costs......................... (22) (13) - - - (35)
------ ------ ------ ------- ------ -----
Cash provided (used) by financing activities............... (899) 4 (75) (1,246) 933 (1,283)
------ ------ ------ ------- ------ ------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................................. - (310) 7 2 - (301)
------ ------ ------ ------- ------ -----
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD..................................... - 372 9 264 - 645
------ ------ ----- ------- ------ -----
CASH AND EQUIVALENTS AT END OF PERIOD...................... $ - $ 62 $ 16 $ 266 $ - $344
====== ====== ====== ======= ====== ====
</TABLE>
42
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Description of Business
Time Warner Entertainment Company, L.P. ("TWE" or the "Company")
classifies its business interests into three fundamental areas: Cable Networks,
consisting principally of interests in cable television programming;
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; and Cable, consisting
principally of interests in cable television systems. TWE also manages the cable
properties owned by Time Warner and the combined cable television operations are
conducted under the name of Time Warner Cable.
Use of EBITA
TWE evaluates operating performance based on several factors, including
its primary financial measure of operating income before noncash amortization of
intangible assets ("EBITA"). Consistent with management's financial focus on
controlling capital spending, EBITA measures operating performance after charges
for depreciation. In addition, EBITA eliminates the uneven effect across all
business segments of considerable amounts of noncash amortization of intangible
assets recognized in business combinations accounted for by the purchase method.
These business combinations, including Time Warner's $14 billion acquisition of
Warner Communications Inc. in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation in 1992, created
over $10 billion of intangible assets that generally are being amortized over a
twenty to forty year period. The exclusion of noncash amortization charges also
is consistent with management's belief that TWE's intangible assets, such as
cable television franchises, film and television libraries and the goodwill
associated with its brands, generally are increasing in value and importance to
TWE's business objective of creating, extending and distributing recognizable
brands and copyrights throughout the world. As such, the following comparative
discussion of the results of operations of TWE includes, among other factors, an
analysis of changes in business segment EBITA. However, EBITA should be
considered in addition to, not as a substitute for, operating income, net income
and other measures of financial performance reported in accordance with
generally accepted accounting principles.
AT&T/MediaOne Acquisition
At the time of this filing, MediaOne Group, Inc. ("MediaOne"), a
limited partner in TWE, had agreed to be acquired by AT&T Corp. ("AT&T"). On
August 3, 1999, TWE received a notice from MediaOne concerning the termination
of its covenant not to compete with TWE. As a result of the termination notice
and the operation of the partnership agreement governing TWE, MediaOne's rights
to participate in the management of TWE's businesses have terminated immediately
and irrevocably. MediaOne has retained only certain protective governance rights
pertaining to certain limited matters affecting TWE as a whole.
In addition, in connection with the proposed acquisition of MediaOne
by AT&T, Time Warner and AT&T are engaged in discussions concerning the overall
relationship of the companies following that acquisition. Among the subjects
included in those discussions are the structure of TWE, the structure of
AT&T/MediaOne's investment in TWE, as well as potential changes to the proposed
cable telephony joint venture discussed on page F-8 of TWE's Annual Report on
Form 10-K for the year ended December 31, 1998.
43
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
The proposed acquisition of MediaOne by AT&T is subject to customary
closing conditions, including regulatory approvals. Accordingly, there is no
assurance that it will occur.
Transactions Affecting Comparability of Results of Operations
As more fully described herein, the comparability of TWE's operating
results has been affected by certain significant transactions and nonrecurring
items in each period.
In 1999, these nonrecurring items consisted of (i) an approximate $215
million net pretax gain recognized in the first quarter of 1999 in connection
with the early termination and settlement of a long-term home video distribution
agreement and (ii) net pretax gains in the amount of $760 million in the second
quarter of 1999 relating to the sale or exchange of various cable television
systems and investments. This compares to net pretax gains in the first half of
1998 of $84 million also relating to the sale or exchange of cable television
systems.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed after
excluding the effects of these significant nonrecurring gains. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of these unusual items. However, unusual items may occur in
any period. Accordingly, investors and other financial statement users
individually should consider the types of events and transactions for which
adjustments have been made.
In addition, the comparability of TWE's Cable division results has been
affected further by certain cable-related transactions, as described more fully
in Note 8 to the accompanying consolidated financial statements. While these
transactions had a significant effect on the comparability of the Cable
division's EBITA and operating income principally due to the deconsolidation of
the related operations, they did not have a significant effect on the
comparability of TWE's net income.
RESULTS OF OPERATIONS
EBITA and operating income are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
Operating Operating
EBITA Income EBITA Income
----- --------- ----- ---------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.(1). $ 132 $121 $ 101 $ 88 $ 478 $ 240 $ 417 $174
Broadcasting-The WB Network.......... (30) (23) (31) (24) (71) (61) (73) (63)
Cable Networks-HBO................... 131 113 131 113 256 222 256 222
Cable(2)............................. 1,099 374 1,011 278 1,436 681 1,263 491
------ ---- ------ ---- ------ ---- ------ ----
Total................................ $1,332 $585 $1,212 $455 $2,099 $1,082 $1,863 $824
====== ==== ====== ==== ====== ====== ====== ====
</TABLE>
(1) Includes a net pretax gain of approximately $215 million recognized
in the first quarter of 1999 in connection with the early termination
and settlement of a long-term home video distribution agreement.
(2) Includes net pretax gains relating to the sale or exchange of certain
cable television systems and investments of $760 million in the second
quarter of 1999 and $70 million in the second quarter of 1998.
Similarly, six-month results include net pretax gains of $760
million in 1999 and $84 million in 1998.
44
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
TWE had revenues of $3.060 billion and net income of $767 million for
the three months ended June 30, 1999, compared to revenues of $2.850 billion and
net income of $155 million for the three months ended June 30, 1998.
As previously described, the comparability of TWE's operating results
for 1999 and 1998 has been affected by certain significant, nonrecurring items
recognized in each period. These nonrecurring items consisted of $760 million of
net pretax gains in 1999, compared to $70 million of net pretax gains in 1998.
TWE's net income increased to $767 million in 1999, compared to $155
million in 1998. However, excluding the effect of the nonrecurring items
referred to earlier, net income increased by $65 million to $165 million in 1999
from $100 million in 1998. As discussed more fully below, this improvement
principally resulted from an overall increase in TWE's business segment
operating income.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $27 million and $17 million for
the three months ended June 30, 1999 and 1998, respectively, have been provided
for the operations of TWE's domestic and foreign subsidiary corporations.
Filmed Entertainment-Warner Bros. Revenues increased to $1.446 billion,
compared to $1.327 billion in the second quarter of 1998. EBITA increased to
$132 million from $121 million. Operating income increased to $101 million from
$88 million. Revenues benefited from increases in worldwide theatrical and
television distribution operations, offset in part by lower revenues from
consumer products operations. Also contributing to the revenue increase were
marginally higher revenues from worldwide home video operations, which benefited
from increased sales of DVDs. EBITA and operating income benefited principally
from improved results from worldwide theatrical and television distribution
operations, offset in part by lower gains on the sale of assets and lower
results from consumer products operations.
Broadcasting - The WB Network. Revenues increased to $83 million,
compared to $61 million in the second quarter of 1998. EBITA decreased to a loss
of $30 million from a loss of $23 million. Operating losses increased to $31
million from $24 million. Revenues increased as a result of improved television
ratings and the addition of a fifth night of prime-time programming in September
1998. Operating losses increased principally because the revenue gains were more
than offset by the combination of higher programming costs associated with the
expanded programming schedule and higher start-up costs associated with The WB
Network 100+ station group, a distribution alliance for The WB Network in
smaller markets.
Cable Networks-HBO. Revenues increased to $546 million, compared to
$509 million in the second quarter of 1998. EBITA and operating income increased
to $131 million from $113 million. Revenues benefited primarily from an increase
in subscriptions. EBITA and operating income increased principally as a result
of the revenue gains, increased cost savings and higher income from Comedy
Central, a 50%-owned equity investee.
Cable. Revenues increased to $1.114 billion, compared to $1.084
billion in the second quarter of 1998. EBITA increased to $1.099 billion from
$374 million. Operating income increased to $1.011 billion from $278
45
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
million. The Cable division's 1999 operating results were affected by certain
cable-related transactions that occurred in 1998 (the "1998 Cable Transactions")
and by net pretax gains of $760 million in 1999 and $70 million in 1998 relating
to the sale or exchange of various cable television systems and investments. The
1998 Cable Transactions principally resulted in the deconsolidation or transfer
of certain operations and are described more fully in Note 8 to the accompanying
consolidated financial statements. Excluding the effect of the 1998 Cable
Transactions, revenues increased due to growth in basic cable subscribers,
increases in basic cable rates, an increase in advertising revenues and an
increase in revenues from providing Road Runner-branded, high-speed online
services. Similarly, excluding the effect of the 1998 Cable Transactions and the
one-time gains, EBITA and operating income increased principally as a result of
the revenue increases, offset in part by higher programming costs.
Interest and Other, Net. Interest and other, net, decreased to an
expense of $167 million in the second quarter of 1999, compared to an expense of
$183 million in the second quarter of 1998. Interest expense increased to $136
million, compared to $132 million in the second quarter of 1998, principally due
to higher average debt levels. Other expense, net, decreased to $31 million in
the second quarter of 1999, compared to $51 million in the second quarter of
1998. The decrease principally related to lower losses from certain investments
accounted for under the equity method of accounting and a gain on the sale of an
investment.
Minority Interest. Minority interest expense increased to $233 million,
compared to $82 million in the second quarter of 1998. Minority interest expense
increased primarily due to the allocation of a portion of the net pretax gains
relating to the sale or exchange of various cable television systems and
investments owned by the TWE-Advance/Newhouse Partnership ("TWE-A/N"), a
majority owned partnership of TWE, to the minority owners of that partnership.
Excluding the significant effect of the gains recognized in each period,
minority interest expense for 1999 and 1998 was comparable in amount and did not
have any significant effect on operating trends.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
TWE had revenues of $5.994 billion and net income of $1.079 billion for
the six months ended June 30, 1999, compared to revenues of $5.760 billion and
net income of $263 million for the six months ended June 30, 1998.
As previously described, the comparability of TWE's operating results
for 1999 and 1998 has been affected by certain significant, nonrecurring items
recognized in each period. These nonrecurring items consisted of approximately
$1 billion of net pretax gains in 1999, compared to $84 million of net pretax
gains in 1998.
TWE's net income increased to $1.079 billion in 1999, compared to $263
million in 1998. However, excluding the significant effect of the nonrecurring
items referred to earlier, net income increased by $63 million to $262 million
in 1999 from $199 million in 1998. This improvement principally resulted from an
overall increase in TWE's business segment operating income, offset in part by
higher equity losses from certain investments accounted for under the equity
method of accounting.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $55 million and $32 million
for the six months ended June 30, 1999 and 1998, respectively,
46
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
have been provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Filmed Entertainment-Warner Bros. Revenues increased to $2.826 billion,
compared to $2.637 billion in the first six months of 1998. EBITA increased to
$478 million from $240 million. Operating income increased to $417 million from
$174 million. Revenues benefited from increases in worldwide theatrical and
television distribution operations, offset in part by lower revenues from
consumer products operations. Also contributing to the revenue increase were
higher revenues from worldwide home video operations, which benefited from
increased sales of DVDs. EBITA and operating income increased primarily from the
inclusion of an approximate $215 million net pretax gain recognized in the first
quarter of 1999 in connection with the early termination and settlement of a
long-term home video distribution agreement. In addition, EBITA and operating
income benefited principally from improved results from worldwide theatrical and
home video operations and an increase in investment-related income, offset in
part by lower results from consumer products operations.
Broadcasting - The WB Network. Revenues increased to $162 million,
compared to $106 million in the first six months of 1998. EBITA decreased to a
loss of $71 million from a loss of $61 million. Operating losses increased to
$73 million from $63 million. Revenues increased as a result of improved
television ratings and the addition of a fifth night of prime-time programming
in September 1998. Operating losses increased principally because the revenue
gains were more than offset by the combination of higher programming costs
associated with the expanded programming schedule, a lower allocation of losses
to a minority partner in the network and higher start-up costs associated with
The WB Network 100+ station group, a distribution alliance for The WB Network in
smaller markets.
Cable Networks-HBO. Revenues increased to $1.072 billion, compared to
$1.021 billion in the first six months of 1998. EBITA and operating income
increased to $256 million from $222 million. Revenues benefited primarily from
an increase in subscriptions. EBITA and operating income increased principally
as a result of the revenue gains, increased cost savings, one-time gains from
the sale of certain investments and higher income from Comedy Central, a
50%-owned equity investee. These increases were offset in part by higher
marketing expenses.
Cable. Revenues decreased to $2.188 billion, compared to $2.237 billion
in the first six months of 1998. EBITA increased to $1.436 billion from $681
million. Operating income increased to $1.263 billion from $491 million. The
Cable division's 1999 operating results were affected by the 1998 Cable
Transactions and by net pretax gains of $760 million in 1999 and $84 million in
1998 relating to the sale or exchange of various cable television systems and
investments. The 1998 Cable Transactions principally resulted in the
deconsolidation or transfer of certain operations and are described more fully
in Note 8 to the accompanying consolidated financial statements. Excluding the
effect of the 1998 Cable Transactions, revenues increased due to growth in basic
cable subscribers, increases in basic cable rates, increases in advertising and
pay-per-view revenues and an increase in revenues from providing Road
Runner-branded, high-speed online services. Similarly, excluding the effect of
the 1998 Cable Transactions and the one-time gains, EBITA and operating income
increased principally as a result of the revenue increases, offset in part by
higher programming costs.
Interest and Other, Net. Interest and other, net, increased to an
expense of $392 million in the first six months of 1999, compared to an expense
of $347 million in the first six months of 1998. Interest expense was $273
million in both periods. Other expense, net, increased to $119 million in the
first six months of 1999,
47
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
compared to $74 million in the first six months of 1998. This increase
principally related to higher losses from certain investments accounted for
under the equity method of accounting, offset in part by a gain on the sale of
an investment.
Minority Interest. Minority interest expense was $301 million in the
first six months of 1999, compared to $146 million in the first six months of
1998. Minority interest expense increased primarily due to the allocation of a
portion of the net pretax gains relating to the sale or exchange of various
cable television systems and investments owned by TWE-A/N to the minority owners
of that partnership. Excluding the significant effect of the gains recognized in
each period, minority interest expense for 1999 and 1998 was comparable in
amount and did not have any significant effect on operating trends.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1999
Financial Condition
At June 30, 1999, TWE had $6.5 billion of debt, $117 million of cash and
equivalents (net debt of $6.4 billion), $627 million of Time Warner General
Partners' senior priority capital and $5.7 billion of partners' capital. This
compares to $6.6 billion of debt, $87 million of cash and equivalents (net debt
of $6.5 billion), $217 million of preferred stock of a subsidiary, $603 million
of Time Warner General Partners' senior priority capital and $5.1 billion of
partners' capital at December 31, 1998.
Senior Capital Distributions
In July 1999, TWE paid a $627 million distribution to the Time Warner
General Partners to redeem the remaining portion of their senior priority
capital interests, including a priority capital return of $173 million. Time
Warner used a portion of the proceeds received from this distribution to repay
all $400 million of outstanding borrowings under its credit agreement with TWE.
Redemption of REIT Preferred Stock
In March 1999, a subsidiary of TWE (the "REIT") redeemed all of its
shares of preferred stock ("REIT Preferred Stock") at an aggregate cost of $217
million, which approximated net book value. The redemption was funded with
borrowings under TWE's bank credit agreement. Pursuant to its terms, the REIT
Preferred Stock was redeemed as a result of proposed changes to federal tax
regulations that substantially increased the likelihood that dividends paid by
the REIT or interest paid to the REIT under a mortgage note of TWE would not be
fully deductible for federal income tax purposes.
Cash Flows
During the first six months of 1999, TWE's cash provided by operations
amounted to $1.519 billion and reflected $2.099 billion of EBITA from its Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses, $406 million of noncash depreciation expense and $21 million
of proceeds from TWE's asset securitization program, less $242 million of
interest payments, $49 million of income taxes, $36 million of corporate
expenses, and $680 million related to an aggregate increase in working capital
48
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
requirements, other balance sheet accounts and noncash items. Cash provided by
operations of $586 million in the first six months of 1998 reflected $1.082
billion of EBITA from its Filmed Entertainment-Warner Bros., Broadcasting-The WB
Network, Cable Networks-HBO and Cable businesses, $469 million of noncash
depreciation expense and $135 million of proceeds from TWE's asset
securitization program, less $260 million of interest payments, $39 million of
income taxes, $36 million of corporate expenses and $765 million related to an
aggregate increase in working capital requirements, other balance sheet accounts
and noncash items.
Cash used by investing activities was $662 million in the first six
months of 1999, compared to $493 million in the first six months of 1998. The
increase principally resulted from a $296 million decrease in investment
proceeds relating to the 1998 sale of TWE's remaining interest in Six Flags
Entertainment Corporation. The decrease in investment proceeds was partially
offset by lower capital expenditures. Capital expenditures decreased to $649
million in the first six months of 1999, compared to $734 million in the first
six months of 1998.
Cash used by financing activities was $827 million in the first six
months of 1999, compared to $343 million in the first six months of 1998. The
use of cash in 1999 principally resulted from the redemption of REIT Preferred
Stock at an aggregate cost of $217 million, the payment of $280 million of
capital distributions to Time Warner and $229 million of debt reduction. The use
of cash in 1998 principally resulted from the payment of $298 million of capital
distributions to Time Warner, offset in part by an $11 million increase in net
borrowings.
Management believes that TWE's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to fund its capital
and liquidity needs for the foreseeable future.
Cable Capital Spending
Time Warner Cable has been engaged in a plan to upgrade the
technological capability and reliability of its cable television systems and
develop new services, which it believes will position the business for
sustained, long-term growth. Capital spending by TWE's Cable division amounted
to $587 million in the six months ended June 30, 1999, compared to $666 million
in the six months ended June 30, 1998. Cable capital spending is expected to
approximate $700 million for the remainder of 1999. Capital spending by TWE's
Cable division is expected to continue to be funded by cable operating cash
flow.
Filmed Entertainment
Backlog represents the amount of future revenue not yet recorded from
cash contracts for the licensing of theatrical and television product for pay
cable, basic cable, network and syndicated television exhibition. Backlog of
TWE's Filmed Entertainment-Warner Bros. division amounted to $2.663 billion at
June 30, 1999 (including amounts relating to the licensing of film product to
TWE's cable television networks of $359 million and to Time Warner's cable
television networks of $655 million). This compares to $2.298 billion at
December 31, 1998 (including amounts relating to the licensing of film product
to TWE's cable television networks of $199 million and to Time Warner's cable
television networks of $570 million).
Because backlog generally relates to contracts for the licensing of
theatrical and television product which have already been produced, the
recognition of revenue for such completed product principally is dependent only
49
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected periodically
over the term of the related licensing agreements or on an accelerated basis
using TWE's $500 million securitization facility. The portion of backlog for
which cash has not already been received has significant off-balance sheet asset
value as a source of future funding. The backlog excludes advertising barter
contracts, which are also expected to result in the future realization of
revenues and cash through the sale of advertising spots received under such
contracts.
Year 2000 Technology Preparedness
TWE, like most large companies, depends on many different computer
systems and other chip-based devices for the continuing conduct of its business.
Older computer programs, computer hardware and chip-based devices may fail to
recognize dates beginning on January 1, 2000 as being valid dates, and as a
result may fail to operate or may operate improperly when such dates are
introduced.
TWE's exposure to potential Year 2000 problems arises both in
technological operations under the control of the Company and in those dependent
on one or more third parties. These technological operations include information
technology ("IT") systems and non-IT systems, including those with embedded
technology, hardware and software. Most of TWE's potential Year 2000 exposures
are dependent to some degree on one or more third parties. Failure to achieve
high levels of Year 2000 compliance could have a material adverse impact on TWE
and its financial statements.
The Company's Year 2000 initiative is being conducted at the
operational level by divisional project managers and senior technology
executives overseen by senior divisional executives, with assistance internally
as well as from outside professionals. The progress of each division through the
different phases of remediation--inventorying, assessment, remediation planning,
implementation and final testing--is actively overseen and reviewed on a regular
basis by an executive oversight group.
The Company has generally completed the process of identifying,
assessing and planning the remediation of potential Year 2000 difficulties in
its technological operations, including IT applications, IT technology and
support, desktop hardware and software, non-IT systems and important third party
operations, and distinguishing those that are "mission critical" from those that
are not. An item is considered "mission critical" if its Year 2000-related
failure would significantly impair the ability of one of the Company's major
business units to (1) produce, market and distribute the products or services
that generate significant revenues for that business, (2) meet its obligations
to pay its employees, artists, vendors and others or (3) meet its obligations
under regulatory requirements and internal accounting controls. The Company and
its divisions have identified approximately 600 worldwide, "mission critical"
potential exposures. Of these, as of June 30, 1999, approximately 72% have been
identified by the divisions as Year 2000 compliant and approximately 28% as in
the remediation implementation or final testing stages. The Company currently
expects that remediation with respect to well over 90% of all these identified
operations will be substantially completed in all material respects by the end
of the third quarter of 1999. The Company, however, could experience unexpected
delays. The Company is currently planning to impose a "quiet" period at some
point during the fourth quarter of 1999 during which any remaining remediation
involving installation or modification of systems that interface with other
systems will be minimized to permit the Company to conduct testing in a stable
environment and to focus on its contingency and transition plans, as necessary.
50
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
As stated above, however, the Company's business is heavily dependent on
third parties and these parties are themselves heavily dependent on technology.
For example, in a situation endemic to the cable industry, much of the Company's
headend equipment that controls cable set-top boxes was not Year 2000 compliant.
The box manufacturers and cable industry groups together developed solutions
that the Company has been installing in its headend equipment at its various
geographic locations. The few remaining installations are currently scheduled
during the third quarter of 1999. In addition, if a television broadcaster or
cable programmer encounters Year 2000 problems that impede its ability to
deliver its programming, the Company will be unable to provide that programming
to its cable customers. Because the Company is also a programming supplier,
third-party signal delivery problems would affect its ability to deliver its
programming to its customers. The Company has attempted to include in its
"mission critical" inventory significant service providers, vendors, suppliers,
customers and governmental entities that are believed to be critical to business
operations and is in various stages of completing its determination of their
state of Year 2000 readiness through various means, including questionnaires,
interviews, on-site visits, system interface testing and industry group
participation. The Company continues to monitor these situations. Moreover, TWE
is dependent, like all large companies, on the continued functioning,
domestically and internationally, of basic, heavily computerized services such
as banking, telephony, water and power, and various distribution mechanisms
ranging from the mail, railroads and trucking to high-speed data transmission.
TWE is taking steps to attempt to satisfy itself that the third parties on which
it is heavily reliant are Year 2000 compliant, are developing satisfactory
contingency plans or that alternate means of meeting its requirements are
available, but cannot predict the likelihood of such compliance nor the direct
or indirect costs to the Company of non-compliance by those third parties or of
securing such services from alternate compliant third parties. In areas in which
the Company is uncertain about the anticipated Year 2000 readiness of a
significant third party, the Company is investigating available alternatives, if
any.
The Company currently estimates that the aggregate cost of its Year
2000 remediation program, which started in 1996, will be approximately $50 to
$85 million, of which an estimated 65% to 75% has been incurred through June 30,
1999. These costs include estimates of the costs of assessment, replacement,
repair and upgrade, both planned and unplanned, of certain IT and non-IT systems
and their implementation and testing. The Company anticipates that its
remediation program, and related expenditures, may continue into 2001 as
temporary solutions to Year 2000 problems are replaced with upgraded equipment.
These expenditures have been and are expected to continue to be funded from the
Company's operating cash flow and have not and are not expected to impact
materially the Company's financial statements.
Management believes that it has established an effective program to
resolve all significant Year 2000 issues in its control in a timely manner. As
noted above, however, the Company has not yet completed all phases of its
program and is dependent on third parties whose progress is not within its
control. In the event that the Company experiences unanticipated failures of the
systems within its control, management believes that the Company could
experience significant difficulty in producing and delivering its products and
services and conducting its business in the Year 2000 as it has in the past.
More importantly, disruptions experienced by third parties with which the
Company does business as well as by the economy generally could materially
adversely affect the Company. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
The Company continues to focus its efforts on remediation of its Year
2000 exposures. Simultaneously, it is examining its existing standard business
interruption strategies to evaluate whether they would satisfactorily meet the
demands of failures arising from Year-2000 related problems. It is also
developing and refining specific transition
51
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONA(Continued)
schedules and contingency plans in the event it does not successfully complete
its remaining remediation as anticipated or experiences unforeseen problems
outside the scope of these standard strategies. The Company intends to examine
its status periodically to determine the necessity of implementing such
contingency plans or additional strategies, which could involve, among other
things, manual workarounds, adjusting staffing strategies and sharing resources
across divisions.
Caution Concerning Forward-Looking Statements
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document, together
with management's public commentary related thereto, contains such
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future
growth in revenues, EBITA and cash flow. Words such as "anticipate", "estimate",
"expects", "projects", "intends", "plans", "believes" and words and terms of
similar substance used in connection with any discussion of future operating or
financial performance identify such forward-looking statements. Those
forward-looking statements are management's present expectations of future
events. As with any projection or forecast, they are inherently susceptible to
changes in circumstances, and TWE is under no obligation to (and expressly
disclaims any such obligation to) update or alter its forward-looking
statements, whether as a result of such changes, new information, future events
or otherwise.
TWE operates in highly competitive, consumer driven and rapidly
changing media and entertainment businesses that are dependent on government
regulation and economic, political, social conditions in the countries in which
they operate, consumer demand for their products and services, technological
developments and (particularly in view of technological changes) protection of
their intellectual property rights. TWE's actual results could differ materially
from management's expectations because of changes in such factors. Some of the
other factors that also could cause actual results to differ from those
contained in the forward-looking statements include those identified in TWE's
other filings and:
o For TWE's cable business, more aggressive than expected competition from
new technologies and other types of video programming distributors,
including DBS; increases in government regulation of cable or equipment
rates or other terms of service (such as "digital must-carry" or
"unbundling" requirements); increased difficulty in obtaining franchise
renewals; the failure of new equipment (such as digital set-top boxes) or
services (such as high-speed on-line services or telephony over cable or
video on demand) to function properly, to appeal to enough consumers or to
be available at reasonable prices and to be delivered in a timely fashion;
and greater than expected increases in programming or other costs.
o For TWE's cable programming and television businesses, greater than
expected programming or production costs; public and cable operator
resistance to price increases (and the negative impact on premium
programmers of increases in basic cable rates); increased regulation of
distribution agreements; the sensitivity of advertising to economic
cyclicality; and greater than expected fragmentation of consumer viewership
due to an increased number of programming services or the increased
popularity of alternatives to television.
o For TWE's film and television businesses, their ability to continue to
attract and select desirable talent and scripts at manageable costs;
increases in production costs generally; fragmentation of consumer leisure
and
52
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONA(Continued)
entertainment time (and its possible negative effects on the broadcast and
cable networks, which are significant customers of these businesses);
continued popularity of merchandising; and the uncertain impact of
technological developments such as DVD and the Internet.
o For TWE's digital media businesses, their ability to develop products and
services that are attractive, accessible and commercially viable in terms
of content, technology and cost, their ability to manage costs and generate
revenues, aggressive competition from existing and developing technologies
and products, the resolution of issues concerning commercial activities via
the Internet, including security, reliability, cost, ease of use and
access, and the possibility of increased government regulation of new media
services.
o The ability of the Company and its key service providers, vendors,
suppliers, customers and governmental entities to replace, modify or
upgrade computer systems in ways that adequately address the Year 2000
issue, including their ability to identify and correct all relevant
computer codes and embedded chips, unanticipated difficulties or delays in
the implementation of the Company's remediation plans and the ability of
third parties to address adequately their own Year 2000 issues.
In addition, TWE's overall financial strategy, including growth in
operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions,
consequences of the euro conversion and changes in TWE's plans, strategies and
intentions.
53
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- -----
(millions)
ASSETS
Current assets
<S> <C> <C>
Cash and equivalents........................................................................ $ 117 $ 87
Receivables, including $469 and $765 million due from Time Warner,
less allowances of $476 and $506 million................................................ 2,639 2,618
Inventories................................................................................. 1,247 1,312
Prepaid expenses............................................................................ 220 166
------ ------
Total current assets........................................................................ 4,223 4,183
Noncurrent inventories...................................................................... 2,114 2,327
Loan receivable from Time Warner............................................................ 400 400
Investments................................................................................. 903 886
Property, plant and equipment............................................................... 6,302 6,041
Cable television franchises................................................................. 4,527 3,773
Goodwill.................................................................................... 3,795 3,854
Other assets................................................................................ 625 766
------ ------
Total assets................................................................................ $22,889 $22,230
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable............................................................................ $ 1,400 $ 1,473
Participations and programming costs payable................................................ 1,494 1,515
Debt due within one year.................................................................... 6 6
Other current liabilities, including $365 and $370 million due to Time Warner............... 1,845 1,942
------ ------
Total current liabilities................................................................... 4,745 4,936
Long-term debt.............................................................................. 6,535 6,578
Other long-term liabilities, including $1.347 and $1.130 billion due to Time Warner......... 3,527 3,267
Minority interests.......................................................................... 1,744 1,522
Preferred stock of subsidiary holding solely a mortgage note of its parent.................. - 217
Time Warner General Partners' Senior Capital................................................ 627 603
Partners' capital
Contributed capital......................................................................... 7,341 7,341
Undistributed partnership deficit........................................................... (1,630) (2,234)
------ ------
Total partners' capital..................................................................... 5,711 5,107
------ ------
Total liabilities and partners' capital..................................................... $22,889 $22,230
======= =======
</TABLE>
See accompanying notes.
54
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues (a)....................................................... $3,060 $2,850 $5,994 $5,760
------ ------ ------ ------
Cost of revenues (a)(b)............................................ (1,985) (1,876) (3,904) (3,836)
Selling, general and administrative (a)(b)......................... (623) (589) (1,202) (1,184)
Gain on sale or exchange of cable systems and investments.......... 760 70 760 84
Gain on early termination of video distribution agreement.......... - - 215 -
------ ------- ------ ------
Business segment operating income.................................. 1,212 455 1,863 824
Interest and other, net (a)........................................ (167) (183) (392) (347)
Minority interest.................................................. (233) (82) (301) (146)
Corporate services (a)............................................. (18) (18) (36) (36)
------ ------ ------ ------
Income before income taxes......................................... 794 172 1,134 295
Income taxes....................................................... (27) (17) (55) (32)
------ ------ ------ ------
Net income......................................................... $ 767 $ 155 $1,079 $ 263
===== ====== ====== ======
- ---------------
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies for the three and six
months ended June 30, 1999, respectively, and for the corresponding periods
in the prior year: revenues-$152 million and $272 million in 1999, $118
million and $247 million in 1998; cost of revenues-$(58) million and $(136)
million in 1999, $(55) million and $(93) million in 1998; selling, general
and administrative-$(12) million and $(16) million in 1999, $(3) million
and $(2) million in 1998; interest and other, net-$8 million and $28
million in 1999, $3 million and $5 million in 1998; and corporate
services-$(18) million and $(36) million in each of 1999 and 1998.
(b) Includes depreciation and amortization expense of:............. $334 $356 $642 $727
==== ==== ==== ====
</TABLE>
See accompanying notes.
55
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------
1999 1998
---- ----
(millions)
OPERATIONS
<S> <C> <C>
Net income................................................................... $1,079 $263
Adjustments for noncash and nonoperating items:
Depreciation and amortization................................................ 642 727
Changes in operating assets and liabilities.................................. (202) (404)
----- ----
Cash provided by operations.................................................. 1,519 586
------ ----
INVESTING ACTIVITIES
Investments and acquisitions................................................. (223) (265)
Capital expenditures......................................................... (649) (734)
Investment proceeds.......................................................... 210 506
----- ----
Cash used by investing activities............................................ (662) (493)
----- ----
FINANCING ACTIVITIES
Borrowings................................................................... 1,310 503
Debt repayments.............................................................. (1,539) (492)
Redemption of preferred stock of subsidiary.................................. (217) -
Capital distributions........................................................ (280) (298)
Other........................................................................ (101) (56)
----- -----
Cash used by financing activities............................................ (827) (343)
----- ----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.................................. 30 (250)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.................................. 87 322
----- ----
CASH AND EQUIVALENTS AT END OF PERIOD........................................ $ 117 $ 72
===== ====
</TABLE>
See accompanying notes.
56
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD............................................. $5,107 $6,333
Net income................................................................. 1,079 263
Other comprehensive income (loss).......................................... 47 (16)
----- -----
Comprehensive income(a).................................................... 1,126 247
Distributions.............................................................. (497) (552)
Allocation of income to Time Warner General Partners' Senior Capital....... (24) (45)
Other...................................................................... (1) -
----- ------
BALANCE AT END OF PERIOD................................................... $5,711 $5,983
====== ======
</TABLE>
- ---------------
(a)Comprehensive income for the three months ended June 30, 1999 and 1998 was
$773 million and $153 million, respectively.
See accompanying notes.
57
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), classifies its business interests into three fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; and Cable, consisting
principally of interests in cable television systems.
Each of the business interests within Cable Networks, Entertainment and
Cable is important to TWE's objective of increasing partner value through the
creation, extension and distribution of recognizable brands and copyrights
throughout the world. Such brands and copyrights include (1) HBO and Cinemax,
the leading pay television services, (2) the unique and extensive film,
television and animation libraries of Warner Bros. and trademarks such as the
Looney Tunes characters and Batman, (3) The WB Network, a national broadcasting
network launched in 1995 as an extension of the Warner Bros. brand and as an
additional distribution outlet for Warner Bros.' collection of children's
cartoons and television programming, and (4) Time Warner Cable, currently the
largest operator of cable television systems in the U.S.
The operating results of TWE's various business interests are presented
herein as an indication of financial performance (Note 8). Except for start-up
losses incurred in connection with The WB Network, TWE's principal business
interests generate significant operating income and cash flow from operations.
The cash flow from operations generated by such business interests is
considerably greater than their operating income due to significant amounts of
noncash amortization of intangible assets recognized principally in Time Warner
Companies, Inc.'s ("Time Warner") $14 billion acquisition of Warner
Communications Inc. ("WCI") in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation ("ATC") in 1992,
a portion of which cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
businesses amounted to $120 million and $130 million in the three months ended
June 30, 1999 and 1998, respectively and $236 million and $258 million for the
six months ended June 30, 1999 and 1998, respectively.
Time Warner and certain of its wholly owned subsidiaries collectively
own general and limited partnership interests in TWE consisting of 74.49% of the
pro rata priority capital ("Series A Capital") and residual equity capital
("Residual Capital"), and 100% of the junior priority capital ("Series B
Capital"). The remaining 25.51% limited partnership interests in the Series A
Capital and Residual Capital of TWE are held by a subsidiary of MediaOne Group,
Inc. ("MediaOne"). Certain of Time Warner's subsidiaries are the general
partners of TWE ("Time Warner General Partners").
Basis of Presentation
The accompanying consolidated financial statements are unaudited but,
in the opinion of management, contain all the adjustments (consisting of those
of a normal recurring nature) considered necessary to present fairly the
financial position and the results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles applicable
to interim periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of TWE
included in its
58
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSA(Continued)
(Unaudited)
Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form
10-K"). Certain reclassifications have been made to the prior year's financial
statements to conform to the 1999 presentation.
2. GAIN ON TERMINATION OF MGM VIDEO DISTRIBUTION AGREEMENT
In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ("MGM")
terminated a long-term distribution agreement under which Warner Bros. had
exclusive worldwide distribution rights for MGM/United Artists home video
product. In connection with the early termination and settlement of this
distribution agreement, Warner Bros. recognized a net pretax gain of
approximately $215 million, which has been included in operating income in the
accompanying consolidated statement of operations.
3. GAIN ON SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS AND INVESTMENTS
In 1999 and 1998, largely in an effort to enhance their geographic
clustering of cable television properties, TWE sold or exchanged various cable
television systems and investments. The 1999 transactions included a large
exchange of cable television systems serving approximately 450,000 subscribers
for other cable television systems of comparable size owned by TCI
Communications, Inc., a subsidiary of AT&T Corp. As a result of these
transactions, the operating results of TWE's Cable division include net pretax
gains for the second quarter of $760 million in 1999 and $70 million in 1998.
Net pretax gains for the first half of the year amounted to $760 million in 1999
and $84 million in 1998.
4. INVESTMENT IN PRIMESTAR
TWE owns an approximate 24% equity interest in Primestar, Inc.
("Primestar"). In January 1999, Primestar, an indirect wholly owned subsidiary
of Primestar and the stockholders of Primestar entered into an agreement to sell
Primestar's medium-power direct broadcast satellite business and assets to
DirecTV, a competitor of Primestar owned by Hughes Electronics Corp. In
addition, a second agreement was entered into with DirecTV, pursuant to which
DirecTV agreed to purchase Primestar's rights with respect to the use or
acquisition of certain high-power satellites from a wholly owned subsidiary of
one of the stockholders of Primestar. In April 1999, Primestar closed on the
sale of its medium-power direct broadcast satellite business to DirecTV. Then,
in June 1999, Primestar completed the sale of its high-power satellite rights to
DirecTV.
As a result of those transactions, Primestar began to substantially
wind down its operations during the first quarter of 1999. TWE recognized its
share of Primestar's 1999 losses under the equity method of accounting. Such
losses are included in interest and other, net, in the accompanying consolidated
statement of operations. Future wind-down losses are not expected to be material
to TWE's operating results.
59
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSA(Continued)
(Unaudited)
5. INVENTORIES
TWE's inventories consist of:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------------- --------------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
(millions)
Film costs:
<S> <C> <C> <C> <C>
Released, less amortization................ $ 529 $ 778 $ 614 $ 744
Completed and not released................. 224 64 179 76
In process and other....................... 54 367 23 572
Library, less amortization................. - 534 - 560
Programming costs, less amortization.......... 361 371 426 375
Merchandise................................... 79 - 70 -
----- ------ ------ ------
Total......................................... $1,247 $2,114 $1,312 $2,327
====== ====== ====== ======
</TABLE>
6. PREFERRED STOCK OF SUBSIDIARY
In February 1997, a newly formed, substantially owned subsidiary of TWE
(the "REIT") issued 250,000 shares of preferred stock ("REIT Preferred Stock").
The REIT was intended to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended.
In March 1999, the REIT redeemed all of its shares of REIT Preferred
Stock at an aggregate cost of $217 million, which approximated net book value.
The redemption was funded with borrowings under TWE's bank credit agreement.
Pursuant to its terms, the REIT Preferred Stock was redeemed as a result of
proposed changes to federal tax regulations that substantially increased the
likelihood that dividends paid by the REIT or interest paid to the REIT under a
mortgage note of TWE would not be fully deductible for federal income tax
purposes.
7. PARTNERS' CAPITAL
TWE is required to make distributions to reimburse the partners for
income taxes at statutory rates based on their allocable share of taxable
income, and to reimburse Time Warner for stock options granted to employees of
TWE based on the amount by which the market price of Time Warner Inc. common
stock exceeds the option exercise price on the exercise date or, with respect to
options granted prior to the TWE capitalization on June 30, 1992, the greater of
the exercise price or the $13.88 market price of Time Warner Inc. common stock
at the time of the TWE capitalization. TWE accrues a stock option distribution
and a corresponding liability with respect to unexercised options when the
market price of Time Warner Inc. common stock increases during the accounting
period, and reverses previously accrued stock option distributions and the
corresponding liability when the market price of Time Warner Inc.
common stock declines.
During the six months ended June 30, 1999, TWE accrued $138 million of
tax-related distributions and $359 million of stock option distributions, based
on closing prices of Time Warner Inc. common stock of $72.63 at June 30, 1999
and $62.06 at December 31, 1998. During the six months ended June 30, 1998, TWE
accrued $138 million of tax-related distributions and $414 million of stock
option distributions as a result of an increase at that time in the market price
of Time Warner Inc. common stock. During the six months ended June 30, 1999, TWE
paid distributions to the Time Warner General Partners in the amount of $280
million, consisting of $138 million of tax-related distributions and $142
million of stock option related distributions. During the six months ended June
30, 1998, TWE paid the Time Warner General Partners distributions in the amount
of $298 million, consisting of $138
60
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
million of tax-related distributions and $160 million of stock option related
distributions.
In July 1999, TWE borrowed $627 million under its bank credit agreement
and paid a distribution to the Time Warner General Partners to redeem the
remaining portion of their senior priority capital interests, including a
priority capital return of $173 million. Time Warner used a portion of the
proceeds received from this distribution to repay all $400 million of
outstanding borrowings under its credit agreement with TWE.
8. SEGMENT INFORMATION
TWE classifies its business interests into three fundamental areas:
Cable Networks, consisting principally of interests in cable television
programming; Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; and Cable,
consisting principally of interests in cable television systems.
Information as to the operations of TWE in different business segments
is set forth below based on the nature of the products and services offered. TWE
evaluates performance based on several factors, of which the primary financial
measure is business segment operating income before noncash amortization of
intangible assets ("EBITA"). The operating results of TWE's cable segment
reflect: (i) the transfer of Time Warner Cable's direct broadcast satellite
operations to Primestar, a separate holding company, effective as of April 1,
1998, (ii) the formation of the Road Runner joint venture to operate and expand
Time Warner Cable's and MediaOne's existing high-speed online businesses,
effective as of June 30, 1998, (iii) the reorganization of Time Warner Cable's
business telephony operations into a separate entity now named Time Warner
Telecom Inc., effective as of July 1, 1998 and (iv) the formation of a joint
venture in Texas that owns cable television systems serving approximately 1.1
million subscribers, effective as of December 31, 1998 (collectively, the "1998
Cable Transactions"). These transactions are described more fully in TWE's 1998
Form 10-K.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Revenues
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros............... $1,446 $1,327 $2,826 $2,637
Broadcasting-The WB Network.................... 83 61 162 106
Cable Networks-HBO............................. 546 509 1,072 1,021
Cable.......................................... 1,114 1,084 2,188 2,237
Intersegment elimination....................... (129) (131) (254) (241)
----- ------ ----- ------
Total.......................................... $3,060 $2,850 $5,994 $5,760
====== ====== ====== ======
</TABLE>
61
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
EBITA(1)
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.(2)........... $ 132 $121 $ 478 $ 240
Broadcasting-The WB Network.................... (30) (23) (71) (61)
Cable Networks-HBO............................. 131 113 256 222
Cable(3)....................................... 1,099 374 1,436 681
------ ---- ------ ----
Total.......................................... $1,332 $585 $2,099 $1,082
====== ==== ====== ======
</TABLE>
- ---------------
(1)EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of intangible
assets, TWE's business segment operating income for the three and six months
ended June 30, 1999, respectively, and for the corresponding periods in the
prior year was $1.212 billion and $1.863 billion in 1999 and $455 million and
$824 million in 1998.
(2)Includes a net pretax gain of approximately $215 million recognized in
the first quarter of 1999 in connection with the early termination and
settlement of a long-term home video distribution agreement.
(3)Includes net pretax gains relating to the sale or exchange of certain cable
television systems of $760 million in the second quarter of 1999 and $70
million in the second quarter of 1998. Similarly, six-month results include
net pretax gains of $760 million in 1999 and $84 million in 1998.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Depreciation of Property, Plant and Equipment
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros............... $ 36 $ 38 $ 65 $ 78
Broadcasting-The WB Network.................... 1 - 1 -
Cable Networks-HBO............................. 6 5 13 10
Cable.......................................... 171 183 327 381
---- ---- ---- ----
Total.......................................... $214 $226 $406 $469
==== ==== ==== ====
Three Months Six Months
Ended June 30, Ended June 30,
-------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment-Warner Bros............... $ 31 $ 33 $ 61 $ 66
Broadcasting-The WB Network.................... 1 1 2 2
Cable Networks-HBO............................. - - - -
Cable.......................................... 88 96 173 190
---- ---- ---- ----
Total.......................................... $120 $130 $236 $258
==== ==== ==== ====
</TABLE>
(1)Amortization includes amortization relating to all business combinations
accounted for by the purchase method, including Time Warner's $14 billion
acquisition of WCI in 1989 and $1.3 billion acquisition of the minority
interest in ATC in 1992.
9. COMMITMENTS AND CONTINGENCIES
TWE is subject to numerous legal proceedings. In management's opinion
and considering established reserves, the resolution of these matters will not
have a material effect, individually and in the aggregate, on TWE's consolidated
financial statements.
62
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
10. ADDITIONAL FINANCIAL INFORMATION
Six Months
Ended June 30,
--------------
1999 1998
---- ----
(millions)
Interest expense.............................. $273 $273
Cash payments made for interest............... 242 260
Cash payments made for income taxes, net...... 49 39
Noncash capital distributions................. 359 414
Noncash investing activities included the exchange of certain cable
television systems in 1999 and 1998 (see Note 3). Noncash investing activities
in the first six months of 1998 also included the transfer of cable television
systems (or interests therein) serving approximately 650,000 subscribers that
were formerly owned by subsidiaries of Time Warner to the TWE-Advance/Newhouse
Partnership, subject to approximately $1 billion of debt, in exchange for common
and preferred partnership interests therein, as well as certain related
transactions (collectively, the "TWE-A/N Transfers"). For a more comprehensive
description of the TWE-A/N Transfers, see TWE's 1998 Form 10-K.
63
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
On July 4, 1999, the former President of Indonesia, H.M. Suharto, filed
a lawsuit in an Indonesian court against Time Inc. Asia and certain individuals,
alleging that the May 24, 1999 issue of the Asian edition of TIME Magazine
defamed him in violation of Indonesian law. The complaint seeks a public
retraction and apology, as well as $27 billion in compensatory damages for
alleged harm to Suharto's reputation.
Reference is made to the various actions filed against American Family
Publishers ("AFP"), a company engaged in magazine sweepstakes solicitations
which is 50%-owned by a subsidiary of Time Inc., described on page I-42 of Time
Warner's Annual Report on Form 10-K for the year ended December 31, 1998. On May
28, 1999, AFP settled the claims made by the states of Florida, West Virginia,
South Carolina and Indiana. Among other things, AFP has agreed to make certain
changes in its sweepstakes mailings. The settlement has been approved by the
court overseeing these actions.
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Annual Meeting of Stockholders of Time Warner was held on
May 20, 1999 (the "1999 Annual Meeting").
(b), (c) The following matters were voted upon at the 1999 Annual
Meeting:
(i) The following were elected directors of Time Warner for
terms expiring in 2000:
Broker
For Withheld Non-Votes
--- -------- ---------
Merv Adelson 968,885,565 6,101,683 0
J. Carter Bacot 969,557,822 5,429,426 0
Stephen F. Bollenbach 969,576,601 5,410,647 0
John C. Danforth 969,212,651 5,774,597 0
Beverly Sills Greenough 964,297,681 10,689,567 0
Gerald Greenwald 969,611,182 5,376,066 0
Carla A. Hills 969,494,154 5,493,094 0
Gerald M. Levin 969,158,519 5,828,729 0
Reuben Mark 969,631,970 5,355,278 0
Michael A. Miles 969,259,942 5,729,306 0
Richard D. Parsons 969,584,922 5,402,326 0
R. E. Turner 969,443,185 5,544,063 0
Francis T. Vincent, Jr. 964,637,841 10,349,407 0
(ii) Approval of an amendment to Time Warner's Restated
Certificate of Incorporation to increase the number of authorized
shares:
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
882,935,815 87,719,723 3,141,296 49,176
(iii) Approval of the Time Warner Inc. 1999 Restricted Stock
Plan:
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
752,070,974 217,311,954 4,413,761 49,321
64
<PAGE>
(iv) Approval of amendments to the Time Warner Inc. 1988
Restricted Stock Plan for Non-Employee Directors:
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
757,870,744 211,388,070 4,536,789 50,399
(v) Approval of the appointment of Ernst & Young LLP as
independent auditors of Time Warner for 1999:
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
965,728,075 1,598,459 6,470,343 49,133
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
---------
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as a part of this report and such Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K.
--------------------
(i) Time Warner filed a Current Report on Form 8-K dated July
12, 1999 in which it reported in Item 5 that Time Warner had entered
into an agreement with CDnow, Inc. and Sony Corporation of America to
combine the businesses of CDnow and Columbia House.
65
<PAGE>
TIME WARNER INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIME WARNER INC.
(Registrant)
By: /s/ Joseph A. Ripp
----------------------------
Name: Joseph A. Ripp
Title: Executive Vice President and
Chief Financial Officer
Dated: August 13, 1999
66
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
3.(i)(a) Restated Certificate of Incorporation of the Registrant as
filed with the Secretary of State of the State of Delaware on
October 10, 1996 (which is incorporated herein by reference to
Exhibit 4.3 to the Registrant's Post-Effective Amendment No. 1
on Form S-8 to the Registrant's Registration Statement on Form
S-4 filed with the Commission on October 11, 1996
(Registration No. 333-11471) (the "S-8 Registration
Statement")).
3.(i)(b) Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant as filed with the Secretary of
State of the State of Delaware on May 26, 1999.
3.(i)(c) Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant as filed with the Secretary of
State of the State of Delaware on May 19, 1997 (which is
incorporated herein by reference to Exhibit 3.(i)(c) to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
3.(i)(d) Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant as filed with the Secretary of
State of the State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.4 to the
Registrant's S-8 Registration Statement).
3.(i)(e) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special Rights,
and Qualifications, Limitations or Restrictions Thereof, of
Series LMC Common Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on October 10,
1996 (which is incorporated herein by reference to Exhibit 4.5
to the Registrant's S-8 Registration Statement).
3.(i)(f) Certificate of Amendment of the Certificate of the Voting
Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions Thereof, of Series LMC Common
Stock of the Registrant as filed with the Secretary of State
of the State of Delaware on May 26, 1999.
3.(i)(g) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special Rights,
and Qualifications, Limitations or Restrictions Thereof, of
Series LMCN-V Common Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on October 10,
1996 (which is incorporated herein by reference to Exhibit 4.6
to the Registrant's S-8 Registration Statement).
3.(i)(h) Certificate of Increase of the Number of Shares of Series
Common Stock of the Registrant Designated as Series LMCN-V
Common Stock as filed with the Secretary of State of the State
of Delaware on August 13, 1997 (which is incorporated herein
by reference to Exhibit 3.(i)(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997).
3.(i)(i) Certificate of Amendment of the Certificate of the Voting
Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions Thereof, of Series LMCN-V Common
Stock of the Registrant as filed with the Secretary of State
of the State of Delaware on May 26, 1999.
3.(i)(j) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special Rights,
and Qualifications, Limitations or Restrictions Thereof, of
Series A Participating Cumulative Preferred Stock of the
Registrant as filed with the Secretary of State of the State
of Delaware on October 10, 1996 (which is incorporated herein
by reference to Exhibit 4.7 to the Registrant's S-8
Registration Statement).
<PAGE>
3.(i)(k) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special Rights,
and Qualifications, Limitations or Restrictions Thereof, of
Series D Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware on
October 10, 1996 (which is incorporated herein by reference to
Exhibit 4.8 to the Registrant's S-8 Registration Statement).
3.(i)(l) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special Rights,
and Qualifications, Limitations or Restrictions Thereof, of
Series E Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware on
October 10, 1996 (which is incorporated herein by reference to
Exhibit 4.9 to the Registrant's S-8 Registration Statement).
3.(i)(m) Certificate of Correction of the Certificate of the Voting
Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions Thereof, of Series E Convertible
Preferred Stock of the Registrant as filed with the Secretary
of State of the State of Delaware on November 13, 1996 (which
is incorporated herein by reference to Exhibit 3.(i)(h) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 (the "1996 Form 10-K")).
3.(i)(n) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special Rights,
and Qualifications, Limitations or Restrictions Thereof, of
Series F Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware on
October 10, 1996 (which is incorporated herein by reference to
Exhibit 4.10 to the Registrant's S-8 Registration Statement).
3.(i)(o) Certificate of Correction of the Certificate of the Voting
Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions Thereof, of Series F Convertible
Preferred Stock of the Registrant as filed with the Secretary
of State of the State of Delaware on November 13, 1996 (which
is incorporated herein by reference to Exhibit 3.(i)(j) of the
Registrant's 1996 Form 10-K).
3.(i)(p) Certificate of Elimination of the Certificate of the Voting
Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights and Qualifications,
Limitations or Restrictions Thereof, of Series G Convertible
Preferred Stock of the Registrant as filed with the Secretary
of State of the State of Delaware on March 18, 1999 (which is
incorporated herein by reference to Exhibit 3.(i)(m) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 Form 10-K")).
3.(i)(q) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special Rights,
and Qualifications, Limitations or Restrictions Thereof, of
Series G Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware on
October 10, 1996 (which is incorporated herein by reference to
Exhibit 4.11 to the Registrant's S-8 Registration Statement).
3.(i)(r) Certificate of Elimination of the Certificate of the Voting
Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights and Qualifications,
Limitations or Restrictions Thereof, of Series H Convertible
Preferred Stock of the Registrant as filed with the Secretary
of State of the State of Delaware on March 18, 1999 (which is
incorporated herein by reference to Exhibit 3.i(o) to the
Registrant's 1998 Form 10-K).
3.(i)(s) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special Rights,
and Qualifications, Limitations or Restrictions Thereof, of
Series H Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware on
October 10, 1996 (which is incorporated herein by reference to
Exhibit 4.12 to the Registrant's S-8 Registration Statement).
3.(i)(t) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special Rights,
and Qualifications, Limitations or Restrictions Thereof, of
<PAGE>
Series H Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware on
October 10, 1996 (which is incorporated herein by reference to
Exhibit 4.12 to the Registrant's S-8 Registration Statement).
3.(i)(u) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special Rights,
and Qualifications, Limitations or Restrictions Thereof, of
Series J Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware on
October 10, 1996 (which is incorporated herein by reference to
Exhibit 4.14 to the Registrant's S-8 Registration Statement).
3.(i)(v) Certificate of Elimination of the Voting Powers, Designations,
Preferences and Relative, Participating, Optional or Other
Special Rights, and Qualifications, Limitations or
Restrictions Thereof, of 10 1/4% Series M Exchangeable
Preferred Stock of the Registrant as filed with the Secretary
of State of the State of Delaware on March 18, 1999 (which is
incorporated herein by reference to Exhibit 3.(i)(s) to the
Registrant's 1998 Form 10-K).
3.(i)(w) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special Rights,
and Qualifications, Limitations or Restrictions Thereof, of 10
1/4% Series M Exchangeable Preferred Stock of the Registrant
as filed with the Secretary of State of the State of Delaware
on October 10, 1996 (which is incorporated herein by reference
to Exhibit 4.15 to the Registrant's S-8 Registration
Statement).
10 Time Warner Inc. 1988 Restricted Stock Plan for Non-Employee
Directors, as amended through May 20, 1999.
27 Financial Data Schedule.
Exhibit 3.(i)(b)
CERTIFICATE OF AMENDMENT TO
RESTATED CERTIFICATE OF INCORPORATION
TIME WARNER INC., a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY that:
A. The first sentence of Section 1 of Article IV of the Restated
Certificate of Incorporation of the Corporation, as heretofore amended, is
hereby further amended to read in its entirety as follows:
"SECTION 1. The total number of shares of all classes of stock which
the Corporation shall have authority to issue is 5.85 billion shares,
consisting of (1) 250 million shares of Preferred Stock, par value $0.10
per share ("Preferred Stock"), (2) 5.0 billion shares of Common Stock, par
value $0.01 per share ("Common Stock"), and (3) 600 million shares of
Series Common Stock, par value $0.01 per share ("Series Common Stock")."
B. The foregoing amendment was duly adopted in accordance with Section 242
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Time Warner Inc. has caused this certificate to be
signed as of this 24th day of May, 1999.
TIME WARNER INC.
By: /s/ Thomas W. McEnerney
-------------------------
Thomas W. McEnerney
Vice President
Exhibit 3.(i)(f)
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS AND
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS THEREOF,
OF SERIES LMC COMMON STOCK
OF
TIME WARNER INC.
-------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
--------------------------------------
Time Warner Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (formerly named "TW Inc.") (the
"Corporation"), does hereby certify:
1. That a Certificate of the Voting Powers, Designations,
Preferences and Relative, Participating, Optional or other Special Rights and
Qualifications, Limitations or Restrictions thereof of the Corporation's Series
LMC Common Stock was filed in the office of the Secretary of State of the State
of Delaware on October 10, 1996.
2. That no shares of the Series LMC Common Stock have been issued by
the Corporation.
3. That pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware, the Board of Directors of the
Corporation, at a meeting duly held on March 20, 1999, duly approved and adopted
the following resolution (the "Resolution"):
RESOLVED, that the Certificate of the Voting Powers,
Designations, Preferences and Relative, Participating, Optional or
other Special Rights of the Series LMC Common Stock and
Qualifications, Limitations and Restrictions thereof (the
"Certificate") of the Corporation, and the resolution of the Board of
Directors of the Corporation contained therein as filed with the
Secretary of State of the State of Delaware on October 10, 1996, shall
be amended to read in its entirety as follows:
<PAGE>
The series of Series Common Stock hereby established shall consist
of 140,000,000 shares designated as Series LMC Common Stock. The number of
shares constituting such series may be increased or decreased (but not below the
number of shares then outstanding) from time to time by a resolution or
resolutions of the Board of Directors of the Corporation.
1. Definitions. As used herein, the following terms shall have the
indicated meanings:
1.1 "Board of Directors" shall mean the Board of Directors of the
Corporation or, with respect to any action to be taken by the Board of
Directors, any committee of the Board of Directors duly authorized to take
such action.
1.2 "Capital Stock" shall mean any and all shares of corporate stock
of a Person (however designated and whether representing rights to vote,
rights to participate in dividends or distributions upon liquidation or
otherwise with respect to such Person, or any division or subsidiary
thereof, or any joint venture, partnership, corporation or other entity).
1.3 "Certificate" shall mean the Certificate of the Voting Powers,
Designations, Preferences and Relative, Participating, Optional or Other
Special Rights, and Qualifications, Limitations or Restrictions Thereof, of
Series LMC Common Stock filed with the Secretary of State of the State of
Delaware pursuant to Section 151 of the DGCL, as amended from time to time.
1.4 "Charter Amendment" shall mean the amendment to the Corporation's
Restated Certificate of Incorporation to increase the number of authorized
shares of the Series Common Stock from 200,000,000 to 600,000,000.
1.5 "Closing Price" of the Common Stock shall mean the last reported
sale price of the Common Stock (regular way) as shown on the Composite Tape
of the NYSE, or, in case no such sale takes place on such day, the average
of the closing bid and asked prices on the NYSE, or, if the Common Stock is
not listed or admitted to trading on the NYSE, on the principal national
securities exchange on which such stock is listed or admitted to trading,
or, if it is not listed or admitted to trading on any national securities
exchange, the last reported sale price of the Common Stock, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, in either case as reported by NASDAQ.
2
<PAGE>
1.6 "Common Stock" shall mean the class of Common Stock, par value
$.01 per share, of the Corporation, or any other class of stock resulting
from (x) successive changes or reclassifications of such Common Stock
consisting of changes in par value, or from par value to no par value, (y)
a subdivision or combination or (z) any other changes for which an
adjustment is made under Section 2.4(a), together with any rights
associated generally with the shares of Common Stock.
1.7 "Communications Laws" shall mean the Communications Act of 1934
(as amended and supplemented from time to time and any successor statute or
statutes regulating telecommunications companies) and the rules and
regulations (and interpretations thereof and determinations with respect
thereto) promulgated, issued or adopted from time to time by the Federal
Communications Commission (the "FCC"). All references herein to
Communications Laws shall include as of any relevant date in question the
Communications Laws as then in effect (including any Communications Law or
part thereof the effectiveness of which is then stayed or promulgated with
a delayed effective date).
1.8 "Conversion Date" shall have the meaning set forth in Section 3.5.
1.9 "Corporation" shall mean Time Warner Inc., a Delaware corporation,
and any of its successors by operation of law, including by merger or
consolidation.
1.10 "DGCL" shall mean the General Corporation Law of the State of
Delaware, as amended from time to time.
1.11 "Dividend Payment Date" shall have the meaning set forth in
Section 2.1.
1.12 "Formula Number" shall have the meaning set forth in Section 2.1.
1.13 "LMC Agreement" shall mean the Second Amended and Restated LMC
Agreement dated as of September 22, 1995, among a Delaware corporation
known on such date as "Time Warner Inc.", the Corporation, Liberty Media
Corporation, a Delaware corporation ("LMC Parent"), and certain
subsidiaries of LMC Parent listed under "Subsidiaries of LMC Parent" on the
signature pages thereto, as amended by Amendment No. 1 dated as of June 24,
1997, Amendment No. 2 dated as of May 25, 1999, and as further amended from
time to time. 1.1
3
<PAGE>
1.14 "NASDAQ" shall mean The Nasdaq Stock Market.
1.15 "NYSE" shall mean the New York Stock Exchange, Inc.
1.16 "Parity Stock" shall mean shares of Common Stock and shares of
any other class or series of Capital Stock of the Corporation that, by the
terms of the Certificate of Incorporation or of the instrument by which the
Board of Directors, acting pursuant to authority granted in the Certificate
of Incorporation, shall fix the relative rights, preferences and
limitations thereof, shall, in the event that the stated dividends thereon
are not paid in full, be entitled to share ratably with the shares of this
Series in the payment of dividends in accordance with the sums that would
be payable on such shares if all dividends were declared and paid in full,
or shall, in the event that the amounts payable thereon in liquidation are
not paid in full, be entitled to share ratably with the shares of this
Series in any distribution of assets other than by way of dividends in
accordance with the sums that would be payable in such distribution if all
sums payable were discharged in full.
1.17 "Permitted Transferee" shall mean any Liberty Party, as such term
is defined in the LMC Agreement.
1.18 "Person" shall mean an individual, corporation, partnership,
limited liability company, joint venture, association, trust,
unincorporated organization or other entity.
1.19 "Preferred Stock" shall mean the class of Preferred Stock, par
value $.10 per share, of the Corporation.
1.20 "Record Date" shall have the meaning set forth in Section 2.1.
1.21 "Senior Stock" shall mean shares of any class or series of
Capital Stock of the Corporation that, by the terms of the Certificate of
Incorporation or of the instrument by which the Board of Directors, acting
pursuant to authority granted in the Certificate of Incorporation, shall
fix the relative rights, preferences and limitations thereof, shall be
senior to the shares of this Series in respect of the right to receive
dividends or to participate in any distribution of assets other than by way
of dividends. 1.1
4
<PAGE>
1.22 "Series Common Stock" shall mean the class of Series Common
Stock, par value $.01 per share, of the Corporation.
1.23 "Series LMC Common Stock" and "this Series" shall mean the series
of Series Common Stock authorized and designated as Series LMC Common
Stock.
1.24 "Series LMCN-V Common Stock" shall mean the series of Series
Common Stock authorized and designated as Series LMCN-V Common Stock.
1.25 "Trading Day" shall mean, so long as the Common Stock is listed
or admitted to trading on the NYSE, a day on which the NYSE is open for the
transaction of business, or, if the Common Stock is not listed or admitted
to trading on the NYSE, a day on which the principal national securities
exchange on which the Common Stock is listed is open for the transaction of
business, or, if the Common Stock is not so listed or admitted for trading
on any national securities exchange, a day on which the National Market
System of NASDAQ is open for the transaction of business.
2. Dividends.
2.1 The holders of shares of this Series shall be entitled to receive
dividends, out of funds legally available therefor, payable on such dates
as may be set by the Board of Directors for payment of cash dividends on
the Common Stock (each such date being referred to herein as a "Dividend
Payment Date"), in cash, in an amount per share equal to the product of (i)
the Formula Number in effect as of such Dividend Payment Date multiplied by
(ii) the amount of the regularly scheduled cash dividend to be paid on one
share of Common Stock on such Dividend Payment Date; provided, however,
dividends on the shares of this Series shall be payable pursuant to this
Section 2.1 only to the extent that regularly scheduled cash dividends are
declared and paid on the Common Stock. As used herein, the "Formula Number"
shall initially be 1.0000, which shall be adjusted from time to time
pursuant to Section 2.4. The dividends payable on any Dividend Payment Date
shall be paid to the holders of record of shares of this Series at the
close of business on the record date for the related regularly scheduled
cash dividend on the Common Stock (each such date being referred to herein
as a "Record Date"). The amount of dividends that are paid to each holder
of record on any Dividend Payment Date shall be rounded to the nearest
cent. 1.1
5
<PAGE>
2.2 In case the Corporation shall at any time distribute (other than a
distribution in liquidation of the Corporation and other than a
distribution of Common Stock as a result of which an adjustment to the
Formula Number is made pursuant to Section 2.4 or in connection with which
a dividend of shares of this Series is paid in accordance with Section
2.4(e)) to the holders of its shares of Common Stock any assets or
property, including evidences of indebtedness or securities of the
Corporation or of any other Person (including common stock of such Person)
or cash (but excluding regularly scheduled cash dividends payable on shares
of Common Stock), or in case the Corporation shall at any time distribute
(other than a distribution in liquidation of the Corporation) to such
holders rights, options or warrants to subscribe for or purchase shares of
Common Stock (including shares held in the treasury of the Corporation), or
rights, options or warrants to subscribe for or purchase any other security
or rights, options or warrants to subscribe for or purchase any assets or
property (in each case, whether of the Corporation or otherwise, but other
than any distribution of rights to purchase securities of the Corporation
if the holder of shares of this Series would otherwise be entitled to
receive such rights upon conversion of shares of this Series for Common
Stock pursuant to Section 3, provided, however, that if such rights are
subsequently redeemed by the Corporation, such redemption shall be treated
for purposes of this Section 2.2 as a cash dividend (but not a regularly
scheduled cash dividend) on the Common Stock), the Corporation shall
simultaneously distribute such assets, property, securities, rights,
options or warrants to the holders of shares of this Series on the record
date fixed for determining the holders of Common Stock entitled to
participate in such distribution (or, if no such record date shall be
established, the effective time thereof) in an amount per share of this
Series equal to the amount that a holder of one share of this Series would
have been entitled to receive had such share of this Series been converted
into Common Stock immediately prior to such record date (or effective
time). In the event of a distribution to holders of shares of this Series
pursuant to this Section 2.2, such holders shall be entitled to receive
fractional shares or interests only to the extent that holders of Common
Stock are entitled to receive the same. The holders of shares of this
Series on the applicable record date (or effective time) shall be entitled
to receive in lieu of such fractional shares or interests the same
consideration as is payable to holders of Common Stock with respect
thereto. If there are no fractional shares or interests payable to holders
of Common Stock, the holders of shares of this Series on the applicable
record date (or effective time) shall receive in lieu of such fractional
shares or interests the fair value thereof as determined by the Board of
Directors.
2.3 In the event that the holders of 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 distribution that is subject to Section
2.2, the kind and amount of securities or other property that shall be
distributable to the holders of shares of this Series shall be based on (i)
the election, if any, made by the holder of record (as of the date used for
determining the holders of Common Stock entitled to make such election) of
the largest number of shares of this Series in writing to the Corporation
on or prior to the last date on which a holder of 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 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 shares of this Series 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 Common Stock).
Concurrently with the mailing to holders of Common Stock of any document
pursuant to which such holders may make an election of the type referred to
in this Section 2.3, the Corporation shall mail a copy thereof to the
holders of record of shares of this Series as of the date used for
determining the holders of record of Common Stock entitled to such mailing,
which document shall be used by the holders of record of shares of this
Series to make such an election.
2.4 The Formula Number shall be adjusted from time to time as follows,
whether or not any shares of this Series have been issued by the
Corporation, for events occurring after December 31, 1998:
6
<PAGE>
(a) In case the Corporation shall (i) pay a dividend in shares
of its Common Stock, (ii) combine its outstanding shares of Common Stock
into a smaller number of shares, (iii) subdivide its outstanding shares of
Common Stock or (iv) reclassify (other than by way of a merger or
consolidation that is subject to Section 3.6) its shares of Common Stock,
then the Formula Number in effect immediately before such event shall be
appropriately adjusted so that immediately following such event the
holders of shares of this Series shall be entitled to receive upon
conversion thereof the kind and amount of shares of Capital Stock of the
Corporation that they would have owned or been entitled to receive upon or
by reason of such event if such shares of this Series had been converted
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
Capital Stock (other than Common Stock) that shall accompany a
reclassification of the Common Stock, shall be subject to Section 2.2
rather than this Section 2.4(a)). An adjustment made pursuant to this
Section 2.4(a) shall become effective retroactively immediately after the
record date in the case of a dividend or distribution and shall become
effective retroactively immediately after the effective date in the case
of a subdivision, combination or reclassification. For the purposes of
this Section 2.4(a), in the event that the holders of Common Stock are
entitled to make any election with respect to the kind or amount of
securities receivable by them in any transaction that is subject to this
Section 2.4(a) (including any election that would result in all or a
portion of the transaction becoming subject to Section 2.2), the kind and
amount of securities that shall be distributable to the holders of shares
of this Series shall be based on (i) the election, if any, made by the
holder of record (as of the date used for determining the holders of
Common Stock entitled to make such election) of the largest number of
shares of this Series in writing to the Corporation on or prior to the
last date on which a holder of 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 shall be based on the kind or amount of
securities receivable by a plurality of nonelecting holders of Common
Stock). Concurrently with the mailing to holders of Common Stock of any
document pursuant to which such holders may make an election of the type
referred to in this Section 2.4(a), the Corporation shall mail a copy
thereof to the holders of record of shares of this Series as of the date
used for determining the holders of record of Common Stock entitled to
such mailing, which document shall be used by the holders of record of
shares of this Series to make such an election.
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(b) The Corporation shall be entitled to make such additional
adjustments in the Formula Number, in addition to those required by
Section 2.4(a) as shall be necessary in order that any dividend or
distribution in Common Stock or any subdivision, reclassification or
combination of shares of Common Stock referred to above, shall not be
taxable to the holders of Common Stock for United States Federal income
tax purposes, so long as such additional adjustments pursuant to this
Section 2.4(b) do not decrease the Formula Number.
(c) All calculations under this Section 2 and Section 3 shall
be made to the nearest cent, one-hundredth of a share or, in the case of
the Formula Number, one hundred-thousandth. Notwithstanding any other
provision of this Section 2.4, the Corporation shall not be required to
make any adjustment of the Formula Number unless such adjustment would
require an increase or decrease of at least one percent (1%) of the
Formula Number. Any lesser adjustment shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment
that, together with any adjustment or adjustments so carried forward,
shall amount to an increase or decrease of at least one percent (1%) of
the Formula Number. Any adjustments under this Section 2.4 shall be made
successively whenever an event requiring such an adjustment occurs.
(d) Promptly after an adjustment in the Formula Number is
required, the Corporation shall provide written notice to each of the
holders of shares of this Series, which notice shall state the adjusted
Formula Number.
(e) Notwithstanding anything to the contrary in this Section
2.4 or the Certificate, if the Corporation pays a dividend with respect to
its outstanding Common Stock in the form of additional shares of Common
Stock, and the Corporation pays an equivalent dividend with respect to its
outstanding Series LMCN-V Common Stock, if any, in the form of additional
shares of Series LMCN-V Common Stock, then:
(i) the Corporation shall pay a dividend with respect to the
outstanding shares of this Series, if any, in the form of additional
shares of this Series, payable at the same time with the same record
date and in the same ratio as the dividend with respect to the
Common Stock (including treatment of fractional shares); and
8
<PAGE>
(ii) if the Corporation pays a dividend in accordance with
clause (i) above or if there are at the time no shares of this
Series outstanding, there shall not be any adjustment to the Formula
Number by reason of such dividend with respect to the Common Stock.
(f) If a distribution is made in accordance with the
provisions of Section 2.2, anything in this Section 2.4 to the contrary
notwithstanding, no adjustment pursuant to this Section 2.4 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.
3. Conversion at the Option of the Holder.
3.1 Each holder of a share of this Series shall have the right at any
time to convert such share of this Series into either: (i) a number of
shares of Common Stock per share of this Series equal to the Formula Number
in effect on the Conversion Date or (ii) one share of Series LMCN-V Common
Stock per share of this Series; provided, however, that such holder may
convert shares of this Series only to the extent that the ownership by such
holder or its designee of the shares of Common Stock or Series LMCN-V
Common Stock issuable upon such conversion would not violate the
Communications Laws.
3.2 No adjustments in respect of payments of dividends on shares of
this Series surrendered for conversion or any dividend on the Common Stock
or Series LMCN-V Common Stock issued upon conversion shall be made upon the
conversion of any shares of this Series (it being understood that if the
Conversion Date for shares of this Series occurs after the Record Date and
prior to the Dividend Payment Date of any such dividend, the holders of
record of shares of this Series on such Record Date shall be entitled to
receive the dividend payable with respect to such shares on the related
Dividend Payment Date pursuant to Section 2.1).
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3.3 The Corporation may, but shall not be required to, in connection
with any conversion of shares of this Series into shares of Common Stock,
issue a fraction of a share of Common Stock, and if the Corporation shall
determine not to issue any such fraction, the Corporation shall make a cash
payment (rounded to the nearest cent) equal to such fraction multiplied by
the Closing Price of the Common Stock on the last Trading Day prior to the
Conversion Date. The Corporation shall issue a fraction of a share of
Series LMCN-V Common Stock in order to effect a conversion of a fraction of
a share of this Series into Series LMCN-V Common Stock.
3.4 Any holder of shares of this Series electing to convert such
shares into Common Stock or Series LMCN-V Common Stock shall surrender the
certificate or certificates for such shares at the principal executive
office of the Corporation (or at such other place as the Corporation may
designate by notice to the holders of shares of this Series) during regular
business hours, duly endorsed to the Corporation or in blank, or
accompanied by instruments of transfer to the Corporation or in blank, or
in form satisfactory to the Corporation, and shall give written notice to
the Corporation at such office that such holder elects to convert such
shares of this Series, which notice shall state whether the shares of this
Series delivered for conversion shall be converted into shares of Common
Stock or shares of Series LMCN-V Common Stock. If any such certificate or
certificates shall have been lost, stolen or destroyed, the holder shall,
in lieu of delivering such certificate or certificates, deliver to the
Corporation (or such other place) an indemnification agreement and bond
satisfactory to the Corporation. The Corporation shall, as soon as
practicable (subject to Section 3.8) after such deposit of certificates for
shares of this Series or delivery of the indemnification agreement and
bond, accompanied by the written notice above prescribed, issue and deliver
at such office (or such other place) to the holder for whose account such
shares were surrendered, or a designee of such holder, certificates
representing either (i) the number of shares of Common Stock and the cash,
if any, or (ii) the number of shares of Series LMCN-V Common Stock, as the
case may be, to which such holder is entitled upon such conversion. Each
share of Common Stock delivered to a holder or its designee as a result of
conversion of shares of this Series pursuant to this Section 3 shall be
accompanied by any rights associated generally with each other share of
Common Stock outstanding as of the Conversion Date.
3.5 Conversion shall be deemed to have been made as of the date (the
"Conversion Date") that the certificate or certificates for the shares of
this Series to be converted and the written notice prescribed in Section
3.4 are received by the Corporation; and the Person entitled to receive the
Common Stock or Series LMCN-V Common Stock issuable upon such conversion
shall be treated for all purposes as the holder of record of such Common
Stock or Series LMCN-V Common Stock, as the case may be, on such date. The
Corporation shall not be required to deliver certificates for shares of
Common Stock or Series LMCN-V Common Stock while the stock transfer books
for such stock or for this Series are duly closed for any purpose, but
certificates for shares of Common Stock or Series LMCN-V Common Stock, as
the case may be, shall be delivered as soon as practicable after the
opening of such books.
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3.6 In the event that after December 31, 1998, whether or not any
shares of this Series have been issued by the Corporation, either (a) any
consolidation or merger to which the Corporation is a party, other than a
merger or consolidation in which the Corporation is the surviving or
continuing corporation and that 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 Common Stock or (b) any sale or
conveyance of all or substantially all of the property and assets of the
Corporation, then lawful provision shall be made as part of the terms of
such transaction whereby the holder of each share of this Series shall have
the right thereafter, during the period such share shall be convertible, to
convert such share into 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 Common Stock into which
such shares of this Series could have been converted immediately prior to
such consolidation, merger, sale or conveyance, subject to adjustment that
shall be as nearly equivalent as may be practicable to the adjustments
provided for in Section 2.4 and this Section 3 (based on (i) the election,
if any, made in writing to the Corporation by the holder of record (as of
the date used for determining holders of Common Stock entitled to make such
election) of the largest number of shares of this Series on or prior to the
last date on which a holder of 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 shall be based upon the kind and amount of
securities or other property receivable by a plurality of the nonelecting
holders of Common Stock)). In the event that any of the transactions
referred to in clause (a) or (b) of the first sentence of this Section 3.6
involves the distribution of cash or property (other than equity
securities) to a holder of Common Stock, lawful provision shall be made as
part of the terms of the transaction whereby the holder of each share of
this Series on the record date fixed for determining holders of Common
Stock entitled to receive such cash or property (or if no such record date
is established, the effective date of such transaction) shall 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 this Series
into Common Stock immediately prior to such record date (or effective date)
(based on the election or nonelection made by the holder of record of the
largest number of shares of this Series, as provided above). Concurrently
with the mailing to holders of Common Stock of any document pursuant to
which such holders may make an election regarding the kind or amount of
securities or other property that will be receivable by such holders in any
transaction described in clause (a) or (b) of the first sentence of this
Section 3.6, the Corporation shall mail a copy thereof to the holders of
record of the shares of this Series as of the date used for determining the
holders of record of Common Stock entitled to such mailing, which document
shall be used by the holders of shares of this Series to make such an
election. The Corporation shall not enter into any of the transactions
referred to in clause (a) or (b) of the first sentence of this Section 3.6
unless effective provision shall be made in the certificate or articles of
incorporation or other constituent documents of the Corporation or the
entity surviving the consolidation or merger, if other than the
Corporation, or the entity acquiring the Corporation's assets, as the case
may be, so as to give effect to the provisions set forth in this Section
3.6. The provisions of this Section 3.6 shall apply similarly to successive
consolidations, mergers, sales or conveyances. For purposes of this Section
3.6, the term "Corporation" shall refer to the Corporation as constituted
immediately prior to the merger, consolidation or other transaction
referred to in this Section 3.6.
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3.7 The Corporation shall at all times reserve and keep available,
free from preemptive rights, out of its authorized but unissued stock, for
the purpose of effecting the conversion of the shares of this Series, such
number of its duly authorized shares of Common Stock and Series LMCN-V
Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of this Series into shares of Common
Stock or Series LMCN-V Common Stock at any time (assuming that, at the time
of the computation of such number of shares, all such Common Stock or
Series LMCN-V Common Stock would be held by a single holder); provided,
however, that nothing contained herein shall preclude the Corporation from
satisfying its obligations in respect of the conversion of the shares by
delivery of purchased shares of Common Stock or Series LMCN-V Common Stock
that are held in the treasury of the Corporation. All shares of Common
Stock or Series LMCN-V Common Stock that shall be deliverable upon
conversion of the shares of this Series shall be duly and validly issued,
fully paid and nonassessable. For purposes of this Section 3, any shares of
this Series at any time outstanding shall not include shares held in the
treasury of the Corporation.
3.8 In any case in which Section 2.4 shall require that any adjustment
be made effective as of or retroactively immediately following a record
date, the Corporation may elect to defer (but only for five (5) Trading
Days following the occurrence of the event that necessitates the notice
referred to in Section 2.4(d)) issuing to the holder of any shares of this
Series converted after such record date (i) the shares of Common Stock
issuable upon such conversion over and above (ii) the shares of Common
Stock issuable upon such conversion on the basis of the Formula Number
prior to adjustment; provided, however, that the Corporation shall 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.
3.9 If any shares of Common Stock or Series LMCN-V Common Stock that
would be issuable upon conversion pursuant to this Section 3 require
registration with or approval of any governmental authority before such
shares may be issued upon conversion (other than any such registration or
approval required to avoid a violation of the Communications Laws), the
Corporation will in good faith and as expeditiously as possible cause such
shares to be duly registered or approved, as the case may be. The
Corporation will use commercially reasonable efforts to list the shares of
(or depositary shares representing fractional interests in) Common Stock
required to be delivered upon conversion of shares of this Series prior to
such delivery upon the principal national securities exchange, if any, upon
which the outstanding Common Stock is listed at the time of such delivery.
12
<PAGE>
3.10 The Corporation shall pay any and all issue or other taxes that
may be payable in respect of any issue or delivery of shares of Common
Stock or Series LMCN-V Common Stock on conversion of shares of this Series
pursuant hereto. The Corporation shall not, however, be required to pay any
tax that is payable in respect of any transfer involved in the issue or
delivery of Common Stock or Series LMCN-V Common Stock in a name other than
that in which the shares of this Series so converted were registered, and
no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of such tax,
or has established, to the satisfaction of the Corporation, that such tax
has been paid.
3.11 In case of (i) the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation or (ii) any action triggering
an adjustment to the Formula Number pursuant to Section 2.4 (or in
connection with which a dividend of shares of this Series is paid in
accordance with Section 2.4(e)) or Section 3.6, then, in each case, the
Corporation shall cause to be mailed, first-class postage prepaid, to the
holders of record of the outstanding shares of this Series, at least
fifteen (15) days prior to the applicable record date for any such
transaction (or if no record date will be established, the effective date
thereof), a notice stating (x) the date, if any, on which a record is to be
taken for the purpose of any such transaction (or, if no record date will
be established, the date as of which holders of record of Common Stock
entitled to participate in such transaction are determined), and (y) the
expected effective date thereof. Failure to give such notice or any defect
therein shall not affect the legality or validity of the proceedings
described in this Section 3.11.
4. Voting.
4.1 The shares of this Series shall have no voting rights except as
expressly provided in this Section 4 or as required by law.
4.2 Except as otherwise required by law, each share of this Series
shall be entitled to vote together as one class with the holders of shares
of Common Stock upon all matters upon which the holders of shares of Common
Stock are entitled to vote. In any such vote, the holders of shares of this
Series shall be entitled to a number of votes per share of this Series
equal to the product of (i) the Formula Number then in effect multiplied by
(ii) the maximum number of votes per share of Common Stock that any holder
of shares of Common Stock generally then has with respect to such matter.
13
<PAGE>
4.3 So long as any shares of this Series remain outstanding, unless a
greater percentage shall then be required by law, the Corporation shall
not, without the affirmative vote or written consent of the holders of
shares of this Series representing at least 66-2/3% of the aggregate voting
power of shares of this Series then outstanding, amend, alter or repeal any
of the provisions of the Certificate or the Certificate of Incorporation so
as, in any such case, as applicable, to (i) amend, alter or repeal any of
the powers, preferences or rights of the Series Common Stock or (ii)
adversely affect the voting powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, of the shares of this Series or the
Series LMCN-V Common Stock; provided, however, that no affirmative vote or
written approval of any holder of shares of this Series shall be required
to amend, alter or repeal any of the powers, preferences or rights of any
series of Series Common Stock other than this Series and the Series LMCN-V
Common Stock.
4.4 So long as any shares of this Series remain outstanding, the
Corporation shall not, without the affirmative vote or written consent of
the holders of shares of this Series representing 100% of the aggregate
voting power of shares of this Series then outstanding, amend, alter or
repeal the provisions of Section 7.7 or this Section 4.4.
4.5 No consent of holders of shares of this Series shall be required
for (i) the creation of any indebtedness of any kind of the Corporation,
(ii) the authorization or issuance of any class or series of Parity Stock
or Senior Stock, (iii) the approval of any amendment to the Certificate of
Incorporation that would increase or decrease the aggregate number of
authorized shares of Series Common Stock or Common Stock or (iv) the
authorization of any increase or decrease in the number of shares
constituting this Series; provided, however, that the number of shares
constituting this Series shall not be decreased below the number of such
shares then outstanding.
5. Liquidation Rights.
5.1 Upon the liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of shares of
this Series shall be entitled to receive, contemporaneously with any
distribution to holders of shares of Common Stock upon such liquidation,
dissolution or winding up, an aggregate amount per share equal to the
product of the Formula Number then in effect multiplied by the aggregate
amount to be distributed per share to holders of Common Stock.
14
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5.2 Neither the sale, exchange or other conveyance (for cash, shares
of stock, securities or other consideration) of all or substantially all
the property and assets of the Corporation nor the merger or consolidation
of the Corporation into or with any other corporation, or the merger or
consolidation of any other corporation into or with the Corporation, shall
be deemed to be a dissolution, liquidation or winding up, voluntary or
involuntary, for the purposes of this Section 5.
6. Transfer Restrictions.
6.1 Without the prior written consent of the Corporation, no holder of
shares of this Series shall offer, sell, transfer, pledge, encumber or
otherwise dispose of, or agree to offer, sell, transfer, pledge, encumber
or otherwise dispose of, any shares of this Series or interests in any
shares of this Series except to a Permitted Transferee that shall agree
that, prior to such Permitted Transferee ceasing to be a Permitted
Transferee, such Permitted Transferee must transfer ownership of any shares
of this Series, and all interests therein, held by such Permitted
Transferee to any Permitted Transferee. For the avoidance of doubt, the
preceding sentence is not intended to prohibit a holder of shares of this
Series from entering into, or offering to enter into, (a) any arrangement
under which such holder agrees to promptly convert shares of this Series
and sell, transfer or otherwise dispose of the Common Stock issuable upon
such conversion or (b) any pledge or encumbrance of shares of this Series;
provided, however, that the terms of any such pledge or encumbrance must
require that, in the event of any sale or foreclosure with respect to
shares of this Series, such shares must be delivered immediately to the
Corporation for conversion into Common Stock. The provisions of this
Section 6.1 shall continue to be in effect with respect to any shares of
this Series received by any holder by virtue of merger, consolidation,
operation of law or otherwise.
6.2 Certificates for shares of this Series shall bear such legends as
the Corporation shall from time to time deem appropriate.
15
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7. Other Provisions.
7.1 All notices from the Corporation to the holders of shares of this
Series shall be given by one of the methods specified in Section 7.2. With
respect to any notice to a holder of shares of this Series required to be
provided hereunder, neither failure to give such notice, nor any defect
therein or in the transmission thereof, to any particular holder shall
affect the sufficiency of the notice or the validity of the proceedings
referred to in such notice with respect to the other holders or affect the
legality or validity of any distribution, right, warrant, reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up, or the vote upon any such action. Any notice that was mailed in
the manner herein provided shall be conclusively presumed to have been duly
given whether or not the holder receives the notice.
7.2 All notices and other communications hereunder shall be deemed
given (i) on the first Trading Day following the date received, if
delivered personally, (ii) on the Trading Day following timely deposit with
an overnight courier service, if sent by overnight courier specifying next
day delivery and (iii) on the first Trading Day that is at least five days
following deposit in the mails, if sent by first class mail to (x) a holder
at its last address as it appears on the transfer records or registry for
the shares of this Series and (y) the Corporation at the following address
(or at such other address as the Corporation shall specify in a notice
pursuant to this Section 7.2): Time Warner Inc., 75 Rockefeller Plaza, New
York, New York 10019, Attention: General Counsel.
7.3 Any shares of this Series that have been converted or otherwise
acquired by the Corporation shall, after such conversion or acquisition, as
the case may be, be retired and promptly canceled and shall become
authorized but unissued shares of this Series, unless the Board of
Directors determines otherwise.
7.4 The Corporation shall be entitled to recognize the exclusive right
of a Person registered on its records as the holder of shares of this
Series, and such holder of record shall be deemed the holder of such shares
for all purposes.
7.5 All notice periods referred to in the Certificate shall commence
on the date of the mailing of the applicable notice.
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7.6 Any registered holder of shares of this Series may proceed to
protect and enforce its rights by any available remedy by proceeding at law
or in equity to protect and enforce any such rights, whether for the
specific enforcement of any provision in the Certificate or in aid of the
exercise of any power granted herein, or to enforce any other proper
remedy.
7.7 The shares of this Series shall not be subject to redemption at
the option of the Corporation, including pursuant to Section 5 of Article
IV of the Certificate of Incorporation (or any equivalent provision in any
further amendment to or restatement of the Certificate of Incorporation).
IN WITNESS WHEREOF, Time Warner Inc. has caused this Certificate of
Amendment to be executed by Thomas W. McEnerney, its Vice President, this 25th
day of May, 1999.
TIME WARNER INC.
By: /s/ Thomas W. McEnerney
-----------------------------
Name: Thomas W. McEnerney
Title: Vice President
17
Exhibit 3.(i)(i)
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF THE VOTING POWERS,
DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL
RIGHTS AND QUALIFICATIONS, LIMITATIONS
OR RESTRICTIONS THEREOF, OF
SERIES LMCN-V COMMON STOCK
OF
TIME WARNER INC.
--------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
--------------------
Time Warner Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (formerly named "TW Inc.") (the
"Corporation"), does hereby certify:
A. That a Certificate of the Voting Powers, Designations,
Preferences and Relative, Participating, Optional or other Special Rights and
Qualifications, Limitations or Restrictions thereof of the Corporation's Series
LMCN-V Common Stock (the "Old Certificate") was filed in the office of the
Secretary of State of the State of Delaware on October 10, 1996.
B. That the amendment set forth in this Certificate of Amendment has
been duly adopted in accordance with Section 242 of the General Corporation Law
of the State of Delaware (the "DGCL").
C. That the Old Certificate is hereby amended to read in its
entirety as follows:
The series of Series Common Stock hereby established shall consist
of 140,000,000 shares designated as Series LMCN-V Common Stock. The number of
shares constituting such series may be increased or decreased (but not below the
number of shares then outstanding) from time to time by a resolution or
resolutions of the Board of Directors of the Corporation.
<PAGE>
1. Definitions. As used herein, the following terms shall have the
indicated meanings:
1.1 "Board of Directors" shall mean the Board of Directors of the
Corporation or, with respect to any action to be taken by the Board of
Directors, any committee of the Board of Directors duly authorized to take
such action.
1.2 "Capital Stock" shall mean any and all shares of corporate stock
of a Person (however designated and whether representing rights to vote,
rights to participate in dividends or distributions upon liquidation or
otherwise with respect to such Person, or any division or subsidiary
thereof, or any joint venture, partnership, corporation or other entity).
1.3 "Certificate" shall mean the Certificate of the Voting Powers,
Designations, Preferences and Relative, Participating, Optional or Other
Special Rights, and Qualifications, Limitations or Restrictions Thereof, of
Series LMCN-V Common Stock filed with the Secretary of State of the State
of Delaware pursuant to Section 151 of the DGCL, as amended from time to
time.
1.4 "Charter Amendment" shall mean the amendment to the Corporation's
Restated Certificate of Incorporation to increase the number of authorized
shares of the Series Common Stock from 200,000,000 to 600,000,000.
1.5 "Closing Price" of the Common Stock shall mean the last reported
sale price of the Common Stock (regular way) as shown on the Composite Tape
of the NYSE, or, in case no such sale takes place on such day, the average
of the closing bid and asked prices on the NYSE, or, if the Common Stock is
not listed or admitted to trading on the NYSE, on the principal national
securities exchange on which such stock is listed or admitted to trading,
or, if it is not listed or admitted to trading on any national securities
exchange, the last reported sale price of the Common Stock, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, in either case as reported by NASDAQ.
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1.6 "Common Stock" shall mean the class of Common Stock, par value
$.01 per share, of the Corporation, or any other class of stock resulting
from (x) successive changes or reclassifications of such Common Stock
consisting of changes in par value, or from par value to no par value, (y)
a subdivision or combination or (z) any other changes for which an
adjustment is made under Section 2.4(a), together with any rights
associated generally with the shares of Common Stock.
1.7 "Communications Laws" shall mean the Communications Act of 1934
(as amended and supplemented from time to time and any successor statute or
statutes regulating telecommunications companies) and the rules and
regulations (and interpretations thereof and determinations with respect
thereto) promulgated, issued or adopted from time to time by the Federal
Communications Commission (the "FCC"). All references herein to
Communications Laws shall include as of any relevant date in question the
Communications Laws as then in effect (including any Communications Law or
part thereof the effectiveness of which is then stayed or promulgated with
a delayed effective date).
1.8 "Conversion Date" shall have the meaning set forth in Section 3.5.
1.9 "Corporation" shall mean Time Warner Inc., a Delaware corporation,
and any of its successors by operation of law, including by merger or
consolidation.
1.10 "DGCL" shall mean the General Corporation Law of the State of
Delaware, as amended from time to time.
1.11 "Dividend Payment Date" shall have the meaning set forth in
Section 2.1.
1.12 "Formula Number" shall have the meaning set forth in Section 2.1.
1.13 "LMC Agreement" shall mean the Second Amended and Restated LMC
Agreement dated as of September 22, 1995, among a Delaware corporation
known on such date as "Time Warner Inc.", the Corporation, Liberty Media
Corporation, a Delaware corporation ("LMC Parent"), and certain
subsidiaries of LMC Parent listed under "Subsidiaries of LMC Parent" on the
signature pages thereto, as amended by Amendment No. 1 dated as of June 24,
1997, Amendment No. 2 dated as of May 25, 1999, and as further amended from
time to time.
1.14 "NASDAQ" shall mean The Nasdaq Stock Market.
1.15 "NYSE" shall mean the New York Stock Exchange, Inc.
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1.16 "Parity Stock" shall mean shares of Common Stock and shares of
any other class or series of Capital Stock of the Corporation that, by the
terms of the Certificate of Incorporation or of the instrument by which the
Board of Directors, acting pursuant to authority granted in the Certificate
of Incorporation, shall fix the relative rights, preferences and
limitations thereof, shall, in the event that the stated dividends thereon
are not paid in full, be entitled to share ratably with the shares of this
Series in the payment of dividends in accordance with the sums that would
be payable on such shares if all dividends were declared and paid in full,
or shall, in the event that the amounts payable thereon in liquidation are
not paid in full, be entitled to share ratably with the shares of this
Series in any distribution of assets other than by way of dividends in
accordance with the sums that would be payable in such distribution if all
sums payable were discharged in full.
1.17 "Permitted Transferee" shall mean any Liberty Party, as such term
is defined in the LMC Agreement.
1.18 "Person" shall mean an individual, corporation, partnership,
limited liability company, joint venture, association, trust,
unincorporated organization or other entity.
1.19 "Preferred Stock" shall mean the class of Preferred Stock, par
value $.10 per share, of the Corporation.
1 1.20 "Record Date" shall have the meaning set forth in Section 2.1.
1.21 "Senior Stock" shall mean shares of any class or series of
Capital Stock of the Corporation that, by the terms of the Certificate of
Incorporation or of the instrument by which the Board of Directors, acting
pursuant to authority granted in the Certificate of Incorporation, shall
fix the relative rights, preferences and limitations thereof, shall be
senior to the shares of this Series in respect of the right to receive
dividends or to participate in any distribution of assets other than by way
of dividends.
1.22 "Series Common Stock" shall mean the class of Series Common
Stock, par value $.01 per share, of the Corporation.
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1.23 "Series LMC Common Stock" shall mean the series of Series Common
Stock authorized and designated as Series LMC Common Stock.
1.24 "Series LMCN-V Common Stock" and "this Series" shall mean the
series of Series Common Stock authorized and designated as Series LMCN-V
Common Stock.
1.25 "Trading Day" shall mean, so long as the Common Stock is listed
or admitted to trading on the NYSE, a day on which the NYSE is open for the
transaction of business, or, if the Common Stock is not listed or admitted
to trading on the NYSE, a day on which the principal national securities
exchange on which the Common Stock is listed is open for the transaction of
business, or, if the Common Stock is not so listed or admitted for trading
on any national securities exchange, a day on which the National Market
System of NASDAQ is open for the transaction of business.
2. Dividends.
2.1 The holders of shares of this Series shall be entitled to receive
dividends, out of funds legally available therefor, payable on such dates
as may be set by the Board of Directors for payment of cash dividends on
the Common Stock (each such date being referred to herein as a "Dividend
Payment Date"), in cash, in an amount per share equal to the product of (i)
the Formula Number in effect as of such Dividend Payment Date multiplied by
(ii) the amount of the regularly scheduled cash dividend to be paid on one
share of Common Stock on such Dividend Payment Date; provided, however,
dividends on the shares of this Series shall be payable pursuant to this
Section 2.1 only to the extent that regularly scheduled cash dividends are
declared and paid on the Common Stock. As used herein, the "Formula Number"
shall initially be 1.0000, which shall be adjusted from time to time
pursuant to Section 2.4. The dividends payable on any Dividend Payment Date
shall be paid to the holders of record of shares of this Series at the
close of business on the record date for the related regularly scheduled
cash dividend on the Common Stock (each such date being referred to herein
as a "Record Date"). The amount of dividends that are paid to each holder
of record on any Dividend Payment Date shall be rounded to the nearest
cent.
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2.2 In case the Corporation shall at any time distribute (other than a
distribution in liquidation of the Corporation and other than a
distribution of Common Stock as a result of which an adjustment to the
Formula Number is made pursuant to Section 2.4 or in connection with which
a dividend of shares of this Series is paid in accordance with Section
2.4(e)) to the holders of its shares of Common Stock any assets or
property, including evidences of indebtedness or securities of the
Corporation or of any other Person (including common stock of such Person)
or cash (but excluding regularly scheduled cash dividends payable on shares
of Common Stock), or in case the Corporation shall at any time distribute
(other than a distribution in liquidation of the Corporation) to such
holders rights, options or warrants to subscribe for or purchase shares of
Common Stock (including shares held in the treasury of the Corporation), or
rights, options or warrants to subscribe for or purchase any other security
or rights, options or warrants to subscribe for or purchase any assets or
property (in each case, whether of the Corporation or otherwise, but other
than any distribution of rights to purchase securities of the Corporation
if the holder of shares of this Series would otherwise be entitled to
receive such rights upon conversion of shares of this Series for Common
Stock pursuant to Section 3, provided, however, that if such rights are
subsequently redeemed by the Corporation, such redemption shall be treated
for purposes of this Section 2.2 as a cash dividend (but not a regularly
scheduled cash dividend) on the Common Stock), the Corporation shall
simultaneously distribute such assets, property, securities, rights,
options or warrants to the holders of shares of this Series on the record
date fixed for determining the holders of Common Stock entitled to
participate in such distribution (or, if no such record date shall be
established, the effective time thereof) in an amount per share of this
Series equal to the amount that a holder of one share of this Series would
have been entitled to receive had such share of this Series been converted
into Common Stock immediately prior to such record date (or effective
time). In the event of a distribution to holders of shares of this Series
pursuant to this Section 2.2, such holders shall be entitled to receive
fractional shares or interests only to the extent that holders of Common
Stock are entitled to receive the same. The holders of shares of this
Series on the applicable record date (or effective time) shall be entitled
to receive in lieu of such fractional shares or interests the same
consideration as is payable to holders of Common Stock with respect
thereto. If there are no fractional shares or interests payable to holders
of Common Stock, the holders of shares of this Series on the applicable
record date (or effective time) shall receive in lieu of such fractional
shares or interests the fair value thereof as determined by the Board of
Directors.
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2.3 In the event that the holders of 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 distribution that is subject to Section
2.2, the kind and amount of securities or other property that shall be
distributable to the holders of shares of this Series shall be based on (i)
the election, if any, made by the holder of record (as of the date used for
determining the holders of Common Stock entitled to make such election) of
the largest number of shares of this Series in writing to the Corporation
on or prior to the last date on which a holder of 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 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 shares of this Series 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 Common Stock).
Concurrently with the mailing to holders of Common Stock of any document
pursuant to which such holders may make an election of the type referred to
in this Section 2.3, the Corporation shall mail a copy thereof to the
holders of record of shares of this Series as of the date used for
determining the holders of record of Common Stock entitled to such mailing,
which document shall be used by the holders of record of shares of this
Series to make such an election.
2.4 The Formula Number shall be adjusted from time to time as follows,
whether or not any shares of this Series have been issued by the
Corporation, for events occurring after December 31, 1998:
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(a) In case the Corporation shall (i) pay a dividend in shares
of its Common Stock, (ii) combine its outstanding shares of Common Stock
into a smaller number of shares, (iii) subdivide its outstanding shares of
Common Stock or (iv) reclassify (other than by way of a merger or
consolidation that is subject to Section 3.6) its shares of Common Stock,
then the Formula Number in effect immediately before such event shall be
appropriately adjusted so that immediately following such event the
holders of shares of this Series shall be entitled to receive upon
conversion thereof the kind and amount of shares of Capital Stock of the
Corporation that they would have owned or been entitled to receive upon or
by reason of such event if such shares of this Series had been converted
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
Capital Stock (other than Common Stock) that shall accompany a
reclassification of the Common Stock, shall be subject to Section 2.2
rather than this Section 2.4(a)). An adjustment made pursuant to this
Section 2.4(a) shall become effective retroactively immediately after the
record date in the case of a dividend or distribution and shall become
effective retroactively immediately after the effective date in the case
of a subdivision, combination or reclassification. For the purposes of
this Section 2.4(a), in the event that the holders of Common Stock are
entitled to make any election with respect to the kind or amount of
securities receivable by them in any transaction that is subject to this
Section 2.4(a) (including any election that would result in all or a
portion of the transaction becoming subject to Section 2.2), the kind and
amount of securities that shall be distributable to the holders of shares
of this Series shall be based on (i) the election, if any, made by the
holder of record (as of the date used for determining the holders of
Common Stock entitled to make such election) of the largest number of
shares of this Series in writing to the Corporation on or prior to the
last date on which a holder of 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 shall be based on the kind or amount of
securities receivable by a plurality of nonelecting holders of Common
Stock). Concurrently with the mailing to holders of Common Stock of any
document pursuant to which such holders may make an election of the type
referred to in this Section 2.4(a), the Corporation shall mail a copy
thereof to the holders of record of shares of this Series as of the date
used for determining the holders of record of Common Stock entitled to
such mailing, which document shall be used by the holders of record of
shares of this Series to make such an election.
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(b) The Corporation shall be entitled to make such additional
adjustments in the Formula Number, in addition to those required by
Section 2.4(a) as shall be necessary in order that any dividend or
distribution in Common Stock or any subdivision, reclassification or
combination of shares of Common Stock referred to above, shall not be
taxable to the holders of Common Stock for United States Federal income
tax purposes, so long as such additional adjustments pursuant to this
Section 2.4(b) do not decrease the Formula Number.
(c) All calculations under this Section 2 and Section 3 shall
be made to the nearest cent, one-hundredth of a share or, in the case of
the Formula Number, one hundred-thousandth. Notwithstanding any other
provision of this Section 2.4, the Corporation shall not be required to
make any adjustment of the Formula Number unless such adjustment would
require an increase or decrease of at least one percent (1%) of the
Formula Number. Any lesser adjustment shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment
that, together with any adjustment or adjustments so carried forward,
shall amount to an increase or decrease of at least one percent (1%) of
the Formula Number. Any adjustments under this Section 2.4 shall be made
successively whenever an event requiring such an adjustment occurs.
(d) Promptly after an adjustment in the Formula Number is
required, the Corporation shall provide written notice to each of the
holders of shares of this Series, which notice shall state the adjusted
Formula Number.
(e) Notwithstanding anything to the contrary in this Section
2.4 or the Certificate, if the Corporation pays a dividend with respect to
its outstanding Common Stock in the form of additional shares of Common
Stock, then:
(i) the Corporation may pay a dividend with respect to the
outstanding shares of this Series in the form of additional shares
of this Series, payable at the same time with the same record date
and in the same ratio as the dividend with respect to the Common
Stock (including treatment of fractional shares);
(ii) if the Corporation elects to pay the dividend in
accordance with clause (i) above, the Corporation shall pay a
dividend with respect to the outstanding shares, if any, of Series
LMC Common Stock in the form of additional shares of Series LMC
Common Stock, payable at the same time with the same record date and
in the same ratio as the dividend with respect to the Common Stock
(including treatment of fractional shares); and
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(iii) if the Corporation pays the dividend in accordance with
clauses (i) and (ii) above, there shall not be any adjustment to the
Formula Number by reason of such dividend with respect to the Common
Stock.
(f) If a distribution is made in accordance with the
provisions of Section 2.2, anything in this Section 2.4 to the contrary
notwithstanding, no adjustment pursuant to this Section 2.4 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.
3. Conversion at the Option of the Holder.
3.1 Each holder of a share of this Series shall have the right at any
time to convert such share of this Series into either: (i) a number of
shares of Common Stock per share of this Series equal to the Formula Number
in effect on the Conversion Date or (ii) one share of Series LMC Common
Stock per share of this Series; provided, however, that such holder may
convert shares of this Series only to the extent that the ownership by such
holder or its designee of the shares of Common Stock or Series LMC Common
Stock issuable upon such conversion would not violate the Communications
Laws.
3.2 No adjustments in respect of payments of dividends on shares of
this Series surrendered for conversion or any dividend on the Common Stock
or Series LMC Common Stock issued upon conversion shall be made upon the
conversion of any shares of this Series (it being understood that if the
Conversion Date for shares of this Series occurs after the Record Date and
prior to the Dividend Payment Date of any such dividend, the holders of
record of shares of this Series on such Record Date shall be entitled to
receive the dividend payable with respect to such shares on the related
Dividend Payment Date pursuant to Section 2.1).
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3.3 The Corporation may, but shall not be required to, in connection
with any conversion of shares of this Series into shares of Common Stock,
issue a fraction of a share of Common Stock, and if the Corporation shall
determine not to issue any such fraction, the Corporation shall make a cash
payment (rounded to the nearest cent) equal to such fraction multiplied by
the Closing Price of the Common Stock on the last Trading Day prior to the
Conversion Date. The Corporation shall issue a fraction of a share of
Series LMC Common Stock in order to effect a conversion of a fraction of a
share of this Series into Series LMC Common Stock.
3.4 Any holder of shares of this Series electing to convert such
shares into Common Stock or Series LMC Common Stock shall surrender the
certificate or certificates for such shares at the principal executive
office of the Corporation (or at such other place as the Corporation may
designate by notice to the holders of shares of this Series) during regular
business hours, duly endorsed to the Corporation or in blank, or
accompanied by instruments of transfer to the Corporation or in blank, or
in form satisfactory to the Corporation, and shall give written notice to
the Corporation at such office that such holder elects to convert such
shares of this Series, which notice shall state whether the shares of this
Series delivered for conversion shall be converted into shares of Common
Stock or shares of Series LMC Common Stock. If any such certificate or
certificates shall have been lost, stolen or destroyed, the holder shall,
in lieu of delivering such certificate or certificates, deliver to the
Corporation (or such other place) an indemnification agreement and bond
satisfactory to the Corporation. The Corporation shall, as soon as
practicable (subject to Section 3.8) after such deposit of certificates for
shares of this Series or delivery of the indemnification agreement and
bond, accompanied by the written notice above prescribed, issue and deliver
at such office (or such other place) to the holder for whose account such
shares were surrendered, or a designee of such holder, certificates
representing either (i) the number of shares of Common Stock and the cash,
if any, or (ii) the number of shares of Series LMC Common Stock, as the
case may be, to which such holder is entitled upon such conversion. Each
share of Common Stock delivered to a holder or its designee as a result of
conversion of shares of this Series pursuant to this Section 3 shall be
accompanied by any rights associated generally with each other share of
Common Stock outstanding as of the Conversion Date.
3.5 Conversion shall be deemed to have been made as of the date (the
"Conversion Date") that the certificate or certificates for the shares of
this Series to be converted and the written notice prescribed in Section
3.4 are received by the Corporation; and the Person entitled to receive the
Common Stock or Series LMC Common Stock issuable upon such conversion shall
be treated for all purposes as the holder of record of such Common Stock or
Series LMC Common Stock, as the case may be, on such date. The Corporation
shall not be required to deliver certificates for shares of Common Stock or
Series LMC Common Stock while the stock transfer books for such stock or
for this Series are duly closed for any purpose, but certificates for
shares of Common Stock or Series LMC Common Stock, as the case may be,
shall be delivered as soon as practicable after the opening of such books.
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3.6 In the event that after December 31, 1998, whether or not any
shares of this Series have been issued by the Corporation, either (a) any
consolidation or merger to which the Corporation is a party, other than a
merger or consolidation in which the Corporation is the surviving or
continuing corporation and that 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 Common Stock or (b) any sale or
conveyance of all or substantially all of the property and assets of the
Corporation, then lawful provision shall be made as part of the terms of
such transaction whereby the holder of each share of this Series shall have
the right thereafter, during the period such share shall be convertible, to
convert such share into 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 Common Stock into which
such shares of this Series could have been converted immediately prior to
such consolidation, merger, sale or conveyance, subject to adjustment that
shall be as nearly equivalent as may be practicable to the adjustments
provided for in Section 2.4 and this Section 3 (based on (i) the election,
if any, made in writing to the Corporation by the holder of record (as of
the date used for determining holders of Common Stock entitled to make such
election) of the largest number of shares of this Series on or prior to the
last date on which a holder of 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 shall be based upon the kind and amount of
securities or other property receivable by a plurality of the nonelecting
holders of Common Stock)). In the event that any of the transactions
referred to in clause (a) or (b) of the first sentence of this Section 3.6
involves the distribution of cash or property (other than equity
securities) to a holder of Common Stock, lawful provision shall be made as
part of the terms of the transaction whereby the holder of each share of
this Series on the record date fixed for determining holders of Common
Stock entitled to receive such cash or property (or if no such record date
is established, the effective date of such transaction) shall 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 this Series
into Common Stock immediately prior to such record date (or effective date)
(based on the election or nonelection made by the holder of record of the
largest number of shares of this Series, as provided above). Concurrently
with the mailing to holders of Common Stock of any document pursuant to
which such holders may make an election regarding the kind or amount of
securities or other property that will be receivable by such holders in any
transaction described in clause (a) or (b) of the first sentence of this
Section 3.6, the Corporation shall mail a copy thereof to the holders of
record of the shares of this Series as of the date used for determining the
holders of record of Common Stock entitled to such mailing, which document
shall be used by the holders of shares of this Series to make such an
election. The Corporation shall not enter into any of the transactions
referred to in clause (a) or (b) of the first sentence of this Section 3.6
unless effective provision shall be made in the certificate or articles of
incorporation or other constituent documents of the Corporation or the
entity surviving the consolidation or merger, if other than the
Corporation, or the entity acquiring the Corporation's assets, as the case
may be, so as to give effect to the provisions set forth in this Section
3.6. The provisions of this Section 3.6 shall apply similarly to successive
consolidations, mergers, sales or conveyances. For purposes of this Section
3.6, the term "Corporation" shall refer to the Corporation as constituted
immediately prior to the merger, consolidation or other transaction
referred to in this Section 3.6.
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3.7 The Corporation shall at all times reserve and keep available,
free from preemptive rights, out of its authorized but unissued stock, for
the purpose of effecting the conversion of the shares of this Series, such
number of its duly authorized shares of Common Stock and Series LMC Common
Stock as shall from time to time be sufficient to effect the conversion of
all outstanding shares of this Series into shares of Common Stock or Series
LMC Common Stock at any time (assuming that, at the time of the computation
of such number of shares, all such Common Stock or Series LMC Common Stock
would be held by a single holder); provided, however, that nothing
contained herein shall preclude the Corporation from satisfying its
obligations in respect of the conversion of the shares by delivery of
purchased shares of Common Stock or Series LMC Common Stock that are held
in the treasury of the Corporation. All shares of Common Stock or Series
LMC Common Stock that shall be deliverable upon conversion of the shares of
this Series shall be duly and validly issued, fully paid and nonassessable.
For purposes of this Section 3, any shares of this Series at any time
outstanding shall not include shares held in the treasury of the
Corporation.
3.8 In any case in which Section 2.4 shall require that any adjustment
be made effective as of or retroactively immediately following a record
date, the Corporation may elect to defer (but only for five (5) Trading
Days following the occurrence of the event that necessitates the notice
referred to in Section 2.4(d)) issuing to the holder of any shares of this
Series converted after such record date (i) the shares of Common Stock
issuable upon such conversion over and above (ii) the shares of Common
Stock issuable upon such conversion on the basis of the Formula Number
prior to adjustment; provided, however, that the Corporation shall 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.
3.9 If any shares of Common Stock or Series LMC Common Stock that
would be issuable upon conversion pursuant to this Section 3 require
registration with or approval of any governmental authority before such
shares may be issued upon conversion (other than any such registration or
approval required to avoid a violation of the Communications Laws), the
Corporation will in good faith and as expeditiously as possible cause such
shares to be duly registered or approved, as the case may be. The
Corporation will use commercially reasonable efforts to list the shares of
(or depositary shares representing fractional interests in) Common Stock
required to be delivered upon conversion of shares of this Series prior to
such delivery upon the principal national securities exchange, if any, upon
which the outstanding Common Stock is listed at the time of such delivery.
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3.10 The Corporation shall pay any and all issue or other taxes that
may be payable in respect of any issue or delivery of shares of Common
Stock or Series LMC Common Stock on conversion of shares of this Series
pursuant hereto. The Corporation shall not, however, be required to pay any
tax that is payable in respect of any transfer involved in the issue or
delivery of Common Stock or Series LMC Common Stock in a name other than
that in which the shares of this Series so converted were registered, and
no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of such tax,
or has established, to the satisfaction of the Corporation, that such tax
has been paid.
3.11 In case of (i) the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation or (ii) any action triggering
an adjustment to the Formula Number pursuant to Section 2.4 (or in
connection with which a dividend of shares of this Series is paid in
accordance with Section 2.4(e)) or Section 3.6, then, in each case, the
Corporation shall cause to be mailed, first-class postage prepaid, to the
holders of record of the outstanding shares of this Series, at least
fifteen (15) days prior to the applicable record date for any such
transaction (or if no record date will be established, the effective date
thereof), a notice stating (x) the date, if any, on which a record is to be
taken for the purpose of any such transaction (or, if no record date will
be established, the date as of which holders of record of Common Stock
entitled to participate in such transaction are determined), and (y) the
expected effective date thereof. Failure to give such notice or any defect
therein shall not affect the legality or validity of the proceedings
described in this Section 3.11.
4. Voting.
4.1 The shares of this Series shall have no voting rights except as
expressly provided in this Section 4 or as required by law.
4.2 Each share of this Series shall be entitled to vote together as
one class with the holders of shares of Common Stock upon the election of
the directors of the Corporation. In any such vote, the holders of shares
of this Series shall be entitled to a number of votes per share of this
Series equal to the product of (i) the Formula Number then in effect
multiplied by (ii) the maximum number of votes per share of Common Stock
that any holder of shares of Common Stock generally then has with respect
to such matter divided by (iii) 100.
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4.3 So long as any shares of this Series remain outstanding, unless a
greater percentage shall then be required by law, the Corporation shall
not, without the affirmative vote or written consent of the holders of
shares of this Series representing at least 66-2/3% of the aggregate voting
power of shares of this Series then outstanding, amend, alter or repeal any
of the provisions of the Certificate or the Certificate of Incorporation so
as, in any such case, as applicable, to (i) amend, alter or repeal any of
the powers, preferences or rights of the Series Common Stock or (ii)
adversely affect the voting powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, of the shares of this Series or the
Series LMC Common Stock; provided, however, that no affirmative vote or
written approval of any holder of shares of this Series shall be required
to amend, alter or repeal any of the powers, preferences or rights of any
series of Series Common Stock other than this Series and the Series LMC
Common Stock.
4.4 So long as any shares of this Series remain outstanding, the
Corporation shall not, without the affirmative vote or written consent of
the holders of shares of this Series representing 100% of the aggregate
voting power of shares of this Series then outstanding, amend, alter or
repeal the provisions of Section 7.7 or this Section 4.4.
4.5 No consent of holders of shares of this Series shall be required
for (i) the creation of any indebtedness of any kind of the Corporation,
(ii) the authorization or issuance of any class or series of Parity Stock
or Senior Stock, (iii) the approval of any amendment to the Certificate of
Incorporation that would increase or decrease the aggregate number of
authorized shares of Series Common Stock or Common Stock or (iv) the
authorization of any increase or decrease in the number of shares
constituting this Series; provided, however, that the number of shares
constituting this Series shall not be decreased below the number of such
shares then outstanding.
5. Liquidation Rights.
5.1 Upon the liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of shares of
this Series shall be entitled to receive, contemporaneously with any
distribution to holders of shares of Common Stock upon such liquidation,
dissolution or winding up, an aggregate amount per share equal to the
product of the Formula Number then in effect multiplied by the aggregate
amount to be distributed per share to holders of Common Stock.
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5.2 Neither the sale, exchange or other conveyance (for cash, shares
of stock, securities or other consideration) of all or substantially all
the property and assets of the Corporation nor the merger or consolidation
of the Corporation into or with any other corporation, or the merger or
consolidation of any other corporation into or with the Corporation, shall
be deemed to be a dissolution, liquidation or winding up, voluntary or
involuntary, for the purposes of this Section 5.
6. Transfer Restrictions.
6.1 Without the prior written consent of the Corporation, no holder of
shares of this Series shall offer, sell, transfer, pledge, encumber or
otherwise dispose of, or agree to offer, sell, transfer, pledge, encumber
or otherwise dispose of, any shares of this Series or interests in any
shares of this Series except to a Permitted Transferee that shall agree
that, prior to such Permitted Transferee ceasing to be a Permitted
Transferee, such Permitted Transferee must transfer ownership of any shares
of this Series, and all interests therein, held by such Permitted
Transferee to any Permitted Transferee. For the avoidance of doubt, the
preceding sentence is not intended to prohibit a holder of shares of this
Series from entering into, or offering to enter into, (a) any arrangement
under which such holder agrees to promptly convert shares of this Series
and sell, transfer or otherwise dispose of the Common Stock issuable upon
such conversion or (b) any pledge or encumbrance of shares of this Series;
provided, however, that the terms of any such pledge or encumbrance must
require that, in the event of any sale or foreclosure with respect to
shares of this Series, such shares must be delivered immediately to the
Corporation for conversion into Common Stock. The provisions of this
Section 6.1 shall continue to be in effect with respect to any shares of
this Series received by any holder by virtue of merger, consolidation,
operation of law or otherwise.
6.2 Certificates for shares of this Series shall bear such legends as
the Corporation shall from time to time deem appropriate.
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<PAGE>
7. Other Provisions.
7.1 All notices from the Corporation to the holders of shares of this
Series shall be given by one of the methods specified in Section 7.2. With
respect to any notice to a holder of shares of this Series required to be
provided hereunder, neither failure to give such notice, nor any defect
therein or in the transmission thereof, to any particular holder shall
affect the sufficiency of the notice or the validity of the proceedings
referred to in such notice with respect to the other holders or affect the
legality or validity of any distribution, right, warrant, reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up, or the vote upon any such action. Any notice that was mailed in
the manner herein provided shall be conclusively presumed to have been duly
given whether or not the holder receives the notice.
7.2 All notices and other communications hereunder shall be deemed
given (i) on the first Trading Day following the date received, if
delivered personally, (ii) on the Trading Day following timely deposit with
an overnight courier service, if sent by overnight courier specifying next
day delivery and (iii) on the first Trading Day that is at least five days
following deposit in the mails, if sent by first class mail to (x) a holder
at its last address as it appears on the transfer records or registry for
the shares of this Series and (y) the Corporation at the following address
(or at such other address as the Corporation shall specify in a notice
pursuant to this Section 7.2): Time Warner Inc., 75 Rockefeller Plaza, New
York, New York 10019, Attention: General Counsel.
7.3 Any shares of this Series that have been converted or otherwise
acquired by the Corporation shall, after such conversion or acquisition, as
the case may be, be retired and promptly canceled and shall become
authorized but unissued shares of this Series, unless the Board of
Directors determines otherwise.
7.4 The Corporation shall be entitled to recognize the exclusive right
of a Person registered on its records as the holder of shares of this
Series, and such holder of record shall be deemed the holder of such shares
for all purposes.
7.5 All notice periods referred to in the Certificate shall commence
on the date of the mailing of the applicable notice.
17
<PAGE>
7.6 Any registered holder of shares of this Series may proceed to
protect and enforce its rights by any available remedy by proceeding at law
or in equity to protect and enforce any such rights, whether for the
specific enforcement of any provision in the Certificate or in aid of the
exercise of any power granted herein, or to enforce any other proper
remedy.
7.7 The shares of this Series shall not be subject to redemption at
the option of the Corporation, including pursuant to Section 5 of Article
IV of the Certificate of Incorporation (or any equivalent provision in any
further amendment to or restatement of the Certificate of Incorporation).
D. That effective upon the filing of this Certificate of Amendment
with the Secretary of State of the State of Delaware (the "Effective Time")
each share of Series LMCN-V Common Stock issued and outstanding immediately
prior to the Effective Time ("Old LMCN-V Common Stock") shall thereupon be
reclassified as and become two shares of Series LMCN-V Common Stock (the
"New LMCN-V Common Stock"). The shares of New LMCN-V Common Stock shall be
fully paid and nonassessable.
Each certificate representing issued and outstanding shares of Old
LMCN-V Common Stock (an "Old Certificate") at the Effective Time shall
represent, and the holder thereof shall be entitled upon surrender of such
Old Certificate to the Corporation for cancelation to receive a new
certificate or certificates representing, the number of shares of New
Series LMCN-V Common Stock into which such issued and outstanding shares of
Old LMCN-V Common Stock are reclassified as provided in this Certificate of
Amendment.
Until the surrender of an Old Certificate to the Corporation as
provided herein, dividends or distributions, if any, in respect of the New
LMCN-V Common Stock the ownership of which is evidenced by such Old
Certificate will be paid to the person in whose name such Old Certificate
is registered. After the Effective Time, the holder of record of an Old
Certificate on any record date for a meeting of stockholders of the
Corporation will be entitled to vote the shares of New LMCN-V Common Stock
the ownership of which is evidenced by such Old Certificate as of such
record date on all matters submitted to a vote of the holders of the Series
LMCN-V Common Stock at such meeting.
18
<PAGE>
IN WITNESS WHEREOF, Time Warner Inc. has caused this Certificate of
Amendment to be executed by Thomas W. McEnerney, Esq., its Vice President, this
25th day of May, 1999.
TIME WARNER INC.,
by /s/ Thomas W. McEnerney
---------------------------
Name: Thomas W. McEnerney
Title: Vice President
19
Exhibit 10
As Amended through
May 20, 1999
TIME WARNER INC.
1988 Restricted Stock Plan For
Non-Employee Directors
1. PURPOSE. The purpose of the Plan is to supplement the compensation
paid to Outside Directors and to increase their proprietary interest in the
Company and their identification with the interests of the Company's
stockholders, by grants of annual awards of Common Stock.
2. CERTAIN DEFINITIONS.
(a) "Average Market Price" shall mean the average (rounded to
the nearest cent) of the means between the high and low sales prices of a share
of Common Stock as reported on the New York Stock Exchange Composite Tape for
the ten consecutive trading days ending on the date of the annual meeting of
stockholders of the Company for the year with respect to which an annual grant
of Restricted Shares is automatically made pursuant to paragraph 5 of the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Commission" shall mean the Securities and Exchange
Commission.
(d) "Common Stock" shall mean the Common Stock, par value $.01
per share, of the Company.
(e) "Company" shall mean Time Warner Inc., a Delaware
corporation.
(f) "Grant Date" shall have the meaning set forth in paragraph
5 of the Plan.
(g) "Outside Director" shall mean a member of the Board of
Directors of the Company who, as of the close of business on the date of the
annual meeting of stockholders of the Company, is not an employee of the Company
or any subsidiary of the Company. For the purposes hereof, a "subsidiary" of the
Company shall mean any corporation, partnership or other entity in which the
Company owns, directly or indirectly, an equity interest of 50% or more.
(h) "Plan" shall mean this 1988 Restricted Stock Plan for
Non-Employee Directors of the Company.
(i) "Retained Distributions" shall mean distributions which
are retained by the Company pursuant to paragraph 6(b) of the Plan.
(j) "Restricted Shares" shall mean shares of Common Stock
automatically granted to an Outside Director pursuant to paragraph 5 of the
Plan.
<PAGE>
(k) "Restriction Period" shall mean the period of time
specified in paragraph 6(a) hereof applicable to all Restricted Shares granted
under the Plan.
3. SHARES SUBJECT TO THE PLAN. Subject to the provisions of paragraph 9
hereof, the maximum aggregate number of Restricted Shares which may be issued
under the Plan in any calendar year, commencing with calendar year 1999, shall
be equal to .003% of the shares of Common Stock outstanding on December 31st of
the preceding calendar year. Any Restricted Shares available for grant in any
calendar year which are not granted in that calendar year shall not be available
for grant in any subsequent calendar year and any Restricted Shares awarded in
any calendar year that are forfeited by the terms of the Plan in any subsequent
calendar year shall not again be available for awards. No fractional shares of
Common Stock shall be granted or issued under the Plan.
The Restricted Shares may be, in whole or in part, authorized but
unissued shares of Common Stock or shares of Common Stock previously issued and
outstanding and reacquired by the Company.
4. ELIGIBILITY. Subject to the last sentence of paragraph 5 hereof, the
only persons eligible to participate in the Plan shall be Outside Directors.
5. ANNUAL GRANTS. Subject to the provisions of paragraph 3 hereof, each
Outside Director shall automatically be granted under the Plan, as of the
conclusion of each annual meeting of stockholders of the Company (the "Grant
Date"), that number of Restricted Shares equal to (a) for Grant Dates occurring
during calendar years 1990 through 1998, $30,000 divided by the Average Market
Price of the Common Stock on the Grant Date and (b) for Grant Dates occurring
during calendar year 1999 and thereafter, that number of Restricted Shares equal
to a dollar amount determined by the Board of Directors on or before the Grant
Date divided by the Average Market Price of the Common Stock on the Grant Date,
and except as hereinafter provided, the Company shall promptly thereafter issue
such shares, in each case without any further action required to be taken by the
Board or any committee thereof. The Company shall not be required to issue
fractions of Restricted Shares and in lieu thereof any fractional Restricted
Share shall be rounded to the next whole number. Notwithstanding the foregoing,
in the case of an Outside Director who, as of any Grant Date, has not
continuously served as a member of the Board for a period of at least six
consecutive months (a "new Outside Director"), the Restricted Shares granted to
such new Outside Director on such Grant Date shall not be issued in such new
Outside Director's name until six months after such new Outside Director shall
have first become a new Outside Director. An individual who shall become an
Outside Director subsequent to the date of the annual meeting of stockholders of
the Company for any year shall first become eligible to participate in the Plan
commencing on the date of the next annual meeting of stockholders of the
Company.
6. RESTRICTION PERIOD; RESTRICTIONS APPLICABLE TO RESTRICTED SHARES;
CERTIFICATES REPRESENTING RESTRICTED SHARES.
(a) All Restricted Shares granted to an Outside Director
pursuant to the Plan shall be subject to the possibility of forfeiture and the
restrictions set forth in paragraph 6(b) below for a period (the "Restriction
Period") commencing on the date such Restricted Shares shall have been
automatically granted to such Outside Director pursuant to paragraph 5 of the
Plan and ending on the earliest of the following events:
<PAGE>
(i) the date such Outside Director ceases to be a
director of the Company by reason of mandatory retirement pursuant to
any policy or plan of the Company applicable to Outside Directors;
(ii) the date such Outside Director, having been
nominated for reelection, is not reelected by the stockholders of the
Company to serve as a member of the Board;
(iii) the date of death of such Outside Director;
(iv) the date such Outside Director terminates
service on the Board on account of medical or health reasons which
render such Outside Director unable to continue to serve as a member of
the Board; or
(v) the occurrence of a Change in Control of the
Company (as defined in paragraph 6(c) below).
;provided, however, that, in the discretion of the Board on a case by case
basis, the Restriction Period applicable to all Restricted Shares granted to an
Outside Director shall end and be deemed completed for all purposes of the Plan
in the event an Outside Director (a "withdrawing Outside Director") terminates
his or her service as a member of the Board (A) for reasons of personal or
financial hardship; (B) to serve in any governmental, diplomatic or any other
public service position or capacity; (C) to avoid or protect against a conflict
of interest of any kind; (D) on the advice of legal counsel; or (E) for any
other extraordinary circumstance that the Board determines to be comparable to
the foregoing. The withdrawing Outside Director shall abstain from participating
in any determination made by the Board with respect to any matter relating to
the foregoing.
(b) Restricted Shares, when issued, will be represented by a
stock certificate or certificates registered in the name of the Outside Director
to whom such Restricted Shares shall have been granted. Each such certificate
shall bear a legend in substantially the following form:
"The shares represented by this certificate are subject to the
terms and conditions (including forfeiture and restrictions against
transfer) contained in the Time Warner Inc. 1988 Restricted Stock Plan
for Non-Employee Directors. A copy of such Plan is on file in the
Office of the Secretary of Time Warner Inc."
Such certificates shall be deposited by such Outside Director
with the Company, together with stock powers or other instruments of assignment,
each endorsed in blank, which will permit transfer to the Company of all or any
portion of the Restricted Shares and any securities constituting Retained
Distributions that shall be forfeited or that shall not become vested in
accordance with the Plan. Restricted Shares shall constitute issued and
outstanding shares of Common Stock for all corporate purposes. The Outside
Director will have the right to vote such Restricted Shares, to receive and
retain all regular cash dividends paid on such Restricted Shares and to exercise
all other rights, powers and privileges of a holder of Common stock with respect
to such Restricted Shares, with the exception that (i) the Outside Director will
not be entitled to delivery of the stock certificate or certificates
representing such Restricted Shares until the Restriction Period shall have
expired and unless all other vesting requirements with respect thereto shall
have been fulfilled; (ii) the Company will retain custody of the stock
certificate or certificates representing the Restricted Shares during the
Restriction Period; (iii) other than regular cash dividends the Company will
retain custody of all distributions ("Retained Distributions") made or declared
with respect to the Restricted Shares (and such Retained Distributions will be
subject to the same restrictions, terms and conditions as are applicable to the
Restricted Shares) until such time, if ever, as the Restricted Shares with
respect to which such Retained Distributions shall have been made, paid or
<PAGE>
declared shall have become vested, and such Retained Distributions shall not
bear interest or be segregated in separate accounts; (iv) an Outside Director
may not sell, assign, transfer, pledge, exchange, encumber or dispose of any
Restricted Shares or any Retained Distributions during the Restriction Period;
and (v) a breach of any restrictions, terms or conditions provided in the Plan
or established by the Board with respect to any Restricted Shares or Retained
Distributions will cause a forfeiture of such Restricted Shares and any Retained
Distributions with respect thereto.
(c) A "Change in Control" of the Company shall be deemed to
have occurred on the date upon which (i) the Board (or, if approval of the Board
is not required as a matter of law, the stockholders of the Company) shall
approve (a) any consolidation or merger of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which shares of
Common Stock would be converted into cash, securities or other property, other
than a merger of the Company in which the holders of Common Stock immediately
prior to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (b) any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company, or (c)
the adoption of any plan or proposal for the liquidation or dissolution of the
Company, or (ii) any person (as such term is defined in Section 13(d)(3) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), corporation, or other entity shall purchase any Common Stock of the
Company (or securities convertible into the Common Stock) for cash, securities
or any other consideration pursuant to a tender offer or exchange offer, without
the prior consent of the Board, or any such person, corporation or other entity
(other than the Company or any benefit plan sponsored by the Company or any
subsidiary) shall become the "beneficial owner" (as such term is defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 20 percent or more of the combined voting power of the then
outstanding securities of the Company ordinarily (and apart from rights accruing
under special circumstances) having the right to vote in the election of
directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the
case of rights to acquire the Company's securities), or (iii) during any period
of two consecutive years, individuals who at the beginning of such period
constitute the entire Board shall cease for any reason to constitute a majority
thereof unless the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
7. COMPLETION OF RESTRICTION PERIOD; FORFEITURE. Upon the completion of
the Restriction Period with respect to an Outside Director's Restricted Shares,
and the satisfaction of any other applicable restrictions, terms and conditions,
all Restricted Shares issued to such Outside Director and any Retained
Distributions with respect to such Restricted Shares shall become vested. The
Company shall promptly thereafter issue and deliver to the Outside Director new
stock certificates or instruments representing the Restricted Shares and other
distributions registered in the name of the Outside Director or, if deceased,
his or her legatee, personal representative or distributee, which do not contain
the legend set forth in paragraph 6(b) hereof.
<PAGE>
If an Outside Director ceases to be a member of the Board for any
reason other than as set forth in clauses (i) through (v) of paragraph 6(a)
hereof or as the Board may otherwise approve in accordance with paragraph 6(a),
then all Restricted Shares issued to such Outside Director and all Retained
Distributions with respect thereto shall be forfeited to the Company and the
Outside Director shall not thereafter have any rights (including dividend and
voting rights) with respect to such Restricted Shares and Retained
Distributions.
8. STATEMENT OF ACCOUNT. Each Outside Director shall receive an annual
statement, on or about June 1st, showing the number of Restricted Shares granted
to such Outside Director for that year and the aggregate number of Restricted
Shares that have been granted to such Outside Director under the Plan.
9. ADJUSTMENT IN EVENT OF CHANGES IN COMMON STOCK. In the event of a
recapitalization, stock split, stock dividend, combination or exchange of
shares, merger, consolidation or liquidation or the like, the aggregate number
and class of Restricted Shares available for grant under the Plan shall be
appropriately adjusted by the Board, whose determination shall be conclusive.
10. NO RIGHT TO NOMINATION. Nothing contained in the Plan shall confer
upon any Outside Director the right to be nominated for reelection to the Board.
11. NONALIENATION OF BENEFITS. No right or benefit under the Plan shall
be subject to anticipation, alienation, sale, assignment, hypothecation, pledge,
exchange, transfer, encumbrance or charge, and any attempt to anticipate,
alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or
charge the same shall be void. No right or benefit hereunder shall in any manner
be liable for or subject to the debts, contracts, liabilities or torts of the
person entitled to such benefit. If any Outside Director or beneficiary
hereunder should become bankrupt or attempt to anticipate, alienate, sell,
assign, hypothecate, pledge, exchange, transfer, encumber or charge any right or
benefit hereunder, then such right or benefit shall, in the discretion of the
Board, cease and terminate, and in such event, the Board in its discretion may
hold or apply the same or any part thereof for the benefit of the Outside
Director, his or her beneficiary, spouse, children or other dependents, or any
of them, in such manner and in such proportion as the Board may deem proper.
12. APPOINTMENT OF ATTORNEY-IN-FACT. Upon the issuance of any
Restricted Shares hereunder and the delivery by an Outside Director of the stock
power referred to in paragraph 6(b) hereof, such Outside Director shall be
deemed to have appointed the Company, its successors and assigns, the
attorney-in-fact of the Outside Director, with full power of substitution, for
the purpose of carrying out the provisions of this Plan and taking any action
and executing any instruments which such attorney-in-fact may deem necessary or
advisable to accomplish the purposes hereof, which appointment as
attorney-in-fact shall be irrevocable and coupled with an interest. The Company
as attorney-in-fact for the Outside Director may in the name and stead of the
Outside Director make and execute all conveyances, assignments and transfers of
the Restricted Shares and Retained Distributions deposited with the Company
pursuant to paragraph 6(b) of the Plan and the Outside Director hereby ratifies
and confirms all that the Company, as said attorney-in-fact, shall do by virtue
thereof.
Nevertheless, the Outside Director shall, if so requested by the
Company, execute and deliver to the Company all such instruments as may, in the
judgment of the Company, be advisable for the purpose.
<PAGE>
13. SECTION 4999 RULES. Notwithstanding any provisions to the contrary
contained in the Plan, if the Payment (as hereinafter defined) due to the
Outside Director hereunder upon the occurrence of a Change in Control of the
Company would be subject to the excise tax imposed by Section 4999 (or any
successor thereto) of the Internal Revenue Code of 1986 (the "Code"), then any
such Payment hereunder payable to the Outside Director shall be reduced to the
largest amount that will result in no portion of the aggregate of the Payments
from the Company being subject to such excise tax. The term "Payment" shall mean
any transfer of property within the meaning of Section 280G (or any successor
thereto) of the Code.
The determination of any reduction in Payments under the Plan shall be
made by the Outside Director in good faith, and such determination shall be
conclusive and binding on the Company. The Outside Director shall have the right
to determine the extent to which the aggregate amount of any such reduction
shall be applied against any cash or any shares of stock of the Company or any
other securities or property to which the Outside Director would otherwise have
been entitled under the Plan, the extent to which the Payments hereunder and any
other payments due to the Outside Director from the Company shall be reduced,
and whether to waive the right to the acceleration of any portion of the Payment
due hereunder or otherwise due to the Outside Director from the Company, and any
such determination shall be conclusive and binding on the Company. To the extent
that Payments hereunder are not paid as a consequence of the limitation
contained in this paragraph 13, then the Restricted Shares and Retained
Distributions not so accelerated shall be deemed to remain outstanding and shall
be subject to the provisions of the Plan as if no acceleration had occurred.
If (a) the Company shall make any Payments pursuant to the Plan to the
Outside Director, (b) an excise tax under Section 4999 (or any successor
thereto) of the Code is in fact paid by the Outside Director (or is claimed by
the Internal Revenue Service to be due) as a result of any such Payment, either
alone or together with any other Payments received or to be received by the
Outside Director from the Company, and (c) if nationally recognized counsel to
the Outside Director or the Company shall have given an opinion of counsel that
repayment of all or a portion of such Payments would result in such excise tax
being refunded to the Outside Director (or, if not paid, in such excise tax not
being imposed), then the Outside Director shall repay to the Company all or such
portion of such Payments so that such excise tax will be refunded (or will not
apply).
The Company shall pay all legal fees and expenses which the Outside
Director may incur in any contest of the Outside Director's interpretation of,
or determinations under, the provisions of this paragraph 13.
14. WITHHOLDING TAXES.
(a) At the time any Restricted Shares or Retained
Distributions become vested or payable, each Outside Director shall pay to the
Company the amount of any Federal, state or local taxes of any kind required by
law to be withheld with respect thereto.
(b) If an Outside Director properly elects (which, apart from
any other notice required by law, shall require that the Outside Director notify
the Company of such election at the time it is made) within 30 days after the
Company issues the certificate or certificates representing the Restricted
Shares to the Outside Director to include in gross income for Federal income tax
purposes an amount equal to the fair market value of such Restricted Shares at
the time of such issuance, he or she shall pay to the Company in the year of
award of such Restricted Shares the amount of any Federal, state or local taxes
required to be withheld with respect to such Restricted Shares.
<PAGE>
(c) If an Outside Director shall fail to make the payments
required hereunder, the Company shall, to the extent permitted by law, have the
right to deduct from any payment of any kind otherwise due to such Outside
Director any Federal, state or local taxes of any kind required by law to be
withheld with respect to such Restricted Shares.
15. AMENDMENT AND TERMINATION OF PLAN. The Board may at any time
terminate the Plan or make such amendments to the Plan as it shall deem
advisable; provided, however, that no termination or amendment of the Plan shall
adversely affect the right of any Outside Director (without his or her consent)
under any grant previously made and any amendment shall comply with all
applicable laws and regulations and stock exchange listing requirements.
16. GOVERNMENT AND OTHER REGULATIONS. Notwithstanding any other
provisions of the Plan, the obligations of the Company with respect to
Restricted Shares shall be subject to all applicable laws, rules and
regulations, and such approvals by any governmental agencies as may be required
or deemed appropriate by the Company. The Company reserves the right to delay or
restrict, in whole or in part, the issuance or delivery of Common Stock pursuant
to any grants of Restricted Shares under the Plan until such time as:
(a) any legal requirements or regulations shall have been met
relating to the issuance of such Restricted Shares or to their registration,
qualification or exemption from registration or qualification under the
Securities Act of 1933 or any applicable state securities laws; and
(b) satisfactory assurances shall have been received that such
Restricted Shares when delivered will be duly listed on any applicable stock
exchange.
17. NONEXCLUSIVITY OF PLAN. Neither the adoption of the Plan by the
Board nor the submission of the Plan to the stockholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board to adopt such other incentive arrangements as it may deem desirable,
including without limitation, the awarding of stock otherwise than under the
Plan, and such arrangements may be either generally applicable or applicable
only in specific cases.
18. GOVERNING LAW. The Plan shall be governed by, and construed in
accordance with, the laws of the State of New York.
19. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective on a
date which is the latter of (i) the date the Plan is approved by the
stockholders of the Company entitled to vote at the annual meeting of
stockholders of the Company to be held in 1988, or any adjournment thereof; and
(ii) the date on which the Company receives a favorable interpretative letter
from the Commission to the effect that (x) the grant of Restricted Shares under
the Plan is exempt from the operation of Section 16(b) of the Exchange Act and
(y) Outside Directors who receive Restricted Shares under the Plan will continue
to be "disinterested persons" within the meaning of Rule 16b-3 under the
Exchange Act with respect to administration of the Company's other stock related
plans in which only employees of the Company (including officers, whether or not
they are directors) and its subsidiaries may participate.
20. BENEFICIARIES. Each Outside Director may designate any person(s) or
legal entity(ies), including his or her estate, as his or her beneficiary under
the Plan. Such designation shall be made in writing on a form filed with the
Secretary of the Company or his or her designee and may be revoked or changed by
an Outside Director at any time by filing written notice of such revocation or
change with the Secretary of the Company or his or her designee. If no person
shall be designated by an Outside Director as his or her beneficiary or if no
person designated by such Outside Director as his or her beneficiary survives
such Outside Director, the Outside Director's beneficiary shall be his or her
estate.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
TIME WARNER INC.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
financial statements of Time Warner Inc. for the six months ended June 30, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 304
<SECURITIES> 0
<RECEIVABLES> 3,272
<ALLOWANCES> 875
<INVENTORY> 2,761
<CURRENT-ASSETS> 4,903
<PP&E> 3,459
<DEPRECIATION> 1,432
<TOTAL-ASSETS> 31,893
<CURRENT-LIABILITIES> 4,136
<BONDS> 10,765
<COMMON> 12
0
2
<OTHER-SE> 9,078
<TOTAL-LIABILITY-AND-EQUITY> 31,893
<SALES> 6,840
<TOTAL-REVENUES> 6,840
<CGS> 3,685
<TOTAL-COSTS> 3,685
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 469
<INCOME-PRETAX> 1,368
<INCOME-TAX> 637
<INCOME-CONTINUING> 731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 731
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.54
</TABLE>
