SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported):
July 12, 1999
TIME WARNER INC.
(Exact Name of Registrant Specified in Charter)
Delaware 1-12259 13-3527249
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(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification No.)
Incorporation)
75 Rockefeller Plaza, New York, NY 10019
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(Address of Principal Executive Office) (Zip Code)
(212) 484-8000
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(Registrant's telephone number)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
ITEM 5. OTHER EVENTS
AGREEMENT OF MERGER AND CONTRIBUTION. On July 12, 1999, Time Warner Inc.
entered into an Agreement of Merger and Contribution with CDnow, Inc. and Sony
Corporation of America to combine the businesses of CDnow and Columbia House,
the leading club-based retailer of music and videos. Columbia House is owned
equally by subsidiaries of Time Warner and Sony. The parties to the Merger
Agreement will create a new Delaware holding company which will be owned 26% by
CDnow's shareholders immediately before the merger, 37% by Time Warner and 37%
by Sony. The new company will be organized to include two separate divisions: an
online/retail division and a club division. A copy of the Agreement of Merger
and Contribution is attached as Exhibit 2.1 and is incorporated by reference.
Under the Merger Agreement, CDnow will be merged with a subsidiary of the
new holding company. Upon consummation of the merger, CDnow shareholders will
receive one share of Class A common stock of the new company for each share of
CDnow common stock they own. The Class A common stock will be publicly traded.
The Merger Agreement also provides that, simultaneously with the merger, Time
Warner and Sony will cause their relevant subsidiaries to contribute their
interests in Columbia House (and Columbia House's Mexican business) to the new
company in exchange for shares of Class B common stock of the new company which,
together with interests in the new company received in the Canadian transaction
described below, will represent 74% ownership and control of the new company.
The Class B common stock will not be publicly traded, but will be convertible
into Class A common stock on a 1-for-1 share basis. Time Warner, Sony and the
new company will enter into a Registration Rights Agreement relating to the
shares of Class A common stock issuable upon conversion of the outstanding Class
B common stock. A copy of the form of Registration Rights Agreement is attached
as Exhibit 10.8 and is incorporated by reference.
After the closing, CDnow and Columbia House will become wholly-owned
subsidiaries of the new company.
The parties intend the transaction to be tax-free to CDnow shareholders.
The parties expect to account for the transaction under the purchase method of
accounting.
In connection with a Master Canadian Transaction Agreement, entered into
on July 12, 1999, assets and liabilities of Columbia House Canada are to be
transferred to a wholly-owned Canadian subsidiary of the new holding company in
exchange for shares of Class B common stock and exchangeable shares of the
Canadian subsidiary, which are exchangeable into shares of common stock of the
new holding company. A copy of this agreement is attached as Exhibit 10.3 and is
incorporated by reference.
STRATEGIC COMMITMENTS. At the closing, Time Warner and Sony will enter
into a Strategic Commitments Letter with a five year term that provides for
strategic commitments to the new company. Time Warner and Sony will each make
the new company their primary vehicle to pursue the packaged music e-commerce
business, provided that neither Time Warner nor Sony will be limited in selling
music or other products to other on-line retailers. The web sites controlled by
the recorded music businesses of Time Warner and Sony in the U.S. and Canada
will contain Abuy now@ links to the new company's on-line retail web site. Sony
and Time Warner will each provide the new company with opportunities to purchase
$25 million annually of promotion and advertising which may include standard
advertising, online advertising, contextual marketing, product ride-along
marketing and commercially reasonable efforts to provide access to certain
databases, as well as certain musical artist content, music videos and various
other materials for promotional purposes. The commitments of Sony and Time
Warner are subject to a number of caveats and qualifications as set forth in the
Strategic Commitments Letter. A copy of the form of Strategic Commitments Letter
is attached as Exhibit 10.5 and is incorporated by reference.
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POST-CLOSING FINANCING COMMITMENTS. Under the Merger Agreement, Time
Warner and affiliates of Sony will each unconditionally guarantee for three
years one-half of a new credit facility to be entered into by the new holding
company upon the closing of the merger. This guarantee will cover a credit
facility in the following amount:
net debt of Columbia House at closing, which, based on March
31, 1999 balances, would have been approximately $300
million, and
$150 million, minus new financing by CDnow between the
signing and closing of the transaction, as permitted under
the Merger Agreement.
CORPORATE GOVERNANCE. At closing, Time Warner and Sony will enter
into a Governance Agreement that provides for post-closing governance
matters with respect to the new holding company. The new holding company
board will initially consist of 12 directors: (1) four designees from Time
Warner, (2) four designees from Sony, (3) Jason Olim, who is currently
CDnow's president and chief executive officer, (4) two independent
directors, and (5) the chief executive officer of the new company. The
Restated Certificate of Incorporation provides that each share of Class B
common stock may be converted into a share of Class A common stock at any
time at the option of the holder. The Restated Certificate of
Incorporation also provides for mandatory conversion of any share of Class
B common stock transferred to a third party and mandatory conversion of
all shares of Class B common stock if the Class B stockholders
collectively own less than one-third of the Class B common stock issued to
them in the transaction. The Governance Agreement contains a standstill
provision which, for a period of three years, limits Time Warner and Sony,
subject to exceptions described in the agreement, from acquiring
additional voting stock in the new holding company if Time Warner and Sony
would collectively own more than 85% of the voting stock of the new
holding company. Additionally, the Governance Agreement prohibits Time
Warner and Sony from transferring any shares of Class B common stock for a
period of three years, subject to exceptions identified in the Governance
Agreement. The disinterested stockholders and/or independent directors
must also approve a list of activities specified in the Governance
Agreement. The Class A common stock and Class B common stock will have the
right to vote together on most matters, except that the Class B common
stock will initially have the right to vote as a class to elect eight
directors. This number decreases if Time Warner or Sony decreases its
Class B common stock ownership, under a schedule described in the Restated
Certificate of Incorporation, with such number of directors being
allocated between Time Warner and Sony as described in the Governance
Agreement. Additionally, numerous fundamental actions by the new holding
company require the approval of Time Warner and Sony so long as they
individually own at least two-thirds of the Class B common stock they
received in the transaction.
A copy of the form of Governance Agreement is attached as Exhibit
10.6 and is incorporated by reference. A copy of the form of the new
company's Restated Certificate of Incorporation is attached as Exhibit
10.7 and is incorporated by reference.
CLOSING. The parties expect the transaction to close by the end of
1999. The closing of the transaction is conditioned upon, among other
things, shareholder approval by CDnow and other customary terms and
conditions, including clearance by U.S. and Canadian antitrust
authorities. CDnow will solicit its shareholders by means of a proxy
statement, which may be reviewed by the Securities and Exchange Commission
prior to its mailing.
NO SOLICITATION. The Merger Agreement contains detailed provisions
prohibiting CDnow from seeking an alternative transaction. These
provisions prevent CDnow, its subsidiaries, and their officers, directors,
employees, advisors or representatives from directly or indirectly through
another person soliciting, initiating, knowingly encouraging
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(including by furnishing information), or knowingly taking any action
designed to facilitate, any inquiries or the making of a proposal which
constitutes, or may be reasonably expected to lead to, any CDnow Takeover
Proposal, as defined in the Merger Agreement, or participating in
discussions or negotiations regarding any CDnow Takeover Proposal.
At any time during the 30 day period following the date of the Merger
Agreement, in response to a Superior CDnow Proposal, as defined in the
Merger Agreement, that is unsolicited and does not result from a breach of
the no-solicitation provisions of the Merger Agreement and subject to
providing written notice to Time Warner and Sony, CDnow may furnish
information under a confidentiality agreement no less restrictive than the
confidentiality agreement with Time Warner and Sony and participate in
discussions or negotiations regarding the Superior CDnow Proposal. During
the 30-day period only, CDnow may terminate the Merger Agreement following
receipt of a Superior CDnow Proposal that is unsolicited and does not
result from a breach of the no-solicitation provisions of the Merger
Agreement and may enter into an agreement with respect to the Superior
CDnow Proposal, but only after the third business day following receipt by
Time Warner and Sony of written notice from CDnow to that effect and only
if a termination fee of $31 million is paid as described below. In
addition, there are other situations in which a termination fee is
payable, as described below.
STOCK OPTION AGREEMENT. Upon the signing of the Merger Agreement,
CDnow entered into a Stock Option Agreement granting Time Warner and Sony
an irrevocable option to purchase 4,531,721 shares of CDnow common stock
at an exercise price of $17.9689 per share. Time Warner and Sony may only
exercise the option under the circumstances where they are entitled to
receive a termination fee under the Merger Agreement, as described below.
If the option becomes exercisable, Time Warner and Sony may elect to
exercise a cash-out right and receive an amount in cash per option share
equal to (x) the average closing price per share for the ten trading days
commencing on the 12th trading day immediately preceding the date Time
Warner and Sony notify CDnow of their intention to exercise their cash-out
rights minus (y) $17.9689. If prior to the time the cash-out right is
exercised, Time Warner and Sony received a termination fee, then the
amount of the cash-out may be limited as described in the Stock Option
Agreement. However, to the extent the cash-out right is so limited, Time
Warner and Sony will continue to be entitled to purchase for cash the
shares for which the cash-out right may not be exercised.
A copy of the Stock Option Agreement is attached as Exhibit 10.1
hereto and is incorporated by reference.
TERMINATION FEE. The Merger Agreement requires CDnow to pay a
termination fee to Time Warner and Sony in the circumstances summarized
below:
(i) a $19 million termination fee if (A) and (B) below occur:
(A) following the making of a CDnow Takeover Proposal,
or the announcement of the intention to make such a proposal:
(1) CDnow, on the one hand, or Time Warner and Sony,
on the other hand, terminate the Merger Agreement
because the transaction has not closed by March 13,
2000, or
(2) CDnow, on the one hand, or Time Warner and Sony,
on the other hand, terminate the Merger
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Agreement if CDnow shareholder approval has not been
obtained at the CDnow shareholder meeting called for
that purpose, or
(3) Time Warner and Sony terminate the Merger
Agreement as a result of CDnow's breach or failure to
perform in any material respect a representation,
warranty or covenant which is not cured within 20
business days, and
(B) within 12 months after termination CDnow enters into any
alternative agreement with respect to, or approves, recommends or
consummates, or a tender or exchange offer is consummated which
constitutes, a CDnow Takeover Transaction, which is defined in the
Merger Agreement.
(ii) a $31 million termination fee if (A) or (B) below occurs:
(A) Time Warner and Sony terminate the Merger Agreement because
CDnow (or any of its directors or officers) breaches the
nonsolicitation provisions described above and within 18
months after termination enters into an alternative
agreement with respect to, or approves, recommends or
consummates, or a tender or exchange offer is consummated
which constitutes, a CDnow Takeover Transaction, or
(B) during the 30-day period following the date of the Merger
Agreement CDnow terminates the Merger Agreement because it
receives and enters into an agreement with respect to the
Superior CDnow Proposal as described above; or
(C) Time Warner and Sony terminate because (i) CDnow or the
CDnow Board of Directors withdraws or modifies or proposes
to withdraw or modify its recommendation of the merger or
enters into an agreement related to, or approves or
recommends or proposes to approve or recommend a CDnow
Takeover Transaction, (ii) CDnow or any of its directors or
officers makes any disclosure that has the effect of
withdrawing, modifying or changing the approval of the
Merger Agreement, approving or recommending a CDnow Takeover
Transaction or approving or recommending a tender or
exchange offer that is a CDnow Takeover Proposal or (iii) a
tender offer or exchange offer constituting a CDnow Takeover
Transaction is consummated.
The maximum aggregate amount of termination fees, together with any
value received by Time Warner and Sony under the cash-out right under the
Stock Option Agreement, is:
$25 million in the case of the events giving rise to the $19
million termination fee described above; or
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$31 million in the case of the events giving rise to the $31
million termination fee described above.
However, to the extent the cash-out right is so limited, Time Warner
and Sony will continue to be entitled to purchase for cash the shares for
which the cash-out right may not be exercised.
SHAREHOLDER AGREEMENT. Upon the signing of the Merger Agreement,
Jason Olim, Jonathan Diamond, Matthew Olim, Robert David Grusin and James
Coane, each a director and a shareholder of CDnow, entered into a
Shareholder Agreement with Time Warner and Sony. The Shareholder Agreement
requires the shareholders to vote their shares of CDnow common stock in
favor of the adoption of the Merger Agreement and against any Acquisition
Agreement or CDnow Takeover Proposal, which are defined in the Merger
Agreement, and against any amendments to CDnow's charter documents which
would impede the pending transactions or change the voting rights of CDnow
capital stock. The Shareholder Agreement also provides that the
shareholders will not sell or otherwise voluntarily dispose of any of
their shares of CDnow common stock except into an all cash tender offer
constituting a Superior CDnow Proposal, within three days of the tender
offer's expiration date, or as otherwise contemplated by the terms of the
Shareholder Agreement. As of July 12, 1999, the shareholders who signed
the Shareholder Agreement owned collectively approximately 24% of the
outstanding shares of CDnow common stock. The Shareholder Agreement
terminates upon termination of the Merger Agreement.
A copy of the Shareholder Agreement is attached as Exhibit 10.2 and
is incorporated by reference.
INTERIM FINANCING AVAILABILITY. Upon the signing of the Merger
Agreement, Time Warner and Sony entered into a Convertible Loan Agreement
to provide CDnow with a $30 million secured credit line beginning December
16, 1999. This financing is available to CDnow whether or not the Merger
Agreement is still in effect, unless the Merger Agreement is terminated
due to material breaches by CDnow, CDnow entering into an acquisition
agreement with another party or violating the nonsolicitation provisions,
a tender offer for CDnow or unless CDnow terminates the Merger Agreement
for any reason other than because the transaction has not closed by March
13, 2000 or because of a material breach by Time Warner or Sony. The loan
is convertible into CDnow common stock based on a conversion price
described in the loan agreement only if the Merger Agreement is
terminated.
A copy of the Convertible Loan Agreement is attached as Exhibit 10.4
and is incorporated by reference.
A copy of the joint press release, dated July 13, 1999 issued by
CDnow, Time Warner and Sony to announce the transaction is attached as
Exhibit 99.1 and is incorporated by reference.
The descriptions above are summaries and are qualified in their
entirety by the attached exhibits.
Caution Concerning Forward-Looking Statements
This report includes certain Aforward-looking statements@ within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations and are
naturally subject to uncertainty and changes in circumstances. Actual
results may vary materially from the expectations contained herein
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due to changes in economic, business, competitive and/or regulatory
factors, as well as difficulty of integrating the organizations,
operations and personnel of CDnow and Columbia House, the potential for
impairment of relationships with employees or customers and the
uncertainty inherent in the execution of a new business plan for the
combined company. More detailed cautionary information is set forth in the
most recent quarterly report and other filings with the Securities and
Exchange Commission made by the companies named herein. None of the
companies named herein are under any obligation to (and expressly disclaim
any such obligation to) update their forward-looking statements whether as
a result of new information, future events or otherwise.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
Exhibit Number Description
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2.1 Agreement of Merger and Contribution, dated as of July 12, 1999, by
and among Time Warner Inc., Sony Corporation of America, CDnow, Inc.,
Delaware Holdco Corporation, Pennsylvania Subsidiary, Inc., Delaware
Sub I L.L.C. and Delaware Sub II L.L.C.
10.1 Stock Option Agreement, dated as of July 12, 1999, among CDnow, Inc.,
Time Warner Inc., and Sony Corporation of America.
10.2 Shareholder Agreement, dated as of July 12, 1999, among Time Warner
Inc., Sony Corporation of America, Jason Olim, Jonathan Diamond,
Matthew Olim, Robert David Grusin and James Coane.
10.3 Master Canadian Transaction Agreement, dated as of July 12, 1999,
among Warner Music Canada Ltd., Sony Music Entertainment (Canada)
Inc., The Columbia House Company (Canada), 3030809 Nova Scotia ULC
and Delaware Holdco Corporation.
10.4 Convertible Loan Agreement, dated July 12, 1999, between CDnow, Inc.,
as borrower, and Sony Music Entertainment Inc. and Time Warner Inc.,
as lenders.
10.5 Form of Strategic Commitments Letter among Time Warner Inc., Sony
Corporation of America and Delaware Holdco Corporation.
10.6 Form of Governance Agreement among Delaware Holdco Corporation, Sony
Corporation of America, Sony Music Entertainment (Canada), Inc., Time
Warner Inc. and Warner Music Canada Ltd.
10.7 Form of Restated Certificate of Incorporation of Delaware Holdco
Corporation.
10.8 Form of Registration Rights Agreement, among Time Warner Inc., Sony
Corporation of America and Delaware Holdco Corporation.
99.1 Joint Press Release, dated July 13, 1999, issued by CDnow, Inc., Time
Warner Inc. and Sony Corporation of America.
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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 hereunto duly authorized.
Date: July 14, 1999
TIME WARNER INC.
by
/s/ SPENCER B. HAYS
_______________________________
Name: Spencer B. Hays
Title: Vice President and
Deputy General Counsel
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EXHIBIT INDEX
Exhibit Number Description
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2.1 Agreement of Merger and Contribution, dated as of July
12, 1999, by and among Time Warner Inc., Sony
Corporation of America, CDnow, Inc., Delaware Holdco
Corporation, Pennsylvania Subsidiary, Inc., Delaware
Sub I L.L.C. and Delaware Sub II L.L.C.
10.1 Stock Option Agreement, dated as of July 12, 1999, among CDnow,
Inc., Time Warner Inc., and Sony Corporation of America.
10.2 Shareholder Agreement, dated as of July 12, 1999,
among Time Warner Inc., Sony Corporation of America,
Jason Olim, Jonathan Diamond, Matthew Olim, Robert
David Grusin and James Coane.
10.3 Master Canadian Transaction Agreement, dated as of July 12, 1999,
among Warner Music Canada Ltd., Sony Music Entertainment
(Canada) Inc., The Columbia House Company (Canada), 3030809
Nova Scotia ULC and Delaware Holdco Corporation.
10.4 Convertible Loan Agreement, dated July 12, 1999, between CDnow,
Inc., as borrower, and Sony Music Entertainment Inc. and Time
Warner Inc., as lenders.
10.5 Form of Strategic Commitments Letter among Time Warner Inc.,
Sony Corporation of America and Delaware Holdco Corporation.
10.6 Form of Governance Agreement among Delaware Holdco
Corporation, Sony Corporation of America, Sony Music
Entertainment (Canada), Inc., Time Warner Inc. and Warner Music
Canada Ltd.
10.7 Form of Restated Certificate of Incorporation of Delaware Holdco
Corporation.
10.8 Form of Registration Rights Agreement, among Time Warner Inc.,
Sony Corporation of America and Delaware Holdco Corporation.
99.1 Joint Press Release, dated July 13, 1999, issued by CDnow, Inc.,
Time Warner Inc. and Sony Corporation of America.
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STATEMENT OF DIFFERENCES
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The section symbol shall be expressed as...................................'SS'