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): March 31, 2000
TIME WARNER INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-12259 13-3527249
- ---------------------------- ------------ -------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
75 ROCKEFELLER PLAZA, NEW YORK, NY 10019
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(Address of principal executive offices) (zip code)
(212) 484-8000
----------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
As described more fully in Time Warner Inc.'s ("Time Warner") Current
Report on Form 8-K dated January 10, 2000, America Online, Inc. ("America
Online") and Time Warner entered into an Agreement and Plan of Merger dated as
of January 10, 2000 (the "merger"). As part of the merger, America Online and
Time Warner will form a new holding company ("AOL Time Warner") which will be
the parent of two wholly owned subsidiaries, America Online and Time Warner.
The following pro forma consolidated condensed financial statements are
presented to illustrate the effects of the merger on the historical financial
position and operating results of America Online and Time Warner. Because
America Online and Time Warner have different fiscal years, and the combined
company will adopt the calendar year-end of Time Warner, pro forma operating
results are presented on two different bases: (1) a June 30 fiscal-year basis,
which is consistent with America Online's historical fiscal year-end and (2) a
December 31 calendar-year basis, which is consistent with both Time Warner's
historical fiscal year-end and that of AOL Time Warner going forward. Management
believes that it is meaningful to present pro forma financial information based
on the calendar year-end of the combined company to facilitate an analysis of
the pro forma effects of the merger.
The following pro forma consolidated condensed balance sheet of AOL
Time Warner at December 31, 1999 gives effect to the merger as if it occurred as
of that date. On a June 30 fiscal-year basis, the pro forma consolidated
condensed statements of operations of AOL Time Warner for the six months ended
December 31, 1999 and the year ended June 30, 1999 give effect to the merger as
if it occurred as of July 1, 1998. On a December 31 calendar-year basis, the pro
forma consolidated condensed statement of operations of AOL Time Warner for the
year ended December 31, 1999 gives effect to the merger as if it occurred as of
January 1, 1999. In addition, the pro forma consolidated condensed statement of
operations of AOL Time Warner for the year ended June 30, 1999 also gives effect
to Time Warner's consolidation of the operating results of Time Warner
Entertainment Company, L.P. ("TWE") and certain related companies, which were
formerly accounted for under the equity method of accounting, as described more
fully in Time Warner's Current Report on Form 8-K dated August 3, 1999, which
is incorporated herein by reference.
The pro forma consolidated condensed financial statements have been
derived from, and should be read in conjunction with, the historical
consolidated financial statements, including the notes thereto, of each of
America Online, Time Warner and TWE. For America Online, those financial
statements are included in America Online's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999 and its Annual Report on Form 10-K for the
year ended June 30, 1999, which are incorporated herein by reference, and which
have been adjusted for a 2-for-1 common stock split in November 1999. For Time
Warner and TWE, those financial statements are included in Time Warner's Annual
Report on Form 10-K for the year ended December 31, 1999, which is incorporated
herein by reference.
The pro forma consolidated condensed financial statements are presented
for informational purposes only and are not necessarily indicative of the
financial position or results of operations of AOL Time Warner that would have
occurred had the merger been consummated as of the dates indicated. In addition,
the pro forma consolidated condensed financial statements are not necessarily
indicative of the future financial condition or operating results of AOL Time
Warner.
THE MERGER
The merger will be structured as a stock-for-stock exchange. America
Online and Time Warner will initially form a new holding company called AOL Time
Warner. AOL Time Warner will thereafter form two wholly owned subsidiaries. Upon
the closing of the transaction, one such subsidiary will merge with and into
America Online and one such subsidiary will merge with and into Time Warner. As
a result, America Online and Time Warner will become wholly owned subsidiaries
of AOL Time Warner. As part of the merger, each issued and outstanding share of
each class of common stock of Time Warner will be converted into 1.5 shares of
an identical series of common stock of AOL Time Warner. In addition, each issued
and outstanding share of each class of preferred stock of Time Warner will be
converted into one share of preferred stock of AOL Time Warner, which will have
substantially identical terms except that such shares will be convertible into
approximately 6.25 shares of AOL Time Warner common stock. Lastly, each issued
and outstanding share of capital stock of America Online will be converted into
one share of an identical series of capital stock of AOL Time Warner.
2
As a result of the merger, we anticipate that the former shareholders
of America Online will have an approximate 55% interest in AOL Time Warner and
that the former shareholders of Time Warner will have an approximate 45%
interest in AOL Time Warner, expressed on a fully diluted basis. The merger is
expected to be accounted for by AOL Time Warner as an acquisition of
Time Warner under the purchase method of accounting for business combinations.
Pro forma adjustments for the merger include:
-- the issuance of approximately 1.9 billion shares of AOL Time
Warner common stock and AOL Time Warner Series LMCN-V common stock
in exchange for all of the 1.3 billion outstanding shares of Time
Warner common stock and Series LMCN-V common stock;
-- the issuance of approximately 8.4 million shares of AOL Time
Warner preferred stock in exchange for all of the 8.4 million
outstanding shares of Time Warner preferred stock;
-- the issuance of options to purchase approximately 204 million
shares of AOL Time Warner common stock in exchange for all of the
outstanding options to purchase 136 million shares of Time Warner
common stock; and
-- the incurrence of approximately $300 million of transaction costs
by America Online and Time Warner, including legal, investment
banking and registration fees.
No pro forma adjustments are necessary to reflect the merger of America
Online into a separate wholly owned subsidiary of AOL Time Warner because
America Online's net assets will be recorded at their historical cost basis and
the exchange ratio for America Online common stock is one to one. In addition,
in December 1999, America Online agreed to acquire MapQuest.com, Inc.
("MapQuest"). Further, in January 2000, Time Warner agreed to form a global
music joint venture with EMI Group plc. Because these transactions are not
significant to the consolidated condensed balance sheet of AOL Time Warner
or to pro forma net income of AOL Time Warner for any of the periods presented
herein, such transactions have not been reflected in these pro forma financial
statements.
Management expects that the strategic benefits of the merger will
result in incremental revenue opportunities for the combined company. Those
opportunities include, but are not limited to, the ability to cross-promote the
combined company's products and services and the ability to offer consumers
expanded broadband and online services. However, such incremental revenues have
not been reflected in the accompanying pro forma consolidated condensed
statements of operations of AOL Time Warner.
The merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.
Under the purchase method of accounting, the estimated cost of
approximately $146 billion to acquire Time Warner, including transaction costs,
will be allocated to its underlying net assets in proportion to their respective
fair values. Any excess of the purchase price over the estimated fair value of
the net assets acquired will be recorded as goodwill. As more fully described in
the notes to the pro forma consolidated condensed financial statements, a
preliminary allocation of the excess of the purchase price, including
transaction costs, over the book value of the net assets to be acquired has been
made to goodwill and other intangible assets. Management expects that the other
intangible assets will include cable television franchises, subscriber lists,
brand names, trademarks, music copyrights and catalogue, and film libraries.
These items are expected to have amortization periods ranging from 3 to 40
years. At this time, the work needed to provide the basis for estimating these
fair values, and amortization periods, has not been completed. As a result, the
final allocation of the excess of purchase price over the book value of the net
assets acquired could differ materially. The pro forma consolidated condensed
financial statements reflect a preliminary allocation to goodwill and other
intangible assets assuming a weighted-average amortization period of twenty-five
years. The final purchase price allocation may result in a different
weighted-average amortization period for intangible assets than that presented
in these pro forma consolidated condensed financial statements. Accordingly, a
change in the amortization period would impact the amount of annual amortization
expense. The following table shows the effect on pro forma loss applicable to
common shares for a range of weighted-average useful lives:
3
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
WEIGHTED-AVERAGE USEFUL LIFE 1999 1999 1999
- ---------------------------- ---- ---- ----
Twenty-five years (as disclosed in these pro forma financial
statements)......................................................... $(1,091) $(4,330) $(2,593)
Twenty years.......................................................... $(1,850) $(5,848) $(4,111)
Thirty years.......................................................... $ (585) $(3,319) $(1,582)
The Company will periodically review the carrying value of the acquired
goodwill and other intangible assets for acquired businesses to determine
whether an impairment may exist. AOL Time Warner will consider relevant cash
flow information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of goodwill and
other intangible assets can be recovered. If it is determined that the carrying
value of goodwill and other intangible assets will not be recovered from the
undiscounted future cash flows of acquired businesses, the carrying value of
such goodwill and other intangible assets would be considered impaired and
reduced by a charge to operations in the amount of the impairment. An impairment
charge is measured as any deficiency in the amount of estimated undiscounted
cash flows of acquired businesses available to recover the carrying value
related to goodwill and other intangible assets.
Revenue Classification Changes
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which will be effective for Time Warner in the quarter ended June 30,
2000. SAB 101 will not be effective for America Online until the quarter ended
September 30, 2000. SAB 101 clarifies certain existing accounting principles for
the recognition and classification of revenues in financial statements. While
America Online's and Time Warner's existing revenue recognition policies are
consistent with the provisions of SAB 101, the new rules are expected to result
in some changes as to how the filmed entertainment industry classifies its
revenues, particularly relating to distribution arrangements for third-party and
co-financed joint venture product. As a result, America Online and Time Warner
are in the process of evaluating the overall impact of SAB 101 on their
respective consolidated financial statements. It is expected that both annual
revenues and costs of Time Warner's filmed entertainment businesses will be
reduced by an equal amount of approximately $1.5 to $2 billion as a result of
these classification changes. However, other aspects of SAB 101 are not expected
to have a significant effect on AOL Time Warner's pro forma consolidated
condensed financial statements.
4
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
DECEMBER 31, 1999
(IN MILLIONS, UNAUDITED)
AOL
TIME PRO FORMA TIME WARNER
AOL(a) WARNER(b) ADJUSTMENTS(c) PRO FORMA
----------- ----------- -------------- -------------
ASSETS
Cash and equivalents........................................... $ 2,535 $ 1,284 $ -- $ 3,819
Other current assets........................................... 1,281 8,577 -- 9,858
----------- ----------- -------------- -------------
Total current assets...................................... 3,816 9,861 -- 13,677
Noncurrent inventories......................................... -- 4,201 -- 4,201
Investments.................................................... 4,902 2,096 -- 6,998
Property, plant and equipment, net............................. 890 8,728 -- 9,618
Goodwill and other intangibles, net............................ 409 24,712 174,278 199,399
Other assets................................................... 284 1,641 -- 1,925
----------- ----------- -------------- -------------
Total assets.............................................. $10,301 $51,239 $174,278 $235,818
=========== =========== ============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities...................................... $ 2,162 $ 9,670 $ 300 $ 12,132
Long-term debt and other obligations(1)........................ 1,586 19,901 -- 21,487
Deferred income taxes.......................................... 10 4,234 34,765 39,009
Other long-term liabilities.................................... 292 4,535 -- 4,827
Minority interests............................................. -- 3,186 -- 3,186
SHAREHOLDERS' EQUITY
Preferred stock................................................ -- 1 -- 1
Series LMCN-V common stock..................................... -- 1 -- 1
Common stock................................................... 23 12 6 41
Paid-in capital................................................ 4,165 12,998 135,908 153,071
Accumulated earnings (deficit)................................. 596 (3,350) 3,350 596
Accumulated other comprehensive income......................... 1,467 51 (51) 1,467
----------- ----------- -------------- -------------
Total shareholders' equity................................ 6,251 9,713 139,213 155,177
----------- ----------- -------------- -------------
Total liabilities and shareholders' equity................ $10,301 $51,239 $174,278 $235,818
=========== =========== ============== =============
- -------------------
(1) For Time Warner, includes $1.243 billion of borrowings against future stock
option proceeds and $575 million of mandatorily redeemable preferred
securities of subsidiaries.
See accompanying notes.
5
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
(a) Reflects the historical financial position of America Online at December 31,
1999.
(b) Reflects the historical financial position of Time Warner at December 31,
1999.
(c) Pro forma adjustments to record the merger as of December 31, 1999 reflect:
-- an increase in equity of $130.758 billion relating to the issuance of
1.930 billion shares of AOL Time Warner common stock (including the
issuance of 171.2 million shares relating to the conversion of 114.1
million outstanding shares of Time Warner's Series LMCN-V common stock
into an identical class of common stock of AOL Time Warner Series
LMCN-V common stock), $0.01 par value per share, in exchange for
approximately 1.287 billion outstanding shares of Time Warner common
stock, based on an exchange ratio of 1.5 to 1. The AOL Time Warner
common stock to be issued was valued based on a price per share of
$67.75, which is the average market price of the America Online common
stock for a few days before and after the date the merger was
announced;
-- an increase in equity of $3.557 billion relating to the issuance of
approximately 8.404 million shares of AOL Time Warner preferred stock,
$0.10 par value per share, in exchange for all outstanding shares of
Time Warner preferred stock. The shares of AOL Time Warner preferred
stock to be issued, which will each be convertible into 6.24792 shares
of AOL Time Warner common stock, were valued based on their common
equivalent value of $423.30 per share;
-- an increase in equity of $11.376 billion relating to the issuance of
options to purchase 203.802 million shares of AOL Time Warner common
stock in exchange for all of the 135.868 million outstanding options to
purchase shares of Time Warner common stock, based on a
weighted-average fair value of $55.82 for all options. The fair value
of the options were determined using the Black-Scholes option-pricing
model and was based on the following weighted-average assumptions:
expected volatility--45.5%; expected lives--5 years; a risk-free
interest rate--5.75%; and expected dividend yield--0%;
-- an increase in accrued expenses of approximately $300 million relating
to the incurrence of transaction costs by America Online and Time
Warner, including legal, investment banking and registration fees;
-- the elimination of approximately $15.458 billion of Time Warner's
pre-existing goodwill;
-- a reduction of $3.235 billion in deferred income tax liabilities and a
corresponding increase in paid-in capital relating to the elimination
of America Online's deferred tax valuation allowance against stock
option-related tax benefits that will become realizable as a direct
result of the merger;
-- a decrease in stockholders' equity of $9.713 billion relating to the
elimination of Time Warner's historical shareholders' equity; and
-- the preliminary allocation of the excess of the $145.991 billion
purchase price, including transaction costs, over the book value of the
net assets acquired to (i) goodwill in the amount of $94.736 billion,
(ii) other intangible assets in the amount of $95 billion and (iii)
deferred income taxes in the amount of $38 billion. The final
allocation of the purchase price will be determined after the
completion of the merger and will be based on a comprehensive final
evaluation of the fair value of Time Warner's tangible and identifiable
intangible assets acquired and liabilities assumed at the time of the
merger. The preliminary allocation is summarized in the following
table:
6
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET -- (CONTINUED)
(UNAUDITED)
CALCULATION OF PURCHASE PRICE: (IN MILLIONS)
Common stock............................................................... $130,758
Preferred stock............................................................ 3,557
Stock options.............................................................. 11,376
Transaction costs.......................................................... 300
----------
Total purchase price.................................................. $145,991
========
ALLOCATION OF PURCHASE PRICE: (IN MILLIONS)
Assets:
Time Warner's historical assets............................................ $ 51,239
Eliminate Time Warner's historical goodwill................................ (15,458)
New goodwill............................................................... 94,736
Other intangible assets.................................................... 95,000
Liabilities:
Time Warner's historical liabilities....................................... (41,526)
Deferred income taxes...................................................... (38,000)
---------
Total purchase price.................................................. $145,991
========
A reconciliation of the above adjustments to reflect the merger is set forth below:
ISSUANCE OF
COMMON ELIMINATION ALLOCATION ELIMINATION ELIMINATION
STOCK, OF OF OF OF
PREFERRED INCREASE TIME WARNER'S EXCESS AOL'S DEFERRED TIME WARNER'S TOTAL
STOCK IN ACCRUED HISTORICAL PURCHASE TAX VALUATION HISTORICAL PRO FORMA
AND OPTIONS EXPENSES GOODWILL PRICE ALLOWANCE EQUITY ADJUSTMENTS
----------- -------- -------- ----- --------- ------ -----------
(IN MILLIONS)
Goodwill and other intangibles, net ..... $ -- $ -- $(15,458) $189,736 $ -- $ -- $ 174,278
Total current liabilities ............... -- 300 -- -- -- -- 300
Deferred income taxes ................... -- -- -- 38,000 (3,235) -- 34,765
Preferred stock ......................... 1 -- -- -- -- (1) --
Series LMCN-V common stock .............. 1 -- -- -- -- (1) --
Common stock ............................ 18 -- -- -- -- (12) 6
Paid-in capital ......................... 145,671 -- -- -- 3,235 (12,998) 135,908
Accumulated earnings (deficit) .......... -- -- -- -- -- 3,350 3,350
Accumulated other comprehensive
income ............................... -- -- -- -- -- (51) (51)
7
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
AOL
TIME PRO FORMA TIME WARNER
AOL(d) WARNER(e) ADJUSTMENTS(f) PRO FORMA
------ ---------- -------------- ---------
Revenues ......................................................... $ 3,088 $ 14,711 $ -- $ 17,799
Cost of revenues(1) .............................................. (1,621) (8,108) -- (9,729)
Selling, general and administrative(1) ........................... (830) (4,008) -- (4,838)
Amortization of goodwill and other intangible assets ............. (35) (671) (3,519) (4,225)
Gain on sale or exchange of cable systems and investments ........ -- 1,476 -- 1,476
Gain on sale of CanalSatellite ................................... -- 97 -- 97
Merger, restructuring and other charges .......................... (5) (106) -- (111)
------- -------- ------- -------
Business segment operating income (loss)(g) ...................... 597 3,391 (3,519) 469
Interest and other, net .......................................... 197 (1,031) -- (834)
Minority interest ................................................ -- (145) -- (145)
Corporate expenses ............................................... (48) (83) -- (131)
------- -------- ------- -------
Income (loss) before income taxes ................................ 746 2,132 (3,519) (641)
Income tax benefit (provision) ................................... (291) (903) 760 (434)
------- -------- ------- -------
Income (loss) before extraordinary item .......................... 455 1,229 (2,759) (1,075)
Preferred dividend requirements .................................. -- (16) -- (16)
------- -------- ------- -------
Income (loss) applicable to common shares before
extraordinary item ............................................. $ 455 $ 1,213 $(2,759) $(1,091)
======= ======== ======= =======
Income (loss) per common share before extraordinary item:
Basic ..................................................... $ 0.20 $ 0.94 $ (0.26)
======= ======== =======
Diluted ................................................... $ 0.18 $ 0.90 $ (0.26)
======= ======== =======
Average common shares:
Basic ..................................................... 2,240 1,288 4,172
======= ======== =======
Diluted ................................................... 2,592 1,395 4,172
======= ======== =======
- ----------
(1) Includes depreciation expense of:............................. $ 122 $ 646 $ -- $ 768
======= ======== ======= =======
See accompanying notes.
8
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
AOL
TIME PRO FORMA TIME WARNER
AOL(d) WARNER(h) ADJUSTMENTS(f) PRO FORMA
------------ ----------- -------------- --------------
Revenues..................................................... $4,777 $26,482 $ -- $ 31,259
Cost of revenues(1).......................................... (2,657) (14,609) -- (17,266)
Selling, general and administrative(1)....................... (1,431) (7,162) -- (8,593)
Amortization of goodwill and other intangible assets......... (65) (1,291) (7,056) (8,412)
Gain on sale or exchange of cable systems and investments.... -- 795 -- 795
Gain on early termination of video distribution agreement.... -- 215 -- 215
Merger, restructuring and other charges...................... (95) -- -- (95)
----- ----- ------- --------
Business segment operating income (loss)(g).................. 529 4,430 (7,056) (2,097)
Interest and other, net...................................... 638 (2,050) -- (1,412)
Minority interest............................................ -- (485) -- (485)
Corporate expenses........................................... (71) (164) -- (235)
----- ----- ------- --------
Income (loss) before income taxes............................ 1,096 1,731 (7,056) (4,229)
Income tax benefit (provision)............................... (334) (871) 1,520 315
----- ----- ------- --------
Net income (loss)............................................ 762 860 (5,536) (3,914)
Preferred dividend requirements.............................. -- (416) -- (416)
----- ----- ------- --------
Net income (loss) applicable to common shares................ $ 762 $ 444 $(5,536) $ (4,330)
===== ===== ======= ========
Net income (loss) per common share:
Basic.................................................... $0.37 $ 0.36 $ (1.10)
===== ===== ========
Diluted.................................................. $0.30 $ 0.36 $ (1.10)
===== ===== ========
Average common shares:
Basic.................................................... 2,081 1,231 3,928
===== ===== ========
Diluted.................................................. 2,555 1,231 3,928
===== ===== ========
- --------------
(1) Includes depreciation expense of:....................... $ 233 $1,230 $ -- $ 1,463
===== ===== ======= ========
See accompanying notes.
9
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS
(UNAUDITED)
(d) Reflects the historical operating results of America Online for the six
months ended December 31, 1999 and the year ended June 30, 1999.
Outstanding share and per share information for America Online have been
restated to reflect a 2-for-1 common stock split which occurred in November
1999. Finally, various reclassifications have been made to conform to AOL
Time Warner's combined financial statement presentation.
(e) Reflects the historical operating results of Time Warner for the six months
ended December 31, 1999, including various reclassifications that have been
made to conform to AOL Time Warner's combined financial statement
presentation.
(f) Pro forma adjustments to record the merger for the six months ended
December 31, 1999 and the year ended June 30, 1999 reflect:
-- increases of $3.795 billion and $7.589 billion, respectively, in
amortization of goodwill and other intangible assets relating to the
amortization of the excess of the purchase price to acquire Time Warner
over the book value of its net assets acquired, which has been
allocated to goodwill and other intangible assets, and are each
amortized on a straight-line basis over a twenty-five year
weighted-average period;
-- decreases of $276 million and $533 million, respectively, in
amortization of goodwill and other intangible assets relating to the
elimination of Time Warner's amortization of pre-existing goodwill; and
-- increases of $760 million and $1.520 billion, respectively, in income
tax benefits, provided at a 40% tax rate, on the aggregate pro forma
reduction in pretax income before goodwill amortization.
In addition, pro forma net income (loss) per common share has been
adjusted to reflect the issuance of additional shares of AOL Time Warner
common stock in the merger, based on Time Warner's historical weighted-
average shares outstanding for the periods presented and an exchange ratio
of 1.5 to 1. Because the effect of stock options and other convertible
securities would be antidilutive to AOL Time Warner, dilutive per share
amounts on a pro forma basis are the same as basic per share amounts.
(g) EBITDA consists of business segment operating income (loss) before
depreciation and amortization. AOL Time Warner considers EBITDA an
important indicator of the operational strength and performance of its
businesses, including the ability to provide cash flows to service debt and
fund capital expenditures. EBITDA, however, should not be considered an
alternative to operating or net income as an indicator of the performance
of AOL Time Warner, or as an alternative to cash flows from operating
activities as a measure of liquidity, in each case determined in accordance
with generally accepted accounting principles. This definition of EBITDA
may not be comparable to similarly titled measures reported by other
companies.
Pro forma EBITDA for AOL Time Warner includes a number of significant and
nonrecurring items. Set forth below for each period is a reconciliation of
pro forma EBITDA to a normalized measure of pro forma EBITDA that excludes
the effect of the significant and nonrecurring items.
SIX MONTHS
ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1999 1999
-------------- ------------
Pro forma EBITDA..................................... $ 5,462 $7,778
======= ======
Increase in pro forma EBITDA......................... $ 1,432 $ 890
======= ======
Adjusted EBITDA...................................... $ 4,030 $6,888
======= ======
10
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS -- (CONTINUED)
(UNAUDITED)
The increase in pro forma EBITDA includes the following significant and
nonrecurring items:
SIX MONTHS
ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1999 1999
-------------- ------------
Items related to America Online include:
Merger, restructuring and other charges............ $ (35) $ (95)
Transition costs................................... -- (25)
Items related to Time Warner include:
Gain on sale or exchange of cable systems and
investments...................................... 1,476 795
Write-down of retail store assets.................. (106) --
Gain on sale of interest in CanalSatellite......... 97 --
Gain on early termination of long-term,
home video distribution agreement................ -- 215
------ -----
Increase in pro forma EBITDA $1,432 $ 890
====== =====
The items above related to America Online are described more fully in
America Online's Quarterly Report on Form 10-Q for the six months ended
December 31, 1999 and Annual Report on Form 10-K for the year ended
June 30, 1999. The above items related to Time Warner are described more
fully in Time Warner's Annual Report on Form 10-K for the year ended
December 31, 1999. These filings are incorporated herein by reference.
(h) Reflects the historical operating results of Time Warner for the year ended
June 30, 1999, as adjusted to reflect Time Warner's consolidation for all
periods prior to 1999. In order to conform Time Warner's fiscal year-end
from a calendar year basis to America Online's June 30 year-end, Time
Warner's historical operating results have been derived from the
combination of Time Warner's quarterly historical operating results for the
year ended June 30, 1999. In addition, Time Warner's historical operating
results for this period have been adjusted to reflect Time Warner's
consolidation of TWE and certain related companies for the six-month
period ended December 31, 1998. During this period, Time Warner accounted
for those entities under the equity method of accounting. Operating results
for the year ended June 30, 1999 have been derived from the compilation of
(i) the results for the six months ended June 30, 1999 included in Time
Warner's Current Report on Form 8-K dated August 3, 1999, (ii) the three
month pro forma results for the quarter ended September 30, 1998 included
in Time Warner's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 and (iii) the three month pro forma results for the
quarter ended December 31, 1998 included in Time Warner's Current Report
on Form 8-K dated February 2, 2000. These reports are incorporated by
reference herein. A complete description of Time Warner's consolidation
of TWE and certain related companies, and the nature of the pro forma
adjustments, is included in Time Warner's Current Report on Form 8-K dated
August 3, 1999.
11
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
AOL
TIME PRO FORMA TIME WARNER
AOL(i) WARNER(j) ADJUSTMENTS(k) PRO FORMA
------ --------- -------------- -----------
Revenues........................................................ $5,718 $27,333 $ -- $ 33,051
Cost of revenues(1)............................................. (3,055) (14,940) -- (17,995)
Selling, general and administrative(1).......................... (1,602) (7,513) -- (9,115)
Amortization of goodwill and other intangible assets............ (68) (1,298) (7,047) (8,413)
Gain on sale or exchange of cable systems and investments....... -- 2,247 -- 2,247
Gain on early termination of video distribution agreement....... -- 215 -- 215
Gain on sale of interest in CanalSatellite...................... -- 97 -- 97
Merger, restructuring and other charges......................... (98) (106) -- (204)
------- ------- -------- --------
Business segment operating income (loss)(l)..................... 895 6,035 (7,047) (117)
Interest and other, net......................................... 814 (1,897) -- (1,083)
Minority interest............................................... -- (475) -- (475)
Corporate expenses.............................................. (88) (163) -- (251)
------- ------- -------- --------
Income (loss) before income taxes............................... 1,621 3,500 (7,047) (1,926)
Income tax benefit (provision).................................. (595) (1,540) 1,520 (615)
------- ------- -------- --------
Income (loss) before extraordinary item......................... 1,026 1,960 (5,527) (2,541)
Preferred dividend requirements................................. -- (52) -- (52)
------- ------- -------- --------
Income (loss) applicable to common shares before
extraordinary item........................................... $ 1,026 $ 1,908 $ (5,527) $ (2,593)
======= ======= ======== ========
Income (loss) per common share before extraordinary item:
Basic...................................................... $0.47 $ 1.51 $ (0.63)
======= ======= ========
Diluted.................................................... $0.40 $ 1.43 $ (0.63)
======= ======= ========
Average common shares:
Basic...................................................... 2,189 1,267 4,090
======= ======= ========
Diluted.................................................... 2,587 1,398 4,090
======= ======= ========
- -------------------
(1) Includes depreciation expense of:........................... $ 248 $1,231 $ -- $ 1,479
======= ======= ======== ========
See accompanying notes.
12
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS-- (CONTINUED)
(UNAUDITED)
(i) Reflects the historical operating results of America Online for the year
ended December 31, 1999. In order to conform America Online's fiscal year
end of June 30 to a calendar-year basis, these operating results have been
derived from the combination of America Online's quarterly historical
operating results for such periods. In addition, outstanding share and per
share information for America Online has been restated to reflect a 2-for-1
common stock split which occurred in November 1999. Finally, various
reclassifications have been made to conform to AOL Time Warner's combined
financial statement presentation.
(j) Reflects the pro forma operating results of Time Warner for the year ended
December 31, 1999, including various reclassifications that have been made
to conform to AOL Time Warner's combined financial statement presentation.
(k) Pro forma adjustments to record the merger for the year ended December 31,
1999 reflect:
-- an increase of $7.589 billion in amortization of goodwill and other
intangible assets relating to the amortization of the excess of the
purchase price to acquire Time Warner over the book value of its net
assets acquired, which has been allocated to goodwill and other
intangible assets and are amortized on a straight-line basis over a
twenty-five year weighted-average period;
-- a decrease of $542 million in amortization of goodwill and other
intangible assets relating to the elimination of Time Warner's
amortization of pre-existing goodwill; and
-- an increase of $1.520 billion in income tax benefits, provided at a 40%
tax rate, on the aggregate pro forma reduction in pretax income before
goodwill amortization.
In addition, pro forma net income (loss) per common share has been adjusted
to reflect the issuance of additional shares of AOL Time Warner common
stock in the merger, based on Time Warner's historical weighted-average
shares outstanding for the periods presented and an exchange ratio of 1.5
to 1. Because the effect of stock options and other convertible securities
would be antidilutive to AOL Time Warner, dilutive per share amounts on a
pro forma basis are the same as basic per share amounts.
(l) EBITDA consists of business segment operating income (loss) before
depreciation and amortization. AOL Time Warner considers EBITDA an
important indicator of the operational strength and performance of its
businesses, including the ability to provide cash flows to service debt and
fund capital expenditures. EBITDA, however, should not be considered an
alternative to operating or net income as an indicator of the performance
of AOL Time Warner, or as an alternative to cash flows from operating
activities as a measure of liquidity, in each case determined in accordance
with generally accepted accounting principles. This definition of EBITDA
may not be comparable to similarly titled measures reported by other
companies.
Pro forma EBITDA for AOL Time Warner includes a number of significant and
nonrecurring items. Set forth below is a reconciliation of pro forma EBITDA
to a normalized measure of pro forma EBITDA that excludes the effect of the
significant and nonrecurring items.
YEAR ENDED
DECEMBER 31,
1999
----
Pro forma EBITDA................................................................. $9,775
======
Increase in pro forma EBITDA..................................................... $2,300
======
Adjusted EBITDA.................................................................. $7,475
======
13
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS-- (CONTINUED)
(UNAUDITED)
The increase in pro forma EBITDA includes the following significant and
nonrecurring items:
YEAR ENDED
DECEMBER 31,
1999
------------
Items related to America Online include:
Merger, restructuring and other charges........... $(128)
Transition costs.................................. (25)
Items related to Time Warner include:
Gain on sale or exchange of cable systems and
investments..................................... 2,247
Gain on early termination of long-term,
home video distribution agreement............... 215
Gain on sale of interest in CanalSatellite........ 97
Write-down of retail store assets................. (106)
-------------
Increase in pro forma EBITDA $2,300
=============
The items above related to America Online are described more fully in
America Online's Quarterly Report on Form 10-Q for the six months ended
December 31, 1999 and Annual Report on Form 10-K for the year ended
June 30, 1999. The above items related to Time Warner are described more
fully in Time Warner's Annual Report on Form 10-K for the year ended
December 31, 1999. These filings are incorporated herein by reference.
14
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS:
(i) Time Warner Inc.:
(A) Pro Forma Consolidated Condensed Balance Sheet as of
December 31, 1999;
(B) Notes to the Pro Forma Consolidated Condensed Balance
Sheet;
(C) Pro Forma Consolidated Condensed Statement of Operations
for the six months ended December 31, 1999;
(D) Pro Forma Consolidated Condensed Statement of Operations
for the year ended June 30, 1999;
(E) Notes to Pro Forma Consolidated Condensed Statements of
Operations;
(F) Pro Forma Consolidated Condensed Statement of Operations
for the year ended December 31, 1999; and
(G) Notes to the Pro Forma Consolidated Condensed Statements
of Operations.
(b) EXHIBITS:
(i) Exhibit 23: Consent of Ernst & Young LLP, Independent
Auditors.
(ii) Exhibit 99(a): Financial Statements of America Online, Inc.,
incorporated by reference from its (i) Annual Report on Form
10-K for the year ended June 30, 1999 and (ii) Quarterly
Report on Form 10-Q for the six months ended December 31,
1999.
15
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBITS NUMBER
--- ----------------------- ------
23 Consent of Ernst & Young LLP, Independent Auditors. 18
99(a) Exhibit 99(a): Financial Statements of America Online, *
Inc., incorporated by reference from its (i) Annual
Report on Form 10-K for the year ended June 30, 1999
and (ii) Quarterly Report on Form 10-Q for the six
months ended December 31, 1999.
- ---------------
* Incorporated by reference.
16
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.
By: /s/ James W. Barge
------------------------------
Name: James W. Barge
Title: Vice President and Controller
Date: March 31, 2000
17