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): January 10, 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
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address, if changed since last report)
Item 7. Financial Statements and Exhibits
(a) 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 30th fiscal-year basis,
which is consistent with America Online's historical fiscal year-end and (2) a
December 31st 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 September 30, 1999 gives effect to the Merger as if it occurred as of
that date. On a June 30th fiscal-year basis, the pro forma consolidated
condensed statements of operations of AOL Time Warner for the three months ended
September 30, 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 31st calendar-year basis, the
pro forma consolidated condensed statements of operations of AOL Time Warner for
the nine months ended September 30, 1999 and the year ended December 31, 1998
give effect to the Merger as if it occurred as of January 1, 1998. In addition,
the pro forma consolidated condensed statements of operations of AOL Time Warner
for the years ended June 30, 1999 and December 31, 1998 also give 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
September 30, 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 and the effects of
certain business combinations accounted for as a pooling-of-interests. For Time
Warner and TWE, those financial statements are included in Time Warner's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and Time
Warner's Annual Report on Form 10-K for the year ended December 31, 1998, as
amended, which are 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 owed 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.
As a result of the Merger, the former shareholders of AOL will have a 55%
interest in AOL Time Warner and the former shareholders of Time Warner will have
a 45% interest in the combined entity, 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.
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. The work needed to provide the
basis for estimating these fair values 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 from the preliminary allocation.
Pro forma adjustments for the Merger include:
. the issuance of approximately 1.9 billion shares of common stock of AOL
Time Warner in exchange for all 1.3 billion outstanding shares of Time
Warner common stock;
. the issuance of approximately 8.4 million shares of convertible preferred
stock of AOL Time Warner in exchange for all 8.4 million outstanding shares
of Time Warner convertible preferred stock;
. the issuance of options to purchase approximately 209 million shares of
common stock of AOL Time Warner in exchange for all of the 139 million
outstanding options to purchase 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") in a stock-for-stock exchange for approximately 13 million shares
of AOL common stock. The transaction is expected to close in the spring of 2000
and is expected to be accounted for as a pooling-of-interests. Further, in
January 2000, Time Warner agreed to form a global music joint venture with EMI
Group plc ("EMI"). Time Warner will acquire a 50% controlling interest in the
joint venture and account for the transaction under the purchase method of
accounting. The transaction is expected to close by the end of 2000, subject to
regulatory and EMI shareholder approval. Because those 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.
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999
(millions, unaudited)
AOL
Time Pro Forma Time Warner
AOL(a) Warner(b) Adjustments(c) Pro Forma
--------- ------------ --------------- ---------
ASSETS
Cash and equivalents........................ $1,330 $ 645 $ - $ 1,975
Other current assets........................ 1,078 7,955 - 9,033
------ ------- -------- --------
Total current assets........................ 2,408 8,600 - 11,008
Noncurrent inventories...................... - 3,942 - 3,942
Investments................................. 2,760 1,702 - 4,462
Property, plant and equipment, net.......... 744 8,489 - 9,233
Goodwill and other intangibles, net......... 422 24,042 175,465 199,929
Other assets................................ 168 1,657 - 1,825
------ ------- -------- --------
Total assets................................ $6,502 $48,432 $175,465 $230,399
====== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities................... $2,011 $ 8,576 $ 300 $ 10,887
Long-term debt and other obligations(1)..... 346 19,617 - 19,963
Deferred income taxes....................... 5 3,848 34,976 38,829
Other long-term liabilities................. 291 4,430 - 4,721
Minority interests.......................... - 3,175 - 3,175
Shareholders' equity
Preferred stock............................. - 1 - 1
Series LMCN-V common stock.................. - 1 - 1
Common stock................................ 22 12 6 40
Paid-in capital............................. 3,068 12,880 136,075 152,023
Accumulated earnings (deficit).............. 335 (3,952) 3,952 335
Accumulated other comprehensive income...... 424 (156) 156 424
------ ------- -------- --------
Total shareholders' equity.................. 3,849 8,786 140,189 152,824
------ ------- -------- --------
Total liabilities and shareholders' equity.. $6,502 $48,432 $175,465 $230,399
====== ======= ======== ========
- -------------------
(1) For Time Warner, includes $1.230 billion of borrowings against future stock
option proceeds and $575 million of mandatorily redeemable preferred
securities of subsidiaries.
See accompanying notes.
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(unaudited)
(a) Reflects the historical financial position of America Online at September
30, 1999. America Online's historical common stock and paid-in capital as
of September 30, 1999 have been restated to reflect the effect of a 2-for-1
common stock split that occurred in November 1999.
(b) Reflects the historical financial position of Time Warner at September 30,
1999.
(c) Pro forma adjustments to record the Merger as of September 30, 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 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), $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 shares to be issued were valued based on a price per
share of $67.75, which is the average market price of America Online
common stock for the period before and after the date the merger was
agreed to and announced;
. an increase in equity of $3.557 billion relating to the issuance of
approximately 8.404 million shares of AOL Time Warner convertible
preferred stock, $0.10 par value per share, in exchange for all
outstanding shares of Time Warner convertible preferred stock. The AOL
Time Warner preferred shares 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 $11.636 billion relating to the issuance of
options to purchase 208.455 million shares of common stock of AOL Time
Warner in exchange for all of the 138.970 million outstanding options to
purchase shares of Time Warner common stock, based on a value per common
share of $55.82 calculated using the Black-Scholes option pricing model;
. 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 $15.377 billion of Time Warner's pre-
existing goodwill;
. the preliminary allocation of the excess of the $146.251 billion
purchase price, including transaction costs, over the book value of the
net assets acquired to (i) goodwill in the amount of $95.842 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;
. a reduction of $3.024 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; and
. a decrease in shareholders' equity of $8.786 billion relating to the
elimination of Time Warner's historical shareholders' equity.
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(millions, except per share amounts; unaudited)
AOL
Time Pro Forma Time Warner
AOL(d) Warner (e) Adjustments(f) Pro Forma
---------- ---------- --------------- ----------
Revenues................................................... $1,467 $ 6,723 $ - $ 8,190
Cost of revenues (1)....................................... (791) (3,718) - (4,509)
Selling, general and administrative (1).................... (372) (1,874) - (2,246)
Gain on sale or exchange of cable systems and investments.. - 477 - 477
Amortization of goodwill and other intangible assets....... (18) (321) (1,776) (2,115)
------ ------- ------- -------
Business segment operating income (loss)................... 286 1,287 (1,776) (203)
Interest and other, net.................................... 37 (490) - (453)
Minority interest.......................................... - (59) - (59)
Corporate expenses......................................... (21) (40) - (61)
------ ------- ------- -------
Income (loss) before income taxes.......................... 302 698 (1,776) (776)
Income tax benefit (provision)............................. (118) (317) 380 (55)
------ ------- ------- -------
Income (loss) before extraordinary item.................... 184 381 (1,396) (831)
Preferred dividend requirements............................ - (9) - (9)
------ ------- ------- -------
Income (loss) applicable to common shares before
extraordinary item........................................ $ 184 $ 372 $(1,396) $ (840)
====== ======= ======= =======
Income (loss) per common share before extraordinary item:
Basic..................................................... $0.08 $0.29 $(0.20)
====== ======= =======
Diluted................................................... $0.07 $0.28 $(0.20)
====== ======= =======
Average common shares:
Basic..................................................... 2,221 1,289 4,154
====== ======= =======
Diluted................................................... 2,575 1,398 4,154
====== ======= =======
EBITDA (l)(m).............................................. $ 365 $ 1,928 $ - $ 2,293
====== ======= ======= =======
- ---------------
(1) Includes depreciation expense of:...................... $ 61 $ 320 $ - $ 381
====== ======= ======= =======
See accompanying note.
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
(millions, except per share amounts; unaudited)
AOL
Time Pro Forma Time Warner
AOL(d) Warner(g) 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)
Gain on sale or exchange of cable systems and investments.. - 795 - 795
Gain on early termination of video distribution agreement.. - 215 - 215
Amortization of goodwill and other intangible assets....... (65) (1,291) (7,101) (8,457)
Merger, restructuring and other charges.................... (95) - - (95)
------- -------- ------- --------
Business segment operating income (loss)................... 529 4,430 (7,101) (2,142)
Interest and other, net.................................... 638 (2,117) - (1,479)
Minority interest.......................................... - (418) - (418)
Corporate expenses......................................... (71) (164) - (235)
------- -------- ------- --------
Income (loss) before income taxes.......................... 1,096 1,731 (7,101) (4,274)
Income tax benefit (provision)............................. (334) (871) 1,520 315
------- -------- ------- --------
Net income (loss).......................................... 762 860 (5,581) (3,959)
Preferred dividend requirements............................ - (416) - (416)
------- -------- ------- --------
Net income (loss) applicable to common shares.............. $ 762 $ 444 $(5,581) $ (4,375)
======= ======== ======= ========
Net income (loss) per common share:
Basic..................................................... $0.37 $0.36 $(1.11)
======= ======== ========
Diluted................................................... $0.30 $0.36 $(1.11)
======= ======== ========
Average common shares:
Basic..................................................... 2,081 1,231 3,928
======= ======== ========
Diluted................................................... 2,555 1,231 3,928
======= ======== ========
EBITDA (l)(m).............................................. $ 827 $ 6,951 $ - $ 7,778
======= ======== ======= ========
- ---------------
(1) Includes depreciation expense of:...................... $ 233 $ 1,230 $ - $ 1,463
======= ======== ======= ========
See accompanying notes.
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 three
months ended September 30, 1999 and the year ended June 30, 1999.
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, certain 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 three
months ended September 30, 1999, including certain reclassifications that
have been made to conform to AOL Time Warner's combined financial
statements presentation.
(f) Pro forma adjustments to record the Merger for the three months ended
September 30, 1999 and the year ended June 30, 1999 reflect:
. increases of $1.908 billion and $7.634 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 $132 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 $380 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 common stock of AOL Time
Warner 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) Reflects the historical operating results of Time Warner for the year ended
June 30, 1999, as adjusted to reflect Time Warner's consolidation of TWE
and certain related companies 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 30th 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,
as shown in the following reconciliation, Time Warner's historical
operating results for such 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 in which those entities were accounted
for under the equity method of accounting. A complete description of Time
Warner's consolidation of TWE and certain related companies, and the nature
of the pro forma adjustments related thereto, has been made in Time
Warner's Current Report on Form 8-K dated August 3, 1999, which is
incorporated by reference herein.
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(millions, unaudited)
A summary of how the Time Warner results of operations for the year ended June
30, 1999 were derived is presented below:
Entertain-
Time Warner ment Group Time Warner
Historical Historical Intercompany Pro Forma Time Warner Time Warner
6 Mos. 6 Mos. Eliminations 6 Mos. Historical Pro Forma
Ended Ended and Consolidating Ended 6 Mos. Ended Year Ended
12/98(1) 12/98(1) Adjustments(2) 12/98 6/30/99(3) 6/30/99(4)
-------- -------- ----------------- -------- ---------- ----------
Revenues....................... $ 7,773 $ 6,491 $(404) $ 13,860 $ 12,622 $ 26,482
Business segment operating 942 899 (55) 1,786 2,644 4,430
income (loss)(a)(b)...........
Equity in pretax income of 83 - (83) - - -
Entertainment Group...........
Interest and other, net........ (614) (618) 12 (1,220) (897) (2,117)
Minority interest.............. - (118) (1) (119) (299) (418)
Income (loss) before income 363 127 (127) 363 1,368 1,731
taxes.........................
Income tax benefit (provision). (234) (60) 60 (234) (637) (871)
Net income (loss).............. 129 67 (67) 129 731 860
Preferred dividend requirements (380) - - (380) (36) (416)
Net income (loss) applicable $ (251) $ 67 $ (67) $ (251) $ 695 $ 444
to common shares..............
Basic and diluted income
(loss) per common
share......................... $(0.21) $(0.21) $0.56 $0.36
======== ======== ========== ==========
Average common shares:......... 1,214.9 1,214.9 1,246.2 1,230.6
======== ======== ========== ==========
- -------------------
(a) Includes depreciation $ 187 $ 458 $ - $ 645 $ 585 $ 1,230
expense of:................... ======== ======== ===== ======== ========== ==========
(b) Includes amortization $ 402 $ 251 $ 11 $ 664 $ 627 $ 1,291
expense of:................... ======== ======== ===== ======== ========== ==========
- -------------------
(1) Reflects the historical and operating results of Time Warner and the
Entertainment Group, which substantially consists of TWE, as of and for the
six months ended December 31, 1998. Certain reclassifications have been
made to conform to the new, consolidated presentation.
(2) Adjustments reflect the elimination of all significant intercompany
accounts and transactions between Time Warner and the Entertainment Group
and other consolidating adjustments necessary to prepare a consolidated set
of financial statements.
(3) As filed in Time Warner's Current Report on Form 8-K dated August 3, 1999.
(4) Per common share amounts for the six-month period and full year have been
calculated separately. Accordingly, per share amounts for the six-month
periods do not add to the annual amount because of differences in the
average common shares outstanding during each period.
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(millions, except per share amounts; unaudited)
AOL
Time Pro Forma Time Warner
AOL(h) Warner(i) Adjustments(j) Pro Forma
---------- ------------ --------------- ----------
Revenues.................................................... $ 4,097 $ 19,345 $ - $ 23,442
Cost of revenues (1)........................................ (2,225) (10,550) - (12,775)
Selling, general and administrative (1)..................... (1,144) (5,379) - (6,523)
Gain on sale or exchange of cable systems and investments... - 1,248 - 1,248
Gain on early termination of video distribution agreement... - 215 - 215
Amortization of goodwill and other intangible assets........ (51) (948) (5,327) (6,326)
Merger, restructuring and other charges..................... (93) - - (93)
------- -------- ------- --------
Business segment operating income (loss).................... 584 3,931 (5,327) (812)
Interest and other, net..................................... 654 (1,387) - (733)
Minority interest........................................... - (358) - (358)
Corporate expenses.......................................... (61) (120) - (181)
------- -------- ------- --------
Income (loss) before income taxes........................... 1,177 2,066 (5,327) (2,084)
Income tax benefit (provision).............................. (422) (954) 1,140 (236)
------- -------- ------- --------
Income (loss) before extraordinary item..................... 755 1,112 (4,187) (2,320)
Preferred dividend requirements............................. - (45) - (45)
------- -------- ------- --------
Income (loss) applicable to common shares before
extraordinary item......................................... $ 755 $ 1,067 $(4,187) $ (2,365)
======= ======== ======= ========
Income (loss) per common share before extraordinary item:
Basic...................................................... $0.35 $0.85 $(0.58)
======= ======== ========
Diluted.................................................... $0.29 $0.82 $(0.58)
======= ======== ========
Average common shares:
Basic...................................................... 2,165 1,261 4,057
======= ======== ========
Diluted.................................................... 2,580 1,400 4,057
======= ======== ========
EBITDA (l)(m)............................................... $ 822 $ 5,784 $ - $ 6,606
======= ======== ======= ========
- ---------------
(1) Includes depreciation expense of:....................... $ 187 $ 905 $ - $ 1,092
======= ======== ======= ========
See accompanying notes.
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(millions, except per share amounts; unaudited)
AOL
Time Pro Forma Time Warner
AOL(h) Warner(k) Adjustments(j) Pro Forma
---------- ------------ --------------- ----------
Revenues................................................... $ 3,847 $ 26,244 $ - $ 30,091
Cost of revenues (1)....................................... (2,254) (14,820) - (17,074)
Selling, general and administrative (1).................... (1,227) (7,070) - (8,297)
Gain on sale or exchange of cable systems and investments.. - 108 - 108
Amortization of goodwill and other intangible assets....... (48) (1,330) (7,102) (8,480)
Merger, restructuring and other charges.................... (147) - - (147)
------- -------- ------- --------
Business segment operating income (loss)................... 171 3,132 (7,102) (3,799)
Interest and other, net.................................... 41 (2,122) - (2,081)
Minority interest.......................................... - (266) - (266)
Corporate expenses......................................... (62) (158) - (220)
------- -------- ------- --------
Income (loss) before income taxes.......................... 150 586 (7,102) (6,366)
Income tax benefit (provision)............................. (30) (418) 1,520 1,072
------- -------- ------- --------
Net income (loss).......................................... 120 168 (5,582) (5,294)
Preferred dividend requirements............................ - (540) - (540)
------- -------- ------- --------
Net income (loss) applicable to common shares.............. $ 120 $ (372) $(5,582) $ (5,834)
======= ======== ======= ========
Net income (loss) per common share:
Basic..................................................... $0.06 $(0.31) $(1.56)
======= ======== ========
Diluted................................................... $0.05 $(0.31) $(1.56)
======= ======== ========
Average common shares:
Basic..................................................... 1,951 1,195 3,744
======= ======== ========
Diluted................................................... 2,360 1,195 3,744
======= ======== ========
EBITDA (l)(m).............................................. $ 413 $ 5,767 $ - $ 6,180
======= ======== ======= ========
- ---------------
(1) Includes depreciation expense of:...................... $ 194 $ 1,305 $ - $ 1,499
======= ======== ======= ========
See accompanying notes.
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(h) Reflects the historical operating results of America Online for the nine
months ended September 30, 1999 and the year ended December 31, 1998. In
order to conform America Online's fiscal year end of June 30th 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, certain reclassifications have
been made to conform to AOL Time Warner's combined financial statement
presentation.
(i) Reflects the historical operating results of Time Warner for the nine
months ended September 30, 1999, including various reclassifications that
have been made to conform to AOL Time Warner's combined financial statement
presentation.
(j) Pro forma adjustments to record the Merger for the nine months ended
September 30, 1999 and the year ended December 31, 1998 reflect:
. increases of $5.725 billion and $7.634 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 $398 million and $532 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 $1.140 billion 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 common stock of AOL Time
Warner 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.
(k) Reflects the pro forma operating results of Time Warner for the year ended
December 31, 1998 giving effect to the consolidation of 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.
(l) EBITDA includes a number of significant and nonrecurring items. The
aggregate effect of those items for each period, as well as the adjusted
EBITDA excluding such amounts, is as follows:
Three Months Nine Months
Ended Year Ended Ended Year Ended
Sept. 30, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
------------ ---------- ----------- ----------
Increase (decrease) in
EBITDA $ 477 $ 890 $1,345 $ (39)
====== ====== ====== ======
Adjusted EBITDA $1,816 $6,888 $5,261 $6,219
====== ====== ====== ======
See the historical financial statements and related notes contained in the
Annual and Quarterly Reports of America Online and Time Warner which have
been incorporated by reference herein.
(m) 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. In addition, EBITDA as
defined herein may not be comparable to similarly titled measures reported
by other companies.
(b) Unaudited Pro Forma Consolidated Condensed Financial Statements:
(i) Time Warner Inc.:
(A) Pro Forma Consolidated Condensed Balance Sheet as of September
30, 1999;
(B) Notes to the Pro Forma Consolidated Condensed Balance Sheet
(C) Pro Forma Consolidated Condensed Statements of Operations for the
three months ended September 30, 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 Statements of Operations for the
nine months ended September 30, 1998;
(G) Pro Forma Consolidated Condensed Statements of Operations for the
year ended December 31, 1998; and
(H) Notes to the Pro Forma Consolidated Condensed Statements of
Operations.
(c) 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 three months ended September 30, 1999.
EXHIBIT INDEX
Sequential
Exhibit Page
No. Description of Exhibits Number
- ------- ----------------------- -----------
23 Consent of Ernst & Young LLP, Independent Auditors.
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 three months ended September 30, 1999.
_______________
* Incorporated by reference.
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: February 11, 2000