<PAGE>
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): May 22, 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
----------------------------------------
(Address of principal executive offices) (zip code)
(212) 484-8000
--------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-----------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
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 March 31, 2000 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 nine months ended March 31,
2000 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 three
months ended March 31, 2000 and the year ended December 31, 1999 give 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.
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 March
31, 2000, as amended, 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 Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000 and its Annual Report on Form
10-K for the year ended December 31, 1999, 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 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.
1
<PAGE>
As a result of the merger, it is anticipated 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 2.0 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 5.4 million shares of AOL Time Warner
preferred stock in exchange for all of the 5.4 million outstanding
shares of Time Warner preferred stock;
. the issuance of options to purchase approximately 196 million shares
of AOL Time Warner common stock in exchange for all of the outstanding
options to purchase 131 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 $147 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, and their respective weighted-average amortization periods,
will include:
Amortization
period
------
Film libraries, cable television franchises and music
catalogue and copyrights............................... 20-25 years
Trademarks and brands....................................... 35-40 years
Other identifiable intangible assets........................ 3-10 years
At this time, the work needed to provide the basis for estimating these
fair values and related 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
2
<PAGE>
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:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Year Ended Ended Year Ended
March 31, June 30, March 31, December 31,
Weighted-average useful life 2000 1999 2000 1999
- ---------------------------- ---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Twenty-five years (as disclosed in these pro forma
financial statements).................................... $(2,116) $(4,329) $(1,044) $(2,574)
Twenty years.............................................. $(3,254) $(5,846) $(1,424) $(4,091)
Thirty years.............................................. $(1,358) $(3,318) $ (791) $(1,563)
</TABLE>
AOL Time Warner will periodically review the carrying value of the acquired
goodwill 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 can be recovered. If it is
determined that the carrying value of goodwill will not be recovered from the
undiscounted future cash flows of acquired businesses, the carrying value of
such goodwill 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.
Accounting Changes
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.
Impact of Changes in Accounting for Employee Stock Options
AOL Time Warner is expected to account for its stock option plans in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees. In March
2000, the Financial Accounting Standards Board issued FASB Interpretation No.
44, Accounting for Certain Transactions involving Stock Compensation, which
contains rules designed to clarify the application of APB Opinion No. 25. FASB
Interpretation No. 44 will be effective on July 1, 2000 and AOL Time Warner will
adopt it at that time.
Among other matters, the provisions of FASB Interpretation No. 44 will change
the accounting for an exchange of unvested employee stock options and restricted
stock awards in a purchase business combination. The new rules require the
intrinsic value of the unvested awards to be allocated to unearned compensation
and recognized as non cash compensation cost over the remaining future vesting
period. The ultimate amount to be allocated to unearned compensation will be
based on the stock price of America Online common stock and the number of Time
Warner's unvested employee stock options and restricted stock awards on the date
the merger is completed. Based on the March 31, 2000 market price of America
Online common stock, and the number of Time Warner's unvested
3
<PAGE>
employee stock options and restricted stock awards at that date, these new
provisions would increase pro forma net loss and net loss per common share by
$26 million and $0.01 per common share for the nine months ended March 31, 2000;
$34 million and $0.01 per common share for the year ended June 30, 1999; $9
million and less than a $0.01 impact per common share for the three months ended
March 31, 2000; and $34 million and $0.01 per common share for the year ended
December 31, 1999.
4
<PAGE>
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
March 31, 2000
(in millions, unaudited)
<TABLE>
<CAPTION>
AOL
Time Pro Forma Time Warner
AOL(a) Warner(b) Adjustments(c) Pro Forma
------ --------- -------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents......................................... $ 2,655 $ 848 $ -- $ 3,503
Other current assets......................................... 1,545 8,028 -- 9,573
------- ------- -------- --------
Total current assets....................................... 4,200 8,876 -- 13,076
Noncurrent inventories....................................... -- 4,233 -- 4,233
Investments.................................................. 4,791 2,134 -- 6,925
Property, plant and equipment, net........................... 991 8,933 -- 9,924
Goodwill and other intangibles, net.......................... 432 24,507 174,386 199,325
Other assets................................................. 375 1,530 -- 1,905
------- ------- -------- --------
Total assets............................................... $10,789 $50,213 $174,386 $235,388
======= ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities.................................... $ 2,323 $ 8,649 $ 300 $ 11,272
Long-term debt and other obligations/(1)/.................... 1,625 19,554 -- 21,179
Deferred income taxes........................................ -- 4,033 34,476 38,509
Other long-term liabilities.................................. 422 4,548 -- 4,970
Minority interests........................................... -- 3,165 -- 3,165
Shareholders' Equity
Preferred stock.............................................. -- 1 -- 1
Series LMCN-V common stock................................... -- 1 -- 1
Common stock................................................. 23 12 6 41
Paid-in capital.............................................. 4,283 14,745 135,109 154,137
Accumulated earnings (deficit)............................... 1,051 (4,553) 4,553 1,051
Accumulated other comprehensive income....................... 1,062 58 (58) 1,062
------- ------- -------- --------
Total shareholders' equity................................. 6,419 10,264 139,610 156,293
------- ------- -------- --------
Total liabilities and shareholders' equity................. $10,789 $50,213 $174,386 $235,388
======= ======= ======== ========
</TABLE>
___________________
/(1)/ For Time Warner, includes $1.245 billion of borrowings against future
stock option proceeds and $575 million of mandatorily redeemable preferred
securities of subsidiaries.
See accompanying notes.
5
<PAGE>
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(unaudited)
(a) Reflects the historical financial position of America Online at March 31,
2000.
(b) Reflects the historical financial position of Time Warner at March 31,
2000.
(c) Pro forma adjustments to record the merger as of March 31, 2000 reflect:
. an increase in equity of $133.671 billion relating to the issuance of
1.973 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 1.315 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 $2.270 billion relating to the issuance of
approximately 5.361 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 $10.409 billion relating to the issuance of
options to purchase 196.182 million shares of AOL Time Warner common
stock in exchange for all of the 130.788 million outstanding options
to purchase shares of Time Warner common stock, based on a weighted-
average fair value of $53.06 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--46.3%; expected lives--5 years; a risk-free interest
rate--6.37%; 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 $15.319 billion of Time Warner's pre-
existing goodwill;
. a reduction of $3.524 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 $10.264 billion relating to the
elimination of Time Warner's historical shareholders' equity; and
. the preliminary allocation of the excess of the $146.650 billion
purchase price, including transaction costs, over the book value of
the net assets acquired to (i) goodwill in the amount of $94.705
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
<PAGE>
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED
BALANCE SHEET--(Continued)
(unaudited)
<TABLE>
<CAPTION>
Calculation of Purchase Price: (in millions)
<S> <C>
Common stock................................. $133,671
Preferred stock.............................. 2,270
Stock options................................ 10,409
Transaction costs............................ 300
--------
Total purchase price.................... $146,650
========
Allocation of Purchase Price: (in millions)
Assets:
Time Warner's historical assets.............. $ 50,213
Eliminate Time Warner's historical goodwill.. (15,319)
New goodwill................................. 94,705
Other intangible assets...................... 95,000
Liabilities:
Time Warner's historical liabilities......... (39,949)
Deferred income taxes........................ (38,000)
--------
Total purchase price....................... $146,650
========
</TABLE>
Time Warner's other assets and liabilities have not been adjusted because
their cost approximates fair value in all material respects.
A reconciliation of the above adjustments to reflect the merger is set
forth below:
<TABLE>
<CAPTION>
Issuance of Elimination of Allocation of Elimination of Elimination of
Common Stock, Increase Time Warner's Excess AOL's Deferred Time Warner's Total
Preferred Stock in Accrued Historical Purchase Tax Valuation Historical Pro Forma
and Options Expenses Goodwill Price Allowance Equity Adjustments
----------- -------- -------- ----- --------- ------ -----------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Goodwill and other
intangibles, net........... $ -- $ -- $(15,319) $189,705 $ -- $ -- $174,386
Total current liabilities... -- 300 -- -- -- -- 300
Deferred income taxes....... -- -- -- 38,000 (3,524) -- 34,476
Preferred stock............. 1 -- -- -- -- (1) --
Series LMCN-V common stock.. 1 -- -- -- -- (1) --
Common stock................ 18 -- -- -- -- (12) 6
Paid-in capital............. 146,330 -- -- -- 3,524 (14,745) 135,109
Accumulated earnings
(deficit).................. -- -- -- -- -- 4,553 4,553
Accumulated other
comprehensive
income..................... -- -- -- -- -- (58) (58)
</TABLE>
7
<PAGE>
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Nine Months Ended March 31, 2000
(in millions, except per share amounts, unaudited)
<TABLE>
<CAPTION>
AOL
Time Pro Forma Time Warner
AOL(d) Warner(e) Adjustments(f) Pro Forma
------ --------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues................................................ $ 4,924 $ 21,260 $ -- $ 26,184
Cost of revenues/(1)/................................... (2,558) (11,756) -- (14,314)
Selling, general and administrative/(1)/................ (1,272) (5,753) -- (7,025)
Amortization of goodwill and other intangible assets.... (55) (992) (5,278) (6,325)
Gain on sale or exchange of cable systems and
investments............................................ -- 1,504 -- 1,504
Gain on sale of interest in CanalSatellite.............. -- 97 -- 97
Merger, restructuring and other charges................. (5) (106) -- (111)
-------- --------- --------- --------
Business segment operating income (loss)(g)............. 1,034 4,254 (5,278) 10
Interest and other, net................................. 533 (1,861) -- (1,328)
Corporate expenses...................................... (74) (126) -- (200)
Minority interest....................................... -- (199) -- (199)
-------- --------- --------- --------
Income (loss) before income taxes....................... 1,493 2,068 (5,278) (1,717)
Income tax benefit (provision).......................... (583) (935) 1,140 (378)
-------- --------- --------- --------
Income (loss) before extraordinary item................. 910 1,133 (4,138) (2,095)
Preferred dividend requirements......................... -- (21) -- (21)
-------- --------- --------- --------
Income (loss) applicable to common shares before
extraordinary item.................................... $ 910 $ 1,112 $ (4,138) $ (2,116)
======== ========= ========= =========
Income (loss) per common share before extraordinary
item:
Basic............................................... $ 0.40 $ 0.86 $ (0.50)
======== ========= =========
Diluted............................................. $ 0.35 $ 0.84 $ (0.50)
======== ========= =========
Average common shares:
Basic............................................... 2,255 1,293 4,195
======== ========= =========
Diluted............................................. 2,593 1,395 4,195
======== ========= =========
_________________
/(1)/ Includes depreciation expense of:................ $ 211 $ 954 $ -- $ 1,165
======== ========= ========= =========
</TABLE>
See accompanying notes.
8
<PAGE>
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Year Ended June 30, 1999
(in millions, except per share amounts, unaudited)
<TABLE>
<CAPTION>
AOL
Time Pro Forma Time Warner
AOL(d) Warner(h) Adjustments(f) Pro Forma
------ --------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues.................................................... $ 4,777 $ 26,482 $ -- $ 31,259
Cost of revenues/(1)/....................................... (2,657) (14,638) -- (17,295)
Selling, general and administrative/(1)/.................... (1,431) (7,162) -- (8,593)
Amortization of goodwill and other intangible assets........ (65) (1,272) (7,055) (8,392)
Gain on sale or exchange of cable systems and
investments................................................ -- 795 -- 795
Gain on early termination of video distribution -- 215 -- 215
agreement..................................................
Merger, restructuring and other charges..................... (95) -- -- (95)
-------- --------- -------- ---------
Business segment operating income (loss)(g)................. 529 4,420 (7,055) (2,106)
Interest and other, net..................................... 638 (2,040) -- (1,402)
Corporate expenses.......................................... (71) (164) -- (235)
Minority interest........................................... -- (485) -- (485)
-------- --------- -------- ---------
Income (loss) before income taxes........................... 1,096 1,731 (7,055) (4,228)
Income tax benefit (provision).............................. (334) (871) 1,520 315
-------- --------- -------- ---------
Net income (loss)........................................... 762 860 (5,535) (3,913)
Preferred dividend requirements............................. -- (416) -- (416)
-------- --------- -------- ---------
Net income (loss) applicable to common shares............... $ 762 $ 444 $(5,535) $ (4,329)
======== ========= ======== =========
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
======== ========= ======== =========
</TABLE>
See accompanying notes.
9
<PAGE>
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 nine
months ended March 31, 2000 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 nine months
ended March 31, 2000, 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 nine months ended March
31, 2000 and the year ended June 30, 1999 reflect:
. increases of $5.691 billion and $7.588 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 $413 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 $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 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.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
March 31, June 30,
2000 1999
---------- ----------
(in millions)
<S> <C> <C>
Pro forma EBITDA................................................................ $7,500 $7,749
====== ======
Increase in pro forma EBITDA.................................................... $1,490 $ 890
====== ======
Adjusted EBITDA................................................................. $6,010 $6,859
====== ======
</TABLE>
10
<PAGE>
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:
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
March 31, June 30,
2000 1999
---------- ----------
(in millions)
<S> <C> <C>
Items related to America Online include:
Merger, restructuring and other charges...................................... $ (5) $ (95)
Transition costs............................................................. -- (25)
Items related to Time Warner include:
Gain on sale or exchange of cable systems and investments.................... 1,504 795
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.................................................... $1,490 $ 890
======= ======
</TABLE>
The items above related to America Online are described more fully in
America Online's Quarterly Report on Form 10-Q for the nine months ended
March 31, 2000, as amended, 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 Quarterly Report on Form 10-Q for the three
months ended March 31, 2000 and 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, which is
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
<PAGE>
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2000
(in millions, except per share amounts, unaudited)
<TABLE>
<CAPTION>
AOL
Time Pro Forma Time Warner
AOL(i) Warner (j) Adjustments(k) Pro Forma
-------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Revenues................................................... $1,836 $ 6,549 $ -- $ 8,385
Cost of revenues/(1)/...................................... (937) (3,661) -- (4,598)
Selling, general and administrative/(1)/................... (471) (1,745) -- (2,216)
Amortization of goodwill and other intangible assets....... (20) (330) (1,760) (2,110)
Gain on sale or exchange of cable systems and investments.. -- 28 -- 28
------- -------- ----------- -----------
Business segment operating income (loss)(l)................ 408 841 (1,760) (511)
Interest and other, net.................................... 336 (808) -- (472)
Corporate expenses......................................... (27) (43) -- (70)
Minority interest.......................................... -- (54) -- (54)
------- -------- ----------- -----------
Income tax benefit (provision)............................. 717 (64) (1,760) (1,107)
Income (loss) before income taxes.......................... (280) (32) 380 68
------- -------- ----------- -----------
Income (loss) before extraordinary item.................... 437 (96) (1,380) (1,039)
Preferred dividend requirements............................ -- (5) -- (5)
------- -------- ----------- -----------
Income (loss) applicable to common shares before
extraordinary item....................................... $ 437 $ (101) $ (1,380) $ (1,044)
======= ======== =========== ===========
Income (loss) per common share before extraordinary item:
Basic.................................................. $ 0.19 $ (0.08) $ (0.25)
======= ======== ===========
Diluted................................................ $ 0.17 $ (0.08) $ (0.25)
======= ======== ===========
Average common shares:
Basic.................................................. 2,287 1,302 4,240
======= ======== ===========
Diluted................................................ 2,595 1,302 4,240
======= ======== ===========
___________________
/(1)/ Includes depreciation expense of:.................. $ 89 $ 308 $ -- $ 397
======= ======== =========== ===========
</TABLE>
See accompanying notes.
12
<PAGE>
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1999
(in millions, except per share amounts, unaudited)
<TABLE>
<CAPTION>
AOL
Time Pro Forma Time Warner
AOL(i) Warner(j) Adjustments(k) Pro Forma
------ --------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues..................................................... $ 5,718 $ 27,333 $ -- $ 33,051
Cost of revenues/(1)/........................................ (3,055) (14,943) -- (17,998)
Selling, general and administrative/(1)/..................... (1,572) (7,513) -- (9,085)
Amortization of goodwill and other intangible assets......... (68) (1,279) (7,046) (8,393)
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).................. 925 6,051 (7,046) (70)
Interest and other, net...................................... 814 (1,913) -- (1,099)
Corporate expenses........................................... (88) (163) -- (251)
Minority interest............................................ -- (475) -- (475)
------- -------- ---------- --------
Income (loss) before income taxes............................ 1,651 3,500 (7,046) (1,895)
Income tax benefit (provision)............................... (607) (1,540) 1,520 (627)
------- -------- ---------- --------
Income (loss) before extraordinary item...................... 1,044 1,960 (5,526) (2,522)
Preferred dividend requirements.............................. -- (52) -- (52)
------- -------- ---------- --------
Income (loss) applicable to common shares before
extraordinary item $ 1,044 $ 1,908 $ (5,526) $ (2,574)
======= ======== ========== ========
Income (loss) per common share before extraordinary item:
Basic................................................... $ 0.48 $ 1.51 $ (0.63)
======= ======== ========
Diluted................................................. $ 0.41 $ 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
======= ======== ========== ========
</TABLE>
See accompanying notes.
13
<PAGE>
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 three
months ended March 31, 2000 and 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 three
months ended March 31, 2000 and 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 three months ended March
31, 2000 and the year ended December 31, 1999 reflect:
. increases of $1.897 billion and $7.588 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 amortized on
a straight-line basis over a twenty-five year weighted-average period;
. decreases of $137 million and $542 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 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.
Three Months Year Ended
Ended March 31, December 31,
2000 1999
--------------- ------------
(in millions)
Pro forma EBITDA................... $1,996 $9,802
====== ======
Increase in pro forma EBITDA....... $ 28 $2,330
====== ======
Adjusted EBITDA.................... $1,968 $7,472
====== ======
14
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, December 31,
2000 1999
---------- -----------
(in millions)
<S> <C> <C>
Items related to America Online include:
Merger, restructuring and other charges.................. $ - $ (98)
Transition costs......................................... - (25)
Items related to Time Warner include:
Gain on sale or exchange of cable systems and
investments............................................ 28 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.................................. $ 28 $ 2,330
========== ===========
</TABLE>
The items above related to America Online are described more fully in America
Online's Quarterly Report on Form 10-Q for the nine months ended March 31, 2000,
as amended, 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
Quarterly Report on Form 10-Q for the three months ended March 31, 2000 and
Annual Report on Form 10-K for the year ended December 31, 1999. These filings
are incorporated herein by reference.
15
<PAGE>
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 March 31,
2000;
(B) Notes to the Pro Forma Consolidated Condensed Balance Sheet;
(C) Pro Forma Consolidated Condensed Statement of Operations for the
nine months ended March 31, 2000;
(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
three months ended March 31, 2000;
(G) Pro Forma Consolidated Condensed Statement of Operations for the
year ended December 31, 1999; and
(H) 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 nine months ended March 31, 2000, as amended.
16
<PAGE>
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: May 19, 2000
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit Page
No. Description of Exhibits Number
-- ----------------------- ------
<S> <C> <C>
23 Consent of Ernst & Young LLP, Independent Auditors. 19
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 nine months ended March 31, 2000, as amended.
</TABLE>
_______________
* Incorporated by reference.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated July 21, 1999,
except for Note 3, as to which the date is May 12, 2000, with respect to the
consolidated financial statements of America Online, Inc. for the three years
ended June 30, 1999, incorporated by reference as Exhibit 99 to its Form 10-Q/A
for the quarterly period ended March 31, 2000, incorporated by reference in the
Current Report on Form 8-K of Time Warner Inc. dated May 22, 2000. Such Form 8-K
is incorporated by reference in each of the following Time Warner Inc.
registration statements:
1. Registration Statement No. 333-11471 on Form S-4 of Time Warner Inc.
(formerly named TW Inc.);
2. Post-Effective Amendment No. 1 to Registration Statement No. 333-11471
on Form S-4 filed on Form S-8 and related prospectuses of Time Warner
Inc.;
3. Post-Effective Amendment No. 2 to Registration Statement No. 333-11471
on Form S-4 filed on Form S-8 and related prospectus of Time Warner
Inc.;
4. Post-Effective Amendment No. 3 to Registration Statement No. 333-11471
on Form S-4 filed on Form S-8 and related prospectus of Time Warner
Inc.;
5. Post-Effective Amendment No. 4 to Registration Statement No. 333-11471
on Form S-4 filed on Form S-8 and related prospectus of Time Warner
Inc.;
6. Post-Effective Amendment No. 5 to Registration Statement No. 333-11471
on Form S-4 filed on Form S-8 and related prospectuses of Time Warner
Inc.;
7. Post-Effective Amendment No. 1 to Registration Statement No. 333-14053
on Form S-8 and related prospectus of Time Warner Inc.;
8. Registration Statement No. 333-14611 on Form S-3 of Time Warner Inc.;
9. Registration Statement No. 333-27265 on Form S-8 and related
prospectus of Time Warner Inc.;
10. Registration Statement No. 333-39647 on Form S-3 of Time Warner Inc.;
11. Registration Statement No. 333-49139 on Form S-8 and related
prospectus of Time Warner Inc.;
12. Registration Statement No. 333-61207 on Form S-3 of Time Warner Inc.
(and Turner Broadcasting System, Inc. and Time Warner Companies, Inc.)
(constitutes a post-effective amendment to and prospectus also relates
to Registration Statement No. 333-44255);
13. Registration Statement No. 333-69161 on Form S-8 and related
prospectus of Time Warner Inc.;
14. Registration Statement No. 33-61497 on Form S-8 and related prospectus
of Time Warner Companies, Inc.;
15. Registration Statement No. 333-37827 on Form S-3 of Time Warner Inc.
(and Registration Statement No. 333-37827-01 of Time Warner Companies,
Inc.) (constitutes a post-effective amendment to and prospectus also
relates to Registration Statement No. 333-32813);
16. Registration Statement No. 333-75409 on Form S-8 and related
prospectus of Time Warner Inc.;
17. Registration Statement No. 333-79253 on Form S-8 and related
prospectus of Time Warner Inc.;
18. Registration Statement No. 333-79263 on Form S-8 and related
prospectus of Time Warner Inc.;
19. Registration Statement No. 333-93221 on Form S-8 and related
prospectus of Time Warner Inc.;
20. Registration Statement No. 333-30532 on Form S-3 of Time Warner Inc.;
21. Registration Statement No. 333-36370 on Form S-8 and related
prospectus of Time Warner Inc.; and
22. Registration Statement No. 333-36446 on Form S-3 of Time Warner Inc.
/s/ Ernst & Young LLP
McLean, Virginia
May 19, 2000
