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 23, 2000
AMERICA ONLINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-12143 54-1322110
- --------------------------- ----------- -------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
22000 AOL Way, Dulles, Virginia 20166-9323
------------------------------------------
(Address of principal executive offices) (zip code)
(703) 265-1000
------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Pro Forma Consolidated Condensed Financial Statements
As described more fully in America Online, Inc.'s ("America Online") Current
Report on Form 8-K dated January 10, 2000, America Online and Time Warner Inc.
("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 statements 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, which are 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 March
31, 2000, as amended, and its Annual Report on Form 10-K for the year ended June
30, 1999, 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 have formed a new company called AOL Time Warner. AOL Time
Warner has formed 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.
As a result of the Merger, it is anticipated that the former stockholders of
America Online will have an approximate 55% interest in AOL Time Warner and that
the former stockholders 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. America Online
agreed to acquire MapQuest.com, Inc., and Time Warner has 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 , they 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.
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 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:
Nine Months Three Months
Ended Year Ended Ended Year Ended
Weighted-average useful March 31, June 30, March 31, December 31,
life 2000 1999 2000 1999
----------------------- ----------- ---------- ------------ ------------
(in millions)
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)
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,"
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
timing of revenue recognition and its classification in financial statements.
While America Online's and Time Warner's existing revenue policies regarding the
timing of revenue recognition 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 revenue, 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 noncash 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 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 $0.01 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.
<PAGE>
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
March 31, 2000
(in millions, unaudited)
AOL
Time Pro Forma Time Warner
AOL(a) Warner(b) Adjustments(c) Pro Forma
------- --------- -------------- -----------
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
======= ======= ======== ========
- --------
(/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.
<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 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 was 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:
. goodwill in the amount of $94.705 billion;
. other intangible assets in the amount of $95 billion; and
. deferred income taxes in the amount of $38 billion.
<PAGE>
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET--(Continued)
(unaudited)
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:
Calculation of Purchase Price:
(in millions)
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
========
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>
Elimination
Issuance of Elimination of Allocation of Elimination of 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)
Goodwill and other
<S> <C> <C> <C> <C> <C> <C> <C>
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>
<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)
AOL
Time Pro Forma Time Warner
AOL(d) Warner (e) Adjustments(f) Pro Forma
------ ---------- -------------- -----------
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 ex-
pense of:...................... $ 211 $ 954 $ -- $ 1,165
====== ======= ======= =======
See accompanying notes.
<PAGE>
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) (14,638) -- (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 agreement.. -- 215 -- 215
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 ex-
pense of:..................... $ 233 $ 1,230 $ -- $ 1,463
======= ======== ======= ========
See accompanying notes.
<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.
Nine Months Year Ended
Ended March June 30,
31, 2000 1999
----------- ----------
(in millions)
Pro forma EBITDA................................... $7,500 $7,749
====== ======
Increase in pro forma EBITDA....................... $1,490 $ 890
====== ======
Adjusted EBITDA.................................... $6,010 $6,859
====== ======
The increase in pro forma EBITDA includes the following significant and
nonrecurring items:
<TABLE>
Nine Months
Ended Year Ended
March 31, June 30,
2000 1999
-------------- -------------
(in millions)
Items related to America Online include:
<S> <C> <C>
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 quarter 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 quarter 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.
<PAGE>
AOL TIME WARNER INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS-- (Continued)
(unaudited)
(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 the entertainment group for the six-month period ended
December 31, 1998. During this period, Time Warner accounted for the
entertainment group under the equity method of accounting. Operating
results for the year ended June 30, 1999 have been derived from the
compilation of:
. 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;
. 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
. 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. A complete description of Time
Warner's consolidation of the entertainment group and the nature of the pro
forma adjustments are included in Time Warner's Current Report on Form 8-K dated
August 3, 1999.
<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)
AOL
Time Pro Forma Time Warner
AOL(i) Warner(j) Adjustments(k) Pro Forma
------ --------- -------------- -----------
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
====== ======= ======= =======
- --------
See accompanying notes.
<PAGE>
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) (14,943) -- (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)(/1/)............ 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 ex-
pense of:..................... $ 248 $ 1,231 $ -- $ 1,479
======= ======== ======= ========
See accompanying notes.
<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 these 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 historical 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
Ended Year 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
====== ======
The increase in pro forma EBITDA includes the following significant and
nonrecurring items:
<TABLE>
Three Months
Ended Year Ended
March 31, December 31,
2000 1999
------------- ------------
(in millions)
Items related to America Online include:
<S> <C> <C>
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 quarter 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 quarter 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.
<PAGE>
(b) Unaudited Pro forma Consolidated Condensed Financial Statements:
(i) America Online, 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 Statements 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 Statements of Operations for the
year ended December 31, 1999;
(G) 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 Time Warner Inc., incorporated
by reference from its (i) Annual Report on Form 10-K for the year
ended December 31, 1999; (ii) Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000; (iii) Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999; (iv) Current
Report on Form 8-K dated February 2, 2000; and (v) Current Report on
Form 8-K dated August 3, 1999.
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit
Number Description of Exhibits
- ------- --------------------------------------------------------------------
23 Consent of Ernst & Young LLP, Independent Auditors.
99(a) Exhibit 99(a): Financial Statements of Time Warner Inc.,
incorporated by reference from its *
(i) Annual Report on Form 10-K for the year ended December 31,
1999;
(ii) Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2000;
(iii)Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999;
(iv) Current Report on Form 8-K dated February 2, 2000; and
(v) Current Report on Form 8-K dated August 3, 1999.
- ---------------
* Incorporated by reference.
<PAGE>
AMERICA ONLINE, INC.
SIGNATURES
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.
AMERICA ONLINE, INC.
DATE: May 23, 2000 SIGNATURE: /s/ Stephen M. Case
--------------------
Stephen M. Case
Chairman of the Board and Chief
Executive Officer
DATE: May 23, 2000 SIGNATURE: /s/ J. Michael Kelly
---------------------
J. Michael Kelly
Senior Vice President and Chief
Financial Officer
Exhibit 23
Consent Of Independent Auditors
We consent to the incorporation by reference of our reports dated February 2,
2000, with respect to the consolidated financial statements, schedule and
supplementary information of Time Warner Inc. ("Time Warner") and the
consolidated financial statements and schedule of Time Warner Entertainment
Company, L.P. included in Time Warner's Annual Report on Form 10-K for the year
ended December 31, 1999, incorporated by reference in the Current Report on Form
8-K of America Online, Inc. dated May 23, 2000. Such Form 8-K is incorporated by
reference in each of the following America Online, Inc. registration statements:
1) No. 33-46607 15) No. 333-07603 29) No. 333-74523 43) No. 333-79489
2) No. 33-48447 16) No. 333-22027 30) No. 333-74525 44) No. 333-79797
3) No. 33-78066 17) No. 333-46633 31) No. 333-74527 45) No. 333-82123
4) No. 33-86392 18) No. 333-46635 32) No. 333-74529 46) No. 333-83409
5) No. 33-86394 19) No. 333-46637 33) No. 333-74531 47) No. 333-85337
6) No. 33-86396 20) No. 333-57143 34) No. 333-74533 48) No. 333-85343
7) No. 33-90174 21) No. 333-57153 35) No. 333-74535 49) No. 333-85345
8) No. 33-91050 22) No. 333-60623 36) No. 333-74537 50) No. 333-94253
9) No. 33-94000 23) No. 333-60625 37) No. 333-74539 51) No. 333-94255
10) No. 33-94004 24) No. 333-68605 38) No. 333-74541 52) No. 333-94259
11) No. 333-00416 25) No. 333-68631 39) No. 333-74543 53) No. 333-95013
12) No. 333-02460 26) No. 333-68599 40) No. 333-76725 54) No. 333-30184
13) No. 333-07163 27) No. 333-72499 41) No. 333-76733
14) No. 333-07559 28) No. 333-74521 42) No. 333-76743
/s/ Ernst &Young LLP
New York, New York
May 19, 2000
