<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): April 3, 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 30th fiscal-year basis,
which is consistent with America Online's historical fiscal year-end and (2) a
December 31st calendar-year basis, which is consistent with both Time Warner's
historical fiscal year-end and that of AOL Time Warner going forward. Management
believes that it is meaningful to present pro forma financial information based
on the calendar year-end of the combined company to facilitate an analysis of
the pro forma effects of the Merger.
The following pro forma consolidated condensed balance sheet of AOL Time
Warner at December 31, 1999 gives effect to the Merger as if it occurred as of
that date. On a June 30th fiscal-year basis, the pro forma consolidated
condensed statements of operations of AOL Time Warner for the six months ended
December 31, 1999 and the year ended June 30, 1999 give effect to the Merger as
if it occurred as of July 1, 1998. On a December 31st calendar-year basis, the
pro forma consolidated condensed statement of operations of AOL Time Warner for
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 statements
of operations of AOL Time Warner for the year ended June 30, 1999 gives effect
to Time Warner's consolidation of the operating results of Time Warner
Entertainment Company, L.P. ("TWE") and certain related companies, which were
formerly accounted for under the equity method of accounting, as described more
fully in Time Warner's Current Report on Form 8-K dated August 3, 1999, which is
incorporated herein by reference.
The pro forma consolidated condensed financial statements have been derived
from, and should be read in conjunction with, the historical consolidated
financial statements, including the notes thereto, of each of America Online,
Time Warner and TWE. For America Online, those financial statements are included
in America Online's Quarterly Report on Form 10-Q for the quarter ended December
31, 1999 and its Annual Report on Form 10-K for the year ended June 30, 1999,
which have been adjusted for a 2-for-1 common stock split in November 1999. For
Time Warner and TWE, those financial statements are included in Time Warner's
Annual Report on Form 10-K for the year ended December 31, 1999, which 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
<PAGE>
common stock. Lastly, each issued and outstanding share of capital stock of
America Online will be converted into one share of an identical series of
capital stock of AOL Time Warner.
As a result of the Merger, the former shareholders of AOL will have an
approximate 55% interest in AOL Time Warner and the former shareholders of Time
Warner will have an approximate 45% interest in AOL Time Warner, expressed
on a fully diluted basis. The Merger is expected to be accounted for by AOL Time
Warner as an acquisition of Time Warner under the purchase method of accounting
for business combinations.
Pro forma adjustments for the merger include:
. the issuance of approximately 1.9 billion shares of AOL Time Warner
common stock and AOL Time Warner series LMCN-V common stock in exchange
for all of the 1.3 billion outstanding shares of Time Warner common
stock and series LMCN-V common stock;
. the issuance of approximately 8.4 million shares of AOL Time Warner
preferred stock in exchange for all of the 8.4 million outstanding
shares of Time Warner preferred stock;
. the issuance of options to purchase approximately 204 million shares of
AOL Time Warner common stock in exchange for all of the outstanding
options to purchase 136 million shares of Time Warner common stock; and
. the incurrence of approximately $300 million of transaction costs by
America Online and Time Warner, including legal, investment banking and
registration fees.
No pro forma adjustments are necessary to reflect the merger of America
Online into a separate wholly owned subsidiary of AOL Time Warner because
America Online's net assets will be recorded at their historical cost basis and
the exchange ratio for America Online common stock is one to one. 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, such transactions have not been reflected in these pro forma financial
statements.
Management expects that the strategic benefits of the merger will result in
incremental revenue opportunities for the combined company. Those opportunities
include, but are not limited to, the ability to cross-promote the combined
company's products and services and the ability to offer consumers expanded
broadband and online services. However, such incremental revenues have not been
reflected in the accompanying pro forma consolidated condensed statements of
operations of AOL Time Warner.
The merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.
Under the purchase method of accounting, the estimated cost of approximately
$146 billion to acquire Time Warner, including transaction costs, will be
allocated to its underlying net assets in proportion to their respective fair
values. Any excess of the purchase price over the estimated fair value of the
net assets acquired will be recorded as goodwill. As more fully described in
the notes to the pro forma consolidated condensed financial statements, a
preliminary allocation of the excess of the purchase price, including
transaction costs, over the book value of the net assets to be acquired has
been made to goodwill and other intangible assets. Management expects that the
other intangible assets will include cable television franchises, subscriber
lists, brand names, trademarks, music copyrights and catalogue, and film
libraries. These items are expected to have amortization periods ranging from 3
to 40 years. At this time, the work needed to provide the basis for estimating
these fair values, and amortization periods, has not been completed. As a
result, the final allocation of the excess of purchase price over the book
value of the net assets acquired could differ materially. The pro forma
consolidated condensed financial statements reflect a preliminary allocation to
goodwill and other intangible assets assuming a weighted-average amortization
period of twenty-five years. The final purchase price allocation may result in
a different weighted-average amortization period for intangible assets than
that presented in these pro forma consolidated condensed financial statements.
Accordingly, a change in the amortization period would impact the amount of
annual amortization expense. The following table shows the effect on pro forma
loss applicable to common shares for a range of weighted-average useful lives:
<TABLE>
<CAPTION>
Six Months Ended Year Ended Year Ended
December 31, June 30, December 31,
Weighted-average useful life 1999 1999 1999
---------------------------- ---------------- ---------- ------------
<S> <C> <C> <C>
Twenty-five years
(as disclosed in these pro forma
financial statements)............. $(1,091) $(4,330) $(2,593)
Twenty years....................... $(1,850) $(5,848) $(4,111)
Thirty years....................... $ (585) $(3,319) $(1,582)
</TABLE>
AOL Time Warner will periodically review the carrying value of the acquired
goodwill and other intangible assets for acquired businesses to determine
whether an impairment may exist. AOL Time Warner will consider relevant cash
flow information, including estimated future operating results, trends and
other available information, in assessing whether the carrying value of
goodwill and other intangible assets can be recovered. If it is determined that
the carrying value of goodwill and other intangible assets will not be
recovered from the undiscounted future cash flows of acquired businesses, the
carrying value of such goodwill and other intangible assets would be considered
impaired and reduced by a charge to operations in the amount of the impairment.
An impairment charge is measured as any deficiency in the amount of estimated
undiscounted cash flows of acquired businesses available to recover the
carrying value related to goodwill and other intangible assets.
Revenue Classification Changes
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
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.
<PAGE>
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
December 31, 1999
(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.............. $ 2,535 $ 1,284 $ -- $ 3,819
Other current assets.............. 1,281 8,577 -- 9,858
------- ------- -------- --------
Total current assets............ 3,816 9,861 -- 13,677
Noncurrent inventories............ -- 4,201 -- 4,201
Investments....................... 4,902 2,096 -- 6,998
Property, plant and equipment,
net.............................. 890 8,728 -- 9,618
Goodwill and other intangibles,
net.............................. 409 24,712 174,278 199,399
Other assets...................... 284 1,641 -- 1,925
------- ------- -------- --------
Total assets.................... $10,301 $51,239 $174,278 $235,818
======= ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities......... $ 2,162 $ 9,670 $ 300 $ 12,132
Long-term debt and other
obligations(/1/)................. 1,586 19,901 -- 21,487
Deferred income taxes............. 10 4,234 34,765 39,009
Other long-term liabilities....... 292 4,535 -- 4,827
Minority interests................ -- 3,186 -- 3,186
Shareholders' Equity
Preferred stock................... -- 1 -- 1
Series LMCN-V common stock........ -- 1 -- 1
Common stock...................... 23 12 6 41
Paid-in capital................... 4,165 12,998 135,908 153,071
Accumulated earnings (deficit).... 596 (3,350) 3,350 596
Accumulated other comprehensive
income........................... 1,467 51 (51) 1,467
------- ------- -------- --------
Total shareholders' equity...... 6,251 9,713 139,213 155,177
------- ------- -------- --------
Total liabilities and
shareholders' equity........... $10,301 $51,239 $174,278 $235,818
======= ======= ======== ========
</TABLE>
- --------
(/1/)For Time Warner, includes $1.243 billion of borrowings against future
stock option proceeds and $575 million of mandatorily redeemable preferred
securities of subsidiaries.
See accompanying notes.
<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 December
31, 1999.
(b) Reflects the historical financial position of Time Warner at December 31,
1999.
(c) Pro forma adjustments to record the merger as of December 31, 1999 reflect:
. an increase in equity of $130.758 billion relating to the issuance of
1.930 billion shares of AOL Time Warner common stock, including the
issuance of 171.2 million shares relating to the conversion of 114.1
million outstanding shares of Time Warner's series LMCN-V common stock
into an identical class of AOL Time Warner series LMCN-V common stock,
$0.01 par value per share, in exchange for approximately 1.287 billion
outstanding shares of Time Warner common stock, based on an exchange
ratio of 1.5 to 1. The AOL Time Warner common stock to be issued was
valued based on a price per share of $67.75, which is the average market
price of the America Online common stock for a few days before and after
the date the merger was announced;
. an increase in equity of $3.557 billion relating to the issuance of
approximately 8.404 million shares of AOL Time Warner preferred stock,
$0.10 par value per share, in exchange for all outstanding shares of
Time Warner preferred stock. The shares of AOL Time Warner preferred
stock to be issued, which will each be convertible into 6.24792 shares
of AOL Time Warner common stock, were valued based on their common
equivalent value of $423.30 per share;
. an increase in equity of $11.376 billion relating to the issuance of
options to purchase 203.802 million shares of AOL Time Warner common
stock in exchange for all of the 135.868 million outstanding options to
purchase shares of Time Warner common stock, based on a weighted-average
fair value of $55.82 for all options. The fair value of the options was
determined using the Black-Scholes option-pricing model and was based on
the following weighted-average assumptions: expected volatility--45.5%;
expected lives--5 years; a risk-free interest rate--5.75%; and expected
dividend yield--0%;
. an increase in accrued expenses of approximately $300 million relating
to the incurrence of transaction costs by America Online and Time
Warner, including legal, investment banking and registration fees;
. the elimination of approximately $15.458 billion of Time Warner's pre-
existing goodwill;
. a reduction of $3.235 billion in deferred income tax liabilities and a
corresponding increase in paid-in capital relating to the elimination of
America Online's deferred tax valuation allowance against stock option-
related tax benefits that will become realizable as a direct result of
the merger;
. a decrease in stockholders' equity of $9.713 billion relating to the
elimination of Time Warner's historical shareholders' equity; and
. the preliminary allocation of the excess of the $145.991 billion
purchase price, including transaction costs, over the book value of the
net assets acquired to:
. goodwill in the amount of $94.736 billion;
. other intangible assets in the amount of $95 billion; and
. deferred income taxes in the amount of $38 billion.
<PAGE>
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:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Common stock............................. $130,758
Preferred stock.......................... 3,557
Stock options............................ 11,376
Transaction costs........................ 300
--------
Total purchase price.................... $145,991
========
Allocation of Purchase Price:
<CAPTION>
(in millions)
<S> <C>
Assets:
Time Warner's historical assets........ $ 51,239
Eliminate Time Warner's historical
goodwill.............................. (15,458)
New goodwill........................... 94,736
Other intangible assets................ 95,000
Liabilities:
Time Warner's historical liabilities... (41,526)
Deferred income taxes.................. (38,000)
--------
Total purchase price.................... $145,991
========
</TABLE>
A reconciliation of the above adjustments to reflect the merger is set forth
below:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C>
Goodwill and other
intangibles, net....... $ -- $ -- $(15,458) $189,736 $ -- $ -- $174,278
Total current
liabilities............ -- 300 -- -- -- -- 300
Deferred income taxes... -- -- -- 38,000 (3,235) -- 34,765
Preferred stock......... 1 -- -- -- -- (1) --
Series LMCN-V common
stock.................. 1 -- -- -- -- (1) --
Common stock............ 18 -- -- -- -- (12) 6
Paid in capital......... 145,671 -- -- -- 3,235 (12,998) 135,908
Accumulated earnings
(deficit).............. -- -- -- -- -- 3,350 3,350
Accumulated other
comprehensive income... -- -- -- -- -- (51) (51)
</TABLE>
<PAGE>
AOL TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Six Months Ended December 31, 1999
(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........................ $3,088 $14,711 $ -- $17,799
Cost of revenues(/1/)........... (1,621) (8,108) -- (9,729)
Selling, general and
administrative(/1/)............ (830) (4,008) -- (4,838)
Amortization of goodwill and
other intangible assets........ (35) (671) (3,519) (4,225)
Gain on sale or exchange of
cable systems and investments.. -- 1,476 -- 1,476
Gain on sale of Canal
Satellite...................... -- 97 -- 97
Merger, restructuring and other
charges........................ (5) (106) -- (111)
------ ------- ------- -------
Business segment operating
income (loss)(g)............... 597 3,391 (3,519) 469
Interest and other, net......... 197 (1,031) -- (834)
Minority interest............... -- (145) -- (145)
Corporate expenses.............. (48) (83) -- (131)
------ ------- ------- -------
Income (loss) before income
taxes.......................... 746 2,132 (3,519) (641)
Income tax benefit (provision).. (291) (903) 760 (434)
------ ------- ------- -------
Income (loss) before
extraordinary item............. 455 1,229 (2,759) (1,075)
Preferred dividend
requirements................... -- (16) -- (16)
------ ------- ------- -------
Income (loss) applicable to
common shares before
extraordinary item............. $ 455 $ 1,213 $(2,759) $(1,091)
====== ======= ======= =======
Income (loss) per common share
before extraordinary item:
Basic......................... $ 0.20 $ 0.94 $ (0.26)
====== ======= =======
Diluted....................... $ 0.18 $ 0.90 $ (0.26)
====== ======= =======
Average common shares:
Basic......................... 2,240 1,288 4,172
====== ======= =======
Diluted....................... 2,592 1,395 4,172
====== ======= =======
- --------
(/1/) Includes depreciation ex-
pense of:...................... $ 122 $ 646 $ -- $ 768
====== ======= ======= =======
</TABLE>
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)
<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) (14,609) -- (17,266)
Selling, general and
administrative(/1/)............ (1,431) (7,162) -- (8,593)
Amortization of goodwill and
other intangible assets........ (65) (1,291) (7,056) (8,412)
Gain on sale or exchange of
cable systems and investments.. -- 795 -- 795
Gain on early termination of
video distribution agreement... -- 215 -- 215
Merger, restructuring and other
charges........................ (95) -- -- (95)
------ -------- ------- --------
Business segment operating
income (loss)(g)............... 529 4,430 (7,056) (2,097)
Interest and other, net......... 638 (2,050) -- (1,412)
Minority interest............... -- (485) -- (485)
Corporate expenses.............. (71) (164) -- (235)
------ -------- ------- --------
Income (loss) before income
taxes.......................... 1,096 1,731 (7,056) (4,229)
Income tax benefit (provision).. (334) (871) 1,520 315
------ -------- ------- --------
Net income (loss)............... 762 860 (5,536) (3,914)
Preferred dividend
requirements................... -- (416) -- (416)
------ -------- ------- --------
Net income (loss) applicable to
common shares.................. $ 762 $ 444 $(5,536) $ (4,330)
====== ======== ======= ========
Net income (loss) per common
share:
Basic......................... $ 0.37 $ 0.36 $ (1.10)
====== ======== ========
Diluted....................... $ 0.30 $ 0.36 $ (1.10)
====== ======== ========
Average common shares:
Basic......................... 2,081 1,231 3,928
====== ======== ========
Diluted....................... 2,555 1,231 3,928
====== ======== ========
- --------
(/1/) Includes depreciation ex-
pense of:...................... $ 233 $ 1,230 $ -- $ 1,463
====== ======== ======= ========
</TABLE>
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 six
months ended December 31, 1999 and the year ended June 30, 1999.
Outstanding share and per share information for America Online have been
restated to reflect a 2-for-1 common stock split which occurred in
November 1999. Finally, various reclassifications have been made to
conform to AOL Time Warner's combined financial statement presentation.
(e) Reflects the historical operating results of Time Warner for the six
months ended December 31, 1999, including various reclassifications that
have been made to conform to AOL Time Warner's combined financial
statement presentation.
(f) Pro forma adjustments to record the merger for the six months ended
December 31, 1999 and the year ended June 30, 1999 reflect:
. increases of $3.795 billion and $7.589 billion, respectively, in
amortization of goodwill and other intangible assets relating to the
amortization of the excess of the purchase price to acquire Time Warner
over the book value of its net assets acquired, which has been allocated
to goodwill and other intangible assets, and are each amortized on a
straight-line basis over a twenty-five year weighted-average period;
. decreases of $276 million and $533 million, respectively, in
amortization of goodwill and other intangible assets relating to the
elimination of Time Warner's amortization of pre-existing goodwill; and
. increases of $760 million and $1.520 billion, respectively, in income
tax benefits, provided at a 40% tax rate, on the aggregate pro forma
reduction in pretax income before goodwill amortization.
In addition, pro forma net income (loss) per common share has been adjusted
to reflect the issuance of additional shares of AOL Time Warner common stock
in the merger, based on Time Warner's historical weighted average shares
outstanding for the periods presented and an exchange ratio of 1.5 to 1.
Because the effect of stock options and other convertible securities would
be antidilutive to AOL Time Warner, dilutive per share amounts on a pro
forma basis are the same as basic per share amounts.
(g) EBITDA consists of business segment operating income (loss) before
depreciation and amortization. AOL Time Warner considers EBITDA an
important indicator of the operational strength and performance of its
businesses, including the ability to provide cash flows to service debt
and fund capital expenditures. EBITDA, however, should not be considered
an alternative to operating or net income as an indicator of the
performance of AOL Time Warner, or as an alternative to cash flows from
operating activities as a measure of liquidity, in each case determined in
accordance with generally accepted accounting principles. This definition
of EBITDA may not be comparable to similarly titled measures reported by
other companies.
<PAGE>
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>
Six Months
Ended Year Ended
December 31, June 30,
1999 1999
------------ ----------
<S> <C> <C>
Pro forma EBITDA.................................. $5,462 $7,778
====== ======
Increase in pro forma EBITDA...................... $1,432 $ 890
====== ======
Adjusted EBITDA................................... $4,030 $6,888
====== ======
</TABLE>
The increase in pro forma EBITDA includes the following significant and
nonrecurring items:
Six Months
Ended Year Ended
December 31, June 30,
1999 1999
------------ ----------
Items related to America Online include:
Merger, restructuring and other charges $(35) $(95)
Transition costs -- (25)
Items related to Time Warner include:
Gain on sale or exchange of cable systems
and investments 1,476 795
Write-down of retail store assets (106) --
Gain on sale of interest in CanalSatellite 97 --
Gain on early termination of long-term, home
video distribution agreement -- 215
------------ ----------
Increase in pro forma EBITDA $1,432 $ 890
============ ==========
The items above related to America Online are described more fully in
America Online's Quarterly Report on Form 10-Q for the six months ended
December 31, 1999 and Annual Report on Form 10-K for the year ended
June 30, 1999. The above items related to Time Warner are described more
fully in Time Warner's Annual Report on Form 10-K for the year ended
December 31, 1999, which 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
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) (14,940) -- (17,995)
Selling, general and
administrative(/1/)............. (1,602) (7,513) -- (9,115)
Amortization of goodwill and
other intangible assets......... (68) (1,298) (7,047) (8,413)
Gain on sale or exchange of cable
systems and investments......... -- 2,247 -- 2,247
Gain on early termination of
video distribution agreement.... -- 215 -- 215
Gain on sale of interest in
CanalSatellite.................. -- 97 -- 97
Merger, restructuring and other
charges......................... (98) (106) -- (204)
------ ------- ------- --------
Business segment operating income
(loss)(/1/)..................... 895 6,035 (7,047) (117)
Interest and other, net.......... 814 (1,897) -- (1,083)
Minority interest................ -- (475) -- (475)
Corporate expenses............... (88) (163) -- (251)
------ ------- ------- --------
Income (loss) before income
taxes........................... 1,621 3,500 (7,047) (1,926)
Income tax benefit (provision)... (595) (1,540) 1,520 (615)
------ ------- ------- --------
Income (loss) before
extraordinary item.............. 1,026 1,960 (5,527) (2,541)
Preferred dividend requirements.. -- (52) -- (52)
------ ------- ------- --------
Income (loss) applicable to
common shares before
extraordinary item.............. $1,026 $ 1,908 $(5,527) $ (2,593)
====== ======= ======= ========
Income (loss) per common share
before extraordinary item:
Basic.......................... $ 0.47 $ 1.51 $ (0.63)
====== ======= ========
Diluted........................ $ 0.40 $ 1.43 $ (0.63)
====== ======= ========
Average common shares:
Basic.......................... 2,189 1,267 4,090
====== ======= ========
Diluted........................ 2,587 1,398 4,090
====== ======= ========
- --------
(/1/) Includes depreciation ex-
pense of:....................... $ 248 $ 1,231 $ -- $ 1,479
====== ======= ======= ========
</TABLE>
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 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 year ended
December 31, 1999, including various reclassifications that have been made
to conform to AOL Time Warner's combined financial statement presentation.
(k) Pro forma adjustments to record the merger for the year ended December 31,
1999 reflect:
. an increase of $7.589 billion in amortization of goodwill and other
intangible assets relating to the amortization of the excess of the
purchase price to acquire Time Warner over the book value of its net
assets acquired, which has been allocated to goodwill and other
intangible assets and are amortized on a straight-line basis over a
twenty-five year weighted-average period;
. a decrease of $542 million in amortization of goodwill and other
intangible assets relating to the elimination of Time Warner's
amortization of pre-existing goodwill; and
. an increase of $1.520 billion in income tax benefits, provided at a 40%
tax rate, on the aggregate pro forma reduction in pretax income before
goodwill amortization.
In addition, pro forma net income (loss) per common share has been adjusted
to reflect the issuance of additional shares of AOL Time Warner common
stock in the merger, based on Time Warner's historical weighted average
shares outstanding for the periods presented and an exchange ratio of 1.5
to 1. Because the effect of stock options and other convertible securities
would be antidilutive to AOL Time Warner, dilutive per share amounts on a
pro forma basis are the same as basic per share amounts.
(l) EBITDA consists of business segment operating income (loss) before
depreciation and amortization. AOL Time Warner considers EBITDA an
important indicator of the operational strength and performance of its
businesses, including the ability to provide cash flows to service debt and
fund capital expenditures. EBITDA, however, should not be considered an
alternative to operating or net income as an indicator of the performance
of AOL Time Warner, or as an alternative to cash flows from operating
activities as a measure of liquidity, in each case determined in accordance
with generally accepted accounting principles. This definition of EBITDA
may not be comparable to similarly titled measures reported by other
companies.
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Pro forma EBITDA............................................. $9,775
======
Increase in pro forma EBITDA................................. $2,300
======
Adjusted EBITDA.............................................. $7,475
======
</TABLE>
The increase in pro forma EBITDA includes the following significant and
nonrecurring items:
Year Ended
December 31,
1999
----------
Items related to America Online include:
Merger, restructuring and other charges $ (128)
Transition costs (25)
Items related to Time Warner include:
Gain on sale or exchange of cable systems
and investments 2,247
Gain on early termination of long-term, home
video distribution agreement 215
Gain on sale of interest in CanalSatellite 97
Write-down of retail store assets (106)
----------
Increase in pro forma EBITDA $2,300
==========
The items above related to America Online are described more fully in
America Online's Quarterly Report on Form 10-Q for the six months ended
December 31, 1999 and Annual Report on Form 10-K for the year ended
June 30, 1999. The above items related to Time Warner are described more
fully in Time Warner's Annual Report on Form 10-K for the year ended
December 31, 1999, which 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 December 31,
1999;
(B) Notes to the Pro Forma Consolidated Condensed Balance Sheet
(C) Pro Forma Consolidated Condensed Statements of Operations for the
six months ended December 31, 1999;
(D) Pro Forma Consolidated Condensed Statement of Operations for the year
ended June 30, 1999;
(E) Notes to Pro Forma Consolidated Condensed Statements of Operations;
(F) Pro Forma Consolidated Condensed 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) Current Report on Form 10-Q for the
quarterly period ended September 30, 1999; (iii) Current Report on
Form 8-K dated February 2, 2000; and (iv) Current Report on Form 8-K
dated August 3, 1999.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit Page
No. Description of Exhibits Number
- ------- ----------------------- -----------
<S> <C> <C>
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) Current Report on
Form 10-Q for the quarterly period end September 30, 1999; (iii) Current Report on Form 8-K
dated February 2, 2000; and (iv) Current Report on Form 8-K dated August 3, 1999.
</TABLE>
_______________
* Incorporated by reference.
<PAGE>
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 April 3, 2000. Such Form 8-K is incorporated
by reference in each of the following America Online, Inc. registration
statements:
<TABLE>
<S> <C> <C> <C>
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
13) No. 333-07163 27) No. 333-72499 41) No. 333-76733
14) No. 333-07559 28) No. 333-74521 42) No. 333-76743
</TABLE>
/s/ ERNST & YOUNG LLP
New York, New York
March 28, 2000
