SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended March 31, 2001 or
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934 for the transition period from _____________ to ______________ .
Commission file number 1-15062
-------
AOL TIME WARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4099534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Description of Class as of April 30, 2001
-------------------- -----------------------
Common Stock - $.01 par value 4,259,406,654
Series LMCN-V Common Stock - $.01 par value 171,185,826
AOL TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.
This Amendment No. 1 to the AOL Time Warner Inc. Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2001 is being filed to correct a
typographical error that occurred in two places in the initial filing on
May 15, 2001 due to a printer's error. The first place is in the "AOL Time
Warner Inc. Management's Discussion and Analysis of Results of Operations and
Financial Condition--Investment in Time Warner Entertainment Company, L.P." and
the second place is in the "Time Warner Entertainment Company, L.P. Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Description of Business."
INDEX TO FORM 10-Q/A
Page
--------------------
AOL Time
Warner TWE
------ ---
PART I. FINANCIAL INFORMATION
Management's discussion and analysis of results of operations and financial condition..... 1 37
Consolidated balance sheet at March 31, 2001 and December 31, 2000........................ 14 44
Consolidated statement of operations for the three months ended
March 31, 2001 and 2000.............................................................. 15 45
Consolidated statement of cash flows for the three months ended March 31, 2001
and 2000............................................................................. 16 46
Consolidated statement of shareholders' equity and partnership capital.................... 17 47
Notes to consolidated financial statements................................................ 18 48
Supplementary information................................................................. 31
PART II. OTHER INFORMATION.................................................................... 57
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Description of Business
AOL Time Warner Inc. ("AOL Time Warner" or the "Company") is the
world's first fully integrated, Internet-powered media and communications
company. The Company was formed in connection with the merger of America Online,
Inc. ("America Online") and Time Warner Inc. ("Time Warner") which was
consummated on January 11, 2001 (the "Merger"). As a result of the Merger,
America Online and Time Warner each became a wholly owned subsidiary of AOL Time
Warner.
The Merger was accounted for by AOL Time Warner as an acquisition of
Time Warner under the purchase method of accounting for business combinations.
Under the purchase method of accounting, the estimated cost of approximately
$147 billion to acquire Time Warner, including transaction costs, was allocated
to its underlying net assets based on their respective estimated fair values.
Any excess of the purchase price over estimated fair values of the net assets
acquired was recorded as goodwill. The financial results for Time Warner have
been included in AOL Time Warner's results since January 1, 2001, as permitted
under generally accepted accounting principles.
As part of the integration of Time Warner's businesses into AOL Time
Warner's operating structure, management is pursuing various initiatives to
enhance efficiencies. Such initiatives, some of which have already been
implemented, include the consolidation of certain duplicative administrative and
operational functions and the restructuring of certain under-performing assets.
For additional information on the Merger and the Company's restructuring
initiatives, see Notes 1 and 2, respectively, to the accompanying consolidated
financial statements.
AOL Time Warner classifies its business interests into six fundamental
areas: AOL, consisting principally of interactive services, Web brands,
Internet technologies and electronic commerce services; Cable, consisting
principally of interests in cable television systems; Filmed Entertainment,
consisting principally of interests in filmed entertainment and television
production; Networks, consisting principally of interests in cable television
and broadcast network programming; Music, consisting principally of interests in
recorded music and music publishing; and Publishing, consisting principally of
interests in magazine publishing, book publishing and direct marketing.
Investment in Time Warner Entertainment Company, L.P.
A majority of AOL Time Warner's interests in filmed entertainment,
television production and cable television systems, and a portion of its
interests in cable television and broadcast network programming, are held
through Time Warner Entertainment Company, L.P. ("TWE"). AOL Time Warner
owns general and limited partnership interests in TWE consisting of 74.49% of
the pro rata priority capital ("Series A Capital") and residual equity capital
("Residual Capital"), and 100% of the junior priority capital. The remaining
25.51% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by MediaOne TWE Holdings, Inc., a subsidiary of AT&T
Corp. ("AT&T").
The Company and AT&T from time to time have engaged in discussions
regarding AT&T's interest in TWE. On February 28, 2001, AT&T delivered to the
Company and TWE notice of its exercise of certain registration rights under the
TWE partnership agreement. Actions pursuant to the notice were then suspended
while discussions between the Company and AT&T regarding AT&T's interest in TWE
continued. AT&T, the Company and TWE have now
1
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
recommenced the registration rights process that could result in the
registration for public sale or the purchase by TWE of some or all of AT&T's
interest in TWE.
Use of EBITDA
AOL Time Warner evaluates operating performance based on several
factors, including its primary financial measure of operating income (loss)
before noncash depreciation of tangible assets and amortization of intangible
assets ("EBITDA"). 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. In
addition, EBITDA eliminates the uneven effect across all business segments of
considerable amounts of noncash depreciation of tangible assets and amortization
of intangible assets recognized in business combinations accounted for by the
purchase method. As such, the following comparative discussion of the results of
operations of AOL Time Warner includes, among other factors, an analysis of
changes in business segment EBITDA. However, EBITDA should be considered in
addition to, not as a substitute for, operating income (loss), net income (loss)
and other measures of financial performance reported in accordance with
generally accepted accounting principles.
Transactions Affecting Comparability of Results of Operations
America Online-Time Warner Merger
The accompanying historical consolidated financial statements and notes
for 2000 reflect only the financial results of America Online, as predecessor to
AOL Time Warner. As a result, AOL Time Warner's 2000 historical operating
results and financial condition are not comparable to 2001 because of the
Merger. Accordingly, in order to enhance comparability and make an analysis of
2001 more meaningful, the following discussion of results of operations and
changes in financial condition and liquidity is based upon pro forma financial
information for 2000 as if the Merger had occurred on January 1, 2000. These
results also reflect reclassifications of each company's historical operating
results and segment information to conform to the combined Company's financial
statement presentation, as follows:
o Time Warner's digital media results have been allocated to the business
segments now responsible for managing those operations and are no longer
treated as a distinct line item;
o Income and losses related to equity-method investments and gains and losses
on the sale of investments have been reclassified from operating income
(loss) to other income (expense), net;
o Corporate expenses have been reclassified to selling, general and
administrative costs as a reduction of operating income (loss); and
o Merger-related costs have been moved from other income (expense), net, to
operating income (loss).
Other Significant Transactions and Nonrecurring Items
As more fully described herein, the comparability of AOL Time Warner's
operating results has been affected by certain significant transactions and
nonrecurring items in each period.
2
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
For the three months ended March 31, 2001, these items included (i)
merger-related costs of $71 million, primarily relating to the Merger, and (ii)
a $620 million noncash pretax charge to reduce the carrying value of certain
investments in AOL Time Warner's investment portfolio, primarily due to
significant market declines experienced in the first quarter.
For the three months ended March 31, 2000 on a pro forma basis, these
items included (i) pretax gains of approximately $28 million relating to the
sale or exchange of various cable television systems and investments, (ii) a
pretax gain of $10 million relating to the partial recognition of a deferred
gain on the 1998 sale of Six Flags Entertainment Corporation, (iii) pretax gains
of approximately $275 million from the sale or exchange of certain investments,
(iv) a noncash, pretax charge of approximately $220 million relating to the
write-down of AOL Time Warner's carrying value of its investment in the Columbia
House Company Partnerships ("Columbia House"), a 50%-owned equity investee, (v)
merger-related costs of approximately $46 million relating to the Merger and
(vi) a noncash pretax charge of $738 million, which is shown separately on the
accompanying statement of operations as an after-tax charge of $443 million
related to the cumulative effect of an accounting change in connection with the
adoption of a new film accounting standard.
For the three months ended March 31, 2000 on a historical basis, the
operating results include pretax gains of approximately $275 million from the
sale or exchange of certain investments.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed after
excluding the effects of these significant nonrecurring items. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of these unusual items. However, unusual items may occur in
any period. Accordingly, investors and other financial statement users
individually should consider the types of events and transactions for which
adjustments have been made.
RESULTS OF OPERATIONS
Consolidated Results
AOL Time Warner had revenues of $9.080 billion and a net loss of $1.369
billion for the three months ended March 31, 2001, compared to revenues of
$8.316 billion on a pro forma basis ($1.814 billion on a historical basis) and a
loss before the cumulative effect of an accounting change of $1.012 billion on a
pro forma basis (net income of $433 million on a historical basis) for the three
months ended March 31, 2000. After preferred dividend requirements, AOL Time
Warner had basic and diluted net loss per common share of $.31 in 2001, compared
to basic and diluted loss before the cumulative effect of an accounting change
of $.24 per common share on a pro forma basis in 2000 (basic earnings per share
of $.19 and diluted earnings per share of $.17 on a historical basis).
As previously described, in addition to the consummation of the Merger,
the comparability of AOL Time Warner's operating results for the first quarter
of 2001 and 2000 has been affected by certain significant, nonrecurring items
recognized in each period. These nonrecurring items consisted of approximately
$691 million of net pretax losses in both 2001 and on a pro forma basis in 2000
(net pretax gains of $275 million on a historical basis). The aggregate net
effect of these items was to increase basic and diluted net loss per common
share by $.09 in 2001 and $.10 on a pro forma basis in 2000 (an increase in
basic and diluted earnings per share of $.07 on a historical basis).
3
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Revenues. AOL Time Warner's revenues increased to $9.080 billion in
2001, compared to $8.316 billion on a pro forma basis in 2000. This increase was
driven by an increase in subscription revenues of 9% to $3.857 billion, an
increase in advertising and commerce revenues of 10% to $2.053 billion and an
increase in content and other revenues of 8% to $3.170 billion. This compares to
$3.528 billion, $1.865 billion and $2.923 billion, respectively, on a pro forma
basis for the three months ended March 31, 2000.
As discussed more fully below, the increase in subscription revenues
was principally due to an increase in the number of subscribers at the AOL,
Cable and Networks segments and an increase in subscription rates at the Cable
and Networks segments. The increase in advertising and commerce revenues was
principally due to increased advertising at the AOL, Cable and Publishing
segments and advertising rate increases at The WB Network. The increase in
content and other revenues was principally due to increased distribution of
theatrical content at the Filmed Entertainment segment, offset in part by lower
revenue at the Music segment from the negative effect of changes in foreign
currency rates on international recorded music sales and lower domestic recorded
music sales.
Net Loss and Net Loss Per Common Share. AOL Time Warner's net loss
decreased to $1.369 billion in 2001, compared to $1.455 billion on a pro forma
basis in 2000. However, excluding the significant effect of the nonrecurring
items referred to earlier, the net loss decreased by $76 million to $954 million
in 2001 from $1.030 billion on a pro forma basis in 2000. As discussed more
fully below, this improvement principally resulted from an overall increase in
AOL Time Warner's EBITDA, offset in part by higher depreciation and amortization
and higher amortization on certain investments accounted for under the equity
method of accounting. Similarly, adjusted basic net loss per common share,
excluding the effect of significant nonrecurring items, decreased to $.22 in
2001, compared to an adjusted basic net loss per common share of $.24 on a pro
forma basis in 2000.
Depreciation and Amortization. Depreciation and amortization increased
to $2.222 billion in 2001 from $2.141 billion on a pro forma basis in 2000. This
increase was due to increases in both depreciation, primarily due to higher
capital spending at the Cable segment, and amortization. The higher amortization
in the first quarter of 2001 was primarily due to goodwill generated from
certain restructuring liabilities that were committed to by management in the
first quarter of 2001 and recorded as liabilities assumed in the purchase of
Time Warner and the absence in 2000 of amortization related to minor
acquisitions consummated after the first quarter of 2000 that were accounted for
under the purchase method of accounting.
Interest Expense, Net. Interest expense, net, decreased to $319 million
in 2001, from $328 million on a pro forma basis in 2000, principally as a result
of lower market interest rates.
Other Income (Expense), Net. Other income (expense), net, increased to
$872 million of expense in 2001 from $104 million of expense on a pro forma
basis in 2000. Other income (expense), net, increased primarily because of a
noncash pretax charge of $620 million to reduce the carrying value of certain
investments, primarily due to declines in market values deemed to be
other-than-temporary, higher amortization of goodwill associated with certain
investments accounted for under the equity method of accounting and the absence
in 2001 of $285 million of gains from the sale or exchange of certain
investments in 2000. This overall decrease was offset in part by the absence
in 2001 of a $220 million noncash pretax charge to reduce the carrying value of
the Company's investment in Columbia House in 2000.
Minority Interest. Minority interest expense increased to $104 million
in 2001, compared to $55 million on a pro forma basis in 2000. Minority interest
expense increased principally due to the allocation of pretax gains related
4
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
to the exchange of various cable television systems in 2001 at the TWE Advance/
Newhouse Partnership ("TWE-A/N") attributable to the minority owners of TWE-A/N
and a higher allocation of losses in 2000 to a minority partner in The WB
Network.
Income Tax Benefit (Provision). The relationship between income before
income taxes and income tax expense of AOL Time Warner is principally affected
by the amortization of goodwill and certain other financial statement expenses
that are not deductible for income tax purposes. AOL Time Warner had an income
tax benefit of $73 million in the first quarter of 2001, compared to income tax
expense of $161 million on a pro forma basis in the first quarter of 2000.
Income taxes, for financial reporting purposes, benefited from the tax effect of
the $620 million noncash pretax charge to reduce the carrying value of certain
investments in the first quarter of 2001. The $28 million of net pretax gains
related to the sale or exchange of various cable television systems and
investments in the first quarter of 2000 resulted in additional expense in that
quarter. Excluding the tax effect of these items, the effective tax rate was
consistent in each period. As of March 31, 2001, the Company had net operating
loss carryforwards of approximately $10.2 billion, primarily resulting from
stock option exercises, available to offset future U.S. federal taxable income.
Business Segment Results
Revenues and EBITDA are as follows:
Three Months Ended March 31,
----------------------------
Revenues EBITDA
---------------------- ----------------------
2001 2000(a)(b) 2001 2000(b)
Historical Pro Forma Historical Pro Forma
---------- --------- ---------- ---------
(millions)
AOL.......................................... $2,125 $1,814 $ 684 $ 506
Cable(c)..................................... 1,625 1,447 768 694
Filmed Entertainment......................... 2,212 1,896 113 185
Networks..................................... 1,699 1,610 449 335
Music........................................ 881 934 94 101
Publishing................................... 966 939 113 94
Corporate.................................... - - (74) (84)
Merger-related costs......................... - - (71) (46)
Intersegment elimination..................... (428) (324) (1) (8)
------ ------ ------ ------
Total revenues and EBITDA.................... $9,080 $8,316 $2,075 $1,777
Depreciation and amortization................ - - (2,222) (2,141)
------ ------ ------ ------
Total revenues and operating loss............ $9,080 $8,316 $ (147) $ (364)
====== ====== ====== ======
--------------
(a) Revenues reflect the provisions of Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 101 ("SAB 101"), which was
retroactively adopted by the Company in the fourth quarter of 2000. The
impact of SAB 101 was to reduce revenues and costs by equal amounts of $91
million.
(b) 2001 operating results reflect the impact of the America Online-Time Warner
merger. In order to enhance comparability, pro forma financial information
for 2000 is provided as if the Merger had occurred at the beginning of
2000, including certain reclassifications of each company's historical
operating results to conform to AOL Time Warner's financial statement
presentation. AOL Time Warner's historical revenues, EBITDA and operating
income for the three months ended March 31, 2000 were $1.814 billion, $484
million and $376 million, respectively.
(c) 2000 EBITDA includes pretax gains of approximately $28 million relating to
the sale or exchange of certain cable television systems and investments.
AOL. Revenues increased to $2.125 billion in 2001, compared to $1.814
billion in 2000. EBITDA increased to $684 million in 2001, compared to $506
million in 2000. Revenues increased due to a 9% increase in subscription
5
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
revenues and a 37% increase in advertising and commerce revenues on the AOL
service, as well as other branded services and portals.
The growth in subscription revenues was principally due to an increase
in subscribers, offset in part by a decline in the average revenue per
subscriber. The decrease in the average revenue per subscriber is due to the
impact of a changing mix of brands and services with different price points, as
well as certain promotional programs. Under these bundling programs, customers
of AOL's commerce partners typically receive a subscription to AOL's online
services as a result of purchasing a product from a commerce partner.
Subscription revenues under these bundling programs are recorded based on the
net amount received from the commerce partner.
The improved operating results in 2001 are primarily due to strong
revenue growth and a decrease in data network-related and overhead costs as a
percentage of subscription revenues, primarily due to efficiencies AOL continues
to gain as a result of its size and scale, as well as lower negotiated rates
with its network providers.
Cable. Revenues increased to $1.625 billion in 2001, compared to $1.447
billion on a pro forma basis in 2000. EBITDA increased to $768 million in 2001
from $694 million on a pro forma basis in 2000. Revenues increased due to a 12%
increase in subscription revenues and a 17% increase in advertising and commerce
revenues. The increase in subscription revenues was due to an increase in basic
cable rates, an increase in basic cable subscribers, a 249% increase in digital
cable subscribers and a 165% increase in subscribers to high-speed online
services. The operating results of the Cable division were affected by pretax
gains of approximately $28 million recognized in 2000 relating to the sale or
exchange of various cable television systems and investments. Excluding these
gains, EBITDA increased principally as a result of the revenue gains, offset in
part by higher programming costs, principally due to programming rate increases.
Filmed Entertainment. Revenues increased to $2.212 billion in 2001,
compared to $1.896 billion on a pro forma basis in 2000. EBITDA decreased to
$113 million in 2001, compared to $185 million on a pro forma basis in 2000.
Revenues grew due to increases at both Warner Bros. and the filmed entertainment
businesses of Turner Broadcasting System, Inc. (the "Turner filmed entertainment
businesses"). The Turner filmed entertainment businesses include New Line
Cinema, Castle Rock and the former film and television libraries of Metro-
Goldwyn-Mayer, Inc. and RKO Pictures, Inc. For Warner Bros., revenues benefited
from increased worldwide revenues from the distribution of theatrical product,
principally due to higher worldwide DVD sales, and increased television
licensing fees. For the Turner filmed entertainment businesses, revenues
increased primarily due to significant syndication revenue from licensing
arrangements for the second-cycle broadcasting rights for Seinfeld, higher
international theatrical revenues and higher revenues from the distribution of
theatrical product through pay-television and basic cable television exhibition.
For Warner Bros., EBITDA decreased principally due to higher
advertising and distribution costs due to an increase in the number and the
timing of new theatrical releases in comparison to the prior year's quarter,
offset in part by the revenue gains. For the Turner filmed entertainment
businesses, EBITDA decreased principally due to higher film and advertising
costs, offset in part by the revenue gains.
Networks. Revenues increased to $1.699 billion in 2001, compared to
$1.610 billion on a pro forma basis in 2000. EBITDA increased to $449 million in
2001 from $335 million on a pro forma basis in 2000. Revenues grew primarily due
to an increase in subscription revenues with growth at the cable networks of
Turner Broadcasting System,
6
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Inc. (the "Turner cable networks group") and HBO. For the Turner cable networks
group, subscription revenues benefited from an increase in the number of
subscribers and higher rates, primarily led by revenue increases at TNT, CNN,
TBS Superstation and Cartoon Network. For HBO, revenues benefited primarily from
an increase in the number of subscribers. For The WB Network, revenues increased
primarily due to an increase in advertising and commerce revenues driven by
advertising rate increases.
Likewise, EBITDA was higher due to improved results at the Turner cable
networks group, HBO and The WB Network. For the Turner cable networks group, the
increase in EBITDA was principally due to the revenue gains and lower
programming costs. For HBO, the increase in EBITDA was principally due to the
revenue gains and increased cost savings from HBO's overhead cost management
program. For The WB Network, the increase in EBITDA was principally due to the
revenue gains.
Music. Revenues decreased to $881 million in 2001, compared to $934
million on a pro forma basis in 2000. EBITDA decreased to $94 million in 2001
from $101 million on a pro forma basis in 2000. Revenues decreased primarily due
to the negative effect of changes in foreign currency exchange rates on
international recorded music operations as well as lower domestic recorded music
sales. EBITDA decreased principally due to the decline in revenues and higher
marketing costs, offset in part by lower artist royalty costs and higher income
from DVD manufacturing operations. Management expects that the revenue decline
relating to lower sales levels will continue into the second quarter of 2001,
which could continue to affect operating results negatively.
Publishing. Revenues increased to $966 million in 2001, compared to
$939 million on a pro forma basis in 2000. EBITDA increased to $113 million in
2001 from $94 million on a pro forma basis in 2000. Revenues increased primarily
from a 9% increase in advertising and commerce revenues, which was primarily due
to increased advertising at In Style, Southern Living and the acquisition of the
Times Mirror magazines group in the fourth quarter of 2000. Subscription
revenues were relatively flat. EBITDA increased principally as a result of the
advertising revenue gains and increased cost savings.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 2001
Financial Condition
At March 31, 2001, AOL Time Warner had $20.2 billion of debt, $1.3
billion of cash and equivalents (net debt of $18.9 billion) and $156.5 billion
of shareholders' equity, this was comparable to $21.3 billion of debt, $3.3
billion of cash and equivalents (net debt of $18.0 billion), $575 million of
mandatorily redeemable preferred securities of a subsidiary and $157.6 billion
of shareholders' equity on a pro forma basis at December 31, 2000. On a
historical basis, AOL Time Warner had $2.6 billion of cash and equivalents,
$1.4 billion of debt and $6.8 billion of shareholders' equity at December 31,
2000.
Cash Flows
During the first three months of 2001, AOL Time Warner's cash provided
by operations amounted to $976 million and reflected $2.075 billion of business
segment EBITDA, less $391 million of net interest payments, $122 million of net
income taxes paid, $74 million of proceeds repaid under AOL Time Warner's asset
securitization program
7
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
and $512 million related to an increase in other working capital requirements.
Cash provided by operations of $909 million on a pro forma basis in the first
three months of 2000 reflected $1.777 billion of business segment EBITDA, less
$388 million of net interest payments, $100 million of net income taxes paid,
$98 million of proceeds repaid under AOL Time Warner's asset securitization
program and $282 million related to an increase in other working capital
requirements.
Cash provided by investing activities was $460 million in the first
three months of 2001, compared to $1.106 billion of cash used by investing
activities on a pro forma basis in the first three months of 2000. The increase
in cash provided by investing activities included $690 million of cash acquired
in the Merger, an increase of $1.175 billion of proceeds received from the sale
of investments, offset in part by a $150 million increase in the acquisitions
of investments and an increase in capital expenditures of $165 million. The
increase in proceeds received from the sale of investments primarily consists of
the sale of short-term investments previously held by America Online. The
increase in capital expenditures was primarily due to increased capital spending
in the Cable segment related to digital cable boxes, high-speed modems and
associated support equipment.
Cash used by financing activities was $2.778 billion in the first three
months of 2001, compared to $101 million on a pro forma basis in the first three
months of 2000. The use of cash in 2001 resulted primarily from $1.844 billion
of debt reduction, the repurchase of approximately 14.1 million shares of AOL
Time Warner common stock at an aggregate cost of $615 million under AOL Time
Warner's recently authorized $5 billion common stock repurchase program and the
redemption of mandatorily redeemable preferred securities of a subsidiary of
$575 million, offset in part by $277 million of proceeds received principally
from the exercise of employee stock options. Cash used by financing activities
on a pro forma basis in the first three months of 2000 principally resulted from
$318 million of debt reduction, the repurchase of approximately 1.4 million
shares of AOL Time Warner common stock at an aggregate cost of $65 million and
the payment of $67 million of dividends, offset in part by $367 million of
proceeds received principally from the exercise of employee stock options. The
lower level of share repurchases in the prior year relates to the suspension of
Time Warner's share repurchase program in early 2000 as a result of the
announced merger between America Online and Time Warner.
AOL Time Warner evaluates operating performance based on several
factors including free cash flow, which is defined as cash provided by
operations after deducting capital expenditures, dividend payments and
partnership distributions. Free cash flow for the three months ended March 31,
2001 was $49 million, compared to $83 million on a pro forma basis for the three
months ended March 31, 2000. The comparability of AOL Time Warner's free cash
flow has been affected by certain significant transactions and nonrecurring
items in each period. For the three months ended March 31, 2001, these items
aggregated approximately $602 million of cash payments, primarily related to
merger-related costs incurred in connection with the Merger and certain
litigation payments. For the three months ended March 31, 2000, these
items aggregated approximately $45 million, primarily related to merger-related
costs incurred in connection with the Merger. Excluding the effect of these
nonrecurring items, free cash flow increased from $128 million in the first
quarter of 2000 to $651 million in the first quarter of 2001.
The assets and cash flows of TWE are restricted by certain borrowing
and partnership agreements and are unavailable to AOL Time Warner except through
the payment of certain fees, reimbursements, cash distributions and loans, which
are subject to limitations. Under its bank credit agreement, TWE is permitted to
incur additional indebtedness to make loans, advances, distributions and other
cash payments to AOL Time Warner, subject to its individual compliance with the
cash flow coverage and leverage ratio covenants contained therein.
8
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Management believes that AOL Time Warner's operating cash flow, cash
and equivalents, borrowing capacity and availability under the shelf
registration statement are sufficient to fund its capital and liquidity needs
for the foreseeable future without distributions and loans from TWE above those
permitted by existing agreements.
Shelf Registration Statement
In January 2001, AOL Time Warner filed a shelf registration statement
with the SEC, which allows AOL Time Warner to offer and sell from time to time,
debt securities, preferred stock, series common stock, common stock and/or
warrants to purchase debt and equity securities in amounts up to $10 billion in
initial aggregate public offering prices. Proceeds from any offerings will be
used for general corporate purposes including investments, capital expenditures,
repayment of debt and financing acquisitions. On April 19, 2001, AOL Time Warner
issued an aggregate of $4 billion principal amount of debt securities under
this shelf registration statement at various fixed interest rates and maturities
of 5, 10 and 30 years. The net proceeds to the Company were $3.964 billion and
were used primarily to pay down bank debt. These securities are guaranteed on an
unsecured basis by each of America Online and Time Warner. In addition, Time
Warner Companies, Inc. ("TW Companies") and Turner Broadcasting System, Inc.
("TBS") have guaranteed, on an unsecured basis, Time Warner's guarantee of the
securities. $5 Billion Commercial Paper Program and Senior Unsecured Revolving
Credit Facility
In April 2001, AOL Time Warner established a $5 billion commercial
paper program which is backed by a $5 billion 364-day senior unsecured revolving
credit facility (the "revolving credit facility"), borrowings under which may be
repaid for a period up to two years following the initial term. The program will
allow AOL Time Warner to issue commercial paper to investors from time to time
in maturities of up to 365 days. Proceeds from the commercial paper offerings
will be used for general corporate purposes including investments, capital
expenditures, repayment of debt and financing acquisitions. The revolving credit
facility is available to support the commercial paper program and for general
corporate purposes. Borrowings under the $5 billion commercial paper program
and the revolving credit facility are guaranteed on an unsecured basis, directly
or indirectly, by each of America Online, Time Warner, TW Companies and TBS.
Common Stock Repurchase Program
In January 2001, AOL Time Warner's Board of Directors authorized a
common stock repurchase program that allows AOL Time Warner to repurchase, from
time to time, up to $5 billion of common stock over a two-year period. During
the first quarter of 2001, the Company repurchased 14.1 million shares at an
aggregate cost of $615 million.
Capital Spending
AOL Time Warner's overall capital spending for the three months ended
March 31, 2001 was $906 million, an increase of $165 million over capital
spending for the three months ended March 31, 2000 of $741 million. AOL Time
Warner capital spending and the related increase is principally at its Cable
segment, as discussed more fully below. Also contributing to the AOL Time Warner
capital spending levels is its AOL segment, including expenditures related to
product development, and, to a lesser extent, AOL Time Warner's other business
segments.
9
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
AOL Time Warner's Cable segment has been engaged in a plan to upgrade
the technological capability and reliability of its cable television systems and
develop new services, which management believes will position the business for
sustained, long-term growth. Capital spending by the Cable segment amounted to
$577 million in the first three months of 2001, compared to $419 million on a
pro forma basis in 2000. Cable capital spending for the remainder of 2001 is
expected to remain at comparable levels, reflecting spending on variable capital
to facilitate the continued roll-out of the Cable segment's popular digital
services, including digital cable and high-speed online services. At March 31,
2001, the Cable segment had 2.1 million digital cable subscribers, a 16.7%
penetration of basic cable subscribers. This compares to 613,000 digital cable
subscribers, or a 4.8% penetration of basic cable subscribers at March 31, 2000.
Similarly, the number of high-speed online customers grew to 1.2 million, or
7.4% of eligible homes, from 447,000, or 4.7% of eligible homes at March 31,
2000. Such rapid growth of subscribers to these digital services increased the
variable capital spending for digital cable boxes, high-speed modems and
associated support equipment. Capital spending by the Cable segment is expected
to continue to be funded by the Cable segment's operating cash flow.
Market Risk Management
Market risk is the potential loss arising from adverse changes in
market rates and prices, such as interest rates, foreign currency exchange rates
and changes in the market value of investments.
Interest Rate Risk
AOL Time Warner has entered into variable-rate debt that, at March 31,
2001, had an outstanding balance of approximately $6.3 billion. Based on AOL
Time Warner's variable-rate obligations outstanding at March 31, 2001, each 25
basis point increase or decrease in the level of interest rates would,
respectively, increase or decrease AOL Time Warner's annual interest expense and
related cash payments by approximately $15.7 million. Such potential increases
or decreases are based on certain simplifying assumptions, including a constant
level of variable-rate debt for all maturities and an immediate,
across-the-board increase or decrease in the level of interest rates with no
other subsequent changes for the remainder of the period.
Foreign Currency Risk
AOL Time Warner uses foreign exchange contracts primarily to hedge the
risk that unremitted or future royalties and license fees owed to AOL Time
Warner domestic companies for the sale or anticipated sale of U.S. copyrighted
products abroad may be adversely affected by changes in foreign currency
exchange rates. As part of its overall strategy to manage the level of exposure
to the risk of foreign currency exchange rate fluctuations, AOL Time Warner
hedges a portion of its foreign currency exposures anticipated over the ensuing
twelve month period. At March 31, 2001, AOL Time Warner had effectively hedged
approximately 60% of the estimated foreign currency exposures that principally
relate to anticipated cash flows to be remitted to the U.S. over the ensuing
twelve month period. To hedge this exposure, AOL Time Warner used foreign
exchange contracts that have maturities of three to twelve months to
provide continuing coverage throughout the year. AOL Time Warner often closes
foreign exchange sale contracts by purchasing an offsetting purchase contract.
At March 31, 2001, AOL Time Warner had contracts for the sale of $725 million
and the purchase of $604 million of foreign currencies at fixed rates.
Based on the foreign exchange contracts outstanding at March 31, 2001,
each 5% devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at March 31, 2001 would result in
10
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
approximately $36 million of unrealized losses and $30 million of unrealized
gains on foreign exchange contracts involving foreign currency sales and
purchases, respectively. Conversely, a 5% appreciation of the U.S. dollar would
result in $36 million of unrealized gains and $30 million of unrealized losses,
respectively. Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses largely would be
offset by corresponding decreases or increases, respectively, in the dollar
value of future foreign currency royalty and license fee payments that would be
received in cash within the ensuing twelve month period from the sale of U.S.
copyrighted products abroad.
Equity Risk
The Company is exposed to market risk as it relates to changes in the
market value of its investments. The Company invests in equity instruments of
public and private companies for business and strategic purposes, many of which
are Internet and technology companies. These securities are subject to
significant fluctuations in fair market value due to the volatility of the stock
market and the industries in which the companies operate. These securities,
which are classified in "Investments, including available-for-sale securities"
on the accompanying consolidated balance sheet, include equity-method
investments, investments in private securities, available-for-sale securities,
restricted securities and derivative securities. As of March 31, 2001, the
Company had investments in private equity securities with a balance of
approximately $340 million and investments in public equity securities, held for
purposes other than trading, with a readily determinable fair market value of
approximately $2.4 billion. However, continued market volatility, as well as
mergers and acquisitions, are beyond the control of AOL Time Warner and have the
potential to have a material non-cash impact on the operating results in future
periods.
Since December 31, 2000, there has been a broad decline in the public
equity markets, particularly in technology stocks, including investments held in
the AOL Time Warner portfolio. Similarly, AOL Time Warner experienced
significant declines in the value of certain privately held investments and
restricted securities. As a result, the Company has recorded a $620 million
noncash pretax charge in the first quarter to reduce the carrying value of
certain publicly traded and privately held investments and restricted
securities. This charge has been included in other income (expense), net, in the
accompanying consolidated statement of operations.
Euro Conversion
Effective January 1, 1999, the "euro" was established as a single
currency valid in more than two-thirds of the member countries of the European
Union. These member countries have a three-year transitional period to
physically convert their sovereign currencies to the euro. By July 1, 2002, all
participating member countries must eliminate their currencies and replace their
legal tender with euro-denominated bills and coins. Accordingly, AOL Time
Warner continues to evaluate the short-term and long-term effects of the euro
conversion on its European operations, principally at the Publishing, Music,
Networks and Filmed Entertainment segments and at AOL Europe, an equity-method
investee of AOL Time Warner.
AOL Time Warner believes that the most significant short-term impact of
the euro conversion is the need to modify its accounting and information systems
to handle an increasing volume of transactions during the transitional period in
both the euro and sovereign currencies of the participating member countries.
Based on preliminary information, costs to modify its accounting and information
systems have not been, and are not expected to be, material. AOL Time Warner
believes that the most significant long-term business risk of the euro
conversion may be increased pricing pressures for its
11
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
products and services brought about by heightened consumer awareness of possible
cross-border price differences. However, AOL Time Warner believes that these
business risks may be offset to some extent by lower material costs, other cost
savings and marketing opportunities. Notwithstanding such risks, management does
not believe that the euro conversion will have a material effect on AOL Time
Warner's financial position, results of operations or cash flows in future
periods.
Caution Concerning Forward-Looking Statements
The SEC encourages companies to disclose forward-looking information so
that investors can better understand a company's future prospects and make
informed investment decisions. This document contains such "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, particularly statements anticipating future growth in revenues,
EBITDA and cash flow. Words such as "anticipates," "estimates," "expects,"
"projects," "intends," "plans," "believes" and words and terms of similar
substance used in connection with any discussion of future operating or
financial performance identify such forward-looking statements. Those
forward-looking statements are based on management's present expectations about
future events. As with any projection or forecast, they are inherently
susceptible to uncertainty and changes in circumstances, and the Company is
under no obligation to (and expressly disclaims any such obligation to) update
or alter its forward-looking statements whether as a result of such changes, new
information, future events or otherwise.
AOL Time Warner operates in highly competitive, consumer driven and
rapidly changing Internet, media and entertainment businesses that are dependent
on government regulation and economic, political and social conditions in the
countries in which they operate, consumer demand for their products and
services, technological developments and (particularly in view of technological
changes) protection of their intellectual property rights. AOL Time Warner's
actual results could differ materially from management's expectations because of
changes in such factors. Other factors could also cause actual results to differ
from those contained in the forward-looking statements, including those
identified in AOL Time Warner's other filings with the SEC and the following:
o For AOL Time Warner's America Online businesses, the ability to develop new
products and services to remain competitive; the ability to develop or
adopt new technologies; the ability to continue growth rates of the
subscriber base; the ability to provide adequate server, network and system
capacity; the risk of increased costs for network services; increased
competition from providers of Internet services; the ability to maintain or
enter into new electronic commerce, advertising, marketing or content
arrangements; the ability to maintain and grow market share in the
enterprise software industry; the risks from changes in U.S. and
international regulatory environments affecting interactive services; and
the ability to expand successfully internationally.
o For AOL Time Warner's cable business, more aggressive than expected
competition from new technologies and other types of video programming
distributors, including DBS and DSL; increases in government regulation of
basic cable or equipment rates or other terms of service (such as "digital
must-carry," open access or common carrier requirements); government
regulation of other services, such as broadband cable modem service;
increased difficulty in obtaining franchise renewals; the failure of new
equipment (such as digital set-top boxes) or services (such as digital
cable, high-speed online services, telephony over cable or video on demand)
to appeal to enough consumers or to be available at reasonable prices, to
function as expected and to be delivered in a timely fashion;
12
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
fluctuations in spending levels by businesses and consumers; and greater
than expected increases in programming or other costs.
o For AOL Time Warner's film businesses, their ability to continue to attract
and select desirable talent and scripts at manageable costs; a strike by
screen actors and writers; general increases in production costs;
fragmentation of consumer leisure and entertainment time (and its possible
negative effects on the broadcast and cable networks, which are significant
customers of these businesses); continued popularity of merchandising; and
the uncertain impact of technological developments, such as the Internet.
o For AOL Time Warner's network businesses, greater than expected programming
or production costs; a strike by television actors and writers; public and
cable operator resistance to price increases (and the negative impact on
premium programmers of increases in basic cable rates); increased
regulation of distribution agreements; the sensitivity of advertising to
economic cyclicality; the development of new technologies that alter the
role of programming networks and services; and greater than expected
fragmentation of consumer viewership due to an increased number of
programming services or the increased popularity of alternatives to
television.
o For AOL Time Warner's music business, its ability to continue to attract
and select desirable talent at manageable costs; the timely completion of
albums by major artists; the popular demand for particular artists and
albums; its ability to continue to enforce its intellectual property rights
in digital environments; its ability to develop a successful business model
applicable to a digital online environment; and the overall strength of
global music sales.
o For AOL Time Warner's print media and publishing businesses, increases in
paper, postal and distribution costs; the introduction and increased
popularity of alternative technologies for the provision of news and
information, such as the Internet; the ability to continue to develop new
sources of circulation; and fluctuations in spending levels by businesses
and consumers.
o The risks related to the successful integration of the businesses of
America Online and Time Warner, including the costs related to the
integration; the failure of the Company to realize the anticipated benefits
of the combination of these businesses; the difficulty the financial market
may have in valuing the business model of the Company; and fluctuating
market prices that could cause the value of AOL Time Warner's stock to fail
to reflect the historical values of America Online's and Time Warner's
stock.
In addition, the Company's overall financial strategy, including growth
in operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions, economic
slowdowns, consequences of the euro conversion and changes in the Company's
plans, strategies and intentions.
13
AOL TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31, December 31,
2001 2000 2000
Historical Pro Forma(a) Historical(a)
---------- --------- ----------
ASSETS (millions, except per share amounts)
Current assets
Cash and equivalents....................................................... $ 1,268 $ 3,300 $ 2,610
Short-term investments..................................................... - 886 886
Receivables, less allowances of $1.732 billion, $1.725 billion and $97
million............................................................... 4,957 6,033 613
Inventories................................................................ 1,857 1,583 47
Prepaid expenses and other current assets.................................. 1,897 1,908 515
-------- -------- -------
Total current assets....................................................... 9,979 13,710 4,671
Noncurrent inventories and film costs...................................... 7,086 6,235 -
Investments, including available-for-sale securities....................... 11,564 9,472 3,824
Property, plant and equipment.............................................. 11,514 11,174 1,041
Music catalogues and copyrights............................................ 2,970 2,500 -
Cable television and sports franchises..................................... 27,796 31,700 -
Brands and trademarks...................................................... 10,830 10,000 -
Goodwill and other intangible assets....................................... 127,907 128,927 816
Other assets............................................................... 2,345 2,329 475
-------- -------- -------
Total assets............................................................... $211,991 $216,047 $10,827
======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................................................... $ 1,855 $ 2,125 $ 105
Participations payable..................................................... 1,201 1,190 -
Royalties and programming costs payable.................................... 1,447 1,488 -
Deferred revenue........................................................... 1,779 1,660 1,063
Debt due within one year................................................... 17 45 2
Other current liabilities.................................................. 6,378 6,163 1,158
-------- -------- -------
Total current liabilities.................................................. 12,677 12,671 2,328
Long-term debt ............................................................ 20,176 21,318 1,411
Deferred income taxes...................................................... 13,127 15,165 -
Deferred revenue........................................................... 1,224 1,277 223
Other liabilities.......................................................... 4,787 4,050 87
Minority interests......................................................... 3,475 3,364 -
Mandatorily redeemable preferred securities of a subsidiary holding
solely debentures of a subsidiary of the Company...................... - 575 -
Shareholders' equity
Series LMCN-V Common Stock, $.01 par value, 171.2 million shares
outstanding at March 31, 2001 and December 31, 2000 pro forma......... 2 2 -
AOL Time Warner (and America Online, as predecessor) Common Stock,
$.01 par value, 4.127, 4.101 and 2.379 billion shares outstanding..... 41 41 24
Paid-in capital............................................................ 156,018 155,796 4,966
Accumulated other comprehensive income, net................................ 101 61 61
Retained earnings.......................................................... 363 1,727 1,727
-------- -------- -------
Total shareholders' equity................................................. 156,525 157,627 6,778
-------- -------- -------
Total liabilities and shareholders' equity................................. $211,991 $216,047 $10,827
======== ======== =======
-------------------
(a) AOL Time Warner's historical financial statements for the prior period
represent the financial results of America Online, as predecessor to AOL
Time Warner. In order to enhance comparability, pro forma financial
statements for 2000 are presented supplementally as if the merger of
America Online and Time Warner had occurred at the beginning of 2000
(Note 1).
See accompanying notes.
14
AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31,
(Unaudited)
2001 2000 2000
Historical Pro Forma(a) Historical(a)
---------- --------- ----------
(millions, except per share amounts)
Revenues:
Subscriptions......................................................... $ 3,857 $ 3,528 $ 1,153
Advertising and commerce.............................................. 2,053 1,865 528
Content and other..................................................... 3,170 2,923 133
-------- ------- -------
Total revenues(b)..................................................... 9,080 8,316 1,814
Costs of revenues(b)....................................................... (5,010) (4,583) (987)
Selling, general and administrative(b)..................................... (2,371) (2,327) (432)
Amortization of goodwill and other intangible assets....................... (1,775) (1,752) (19)
Gain on sale or exchange of cable television systems....................... - 28 -
Merger-related costs....................................................... (71) (46) -
-------- ------- -------
Operating income (loss).................................................... (147) (364) 376
Interest income (expense), net............................................. (319) (328) 58
Other income (expense), net(b)............................................. (872) (104) 280
Minority interest.......................................................... (104) (55) (1)
-------- ------- -------
Income (loss) before income taxes and cumulative effect of accounting
change................................................................ (1,442) (851) 713
Income tax benefit (provision)............................................. 73 (161) (280)
-------- ------- -------
Income (loss) before cumulative effect of accounting change................ (1,369) (1,012) 433
Cumulative effect of accounting change, net of $295 million income tax
benefit............................................................... - (443) -
-------- ------- -------
Net income (loss).......................................................... (1,369) (1,455) 433
Preferred dividend requirements............................................ - (5) -
-------- ------- -------
Net income (loss) applicable to common shares.............................. $ (1,369) $(1,460) $ 433
======== ======= =======
Basic income (loss) per common share before cumulative effect
of accounting change.................................................. $ (0.31) $ (0.24) $ 0.19
Cumulative effect of accounting change..................................... - (0.10) -
-------- ------- -------
Basic net income (loss) per common share................................... $ (0.31) $ (0.34) $ 0.19
======== ======= =======
Average basic common shares................................................ 4,412.7 4,250.3 2,298.0
======== ======= =======
Diluted income (loss) per common share before cumulative effect
of accounting change.................................................. $ (0.31) $ (0.24) $ 0.17
Cumulative effect of accounting change..................................... - (0.10) -
-------- ------- -------
Diluted net income (loss) per common share................................. $ (0.31) $ (0.34) $ 0.17
======== ======= =======
Average diluted common shares.............................................. 4,412.7 4,250.3 2,608.0
======== ======= =======
-------------------
(a) AOL Time Warner's historical financial statements for prior periods
represent the financial results of America Online, as predecessor to AOL
Time Warner. In order to enhance comparability, pro forma financial
statements for 2000 are presented supplementally as if the merger of
America Online and Time Warner had occurred at the beginning of 2000,
including the reclassifications of each company's historical operating
results to conform to the combined Company's financial statement
presentation (Note 1).
(b) Includes the following income (expenses) resulting from transactions with
related companies:
Revenues.......................................................... $ 237 $ 109 $ 17
Cost of revenues.................................................. (103) (40) (11)
Selling, general and administrative............................... (13) (3) 2
Other income (expense), net....................................... (1) (7) -
See accompanying notes.
15
AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
(Unaudited)
2001 2000 2000
Historical Pro Forma(a) Historical(a)
---------- --------- ----------
(millions, except per share amounts)
OPERATIONS
Net income (loss).......................................................... $(1,369) $(1,455) $ 433
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change................................ - 443 -
Depreciation and amortization......................................... 2,222 2,141 108
Amortization of film costs............................................ 626 500 -
Loss on writedown of investments...................................... 620 - -
Gain on sale of investments........................................... (3) (297) (279)
Gain on sale or exchange of cable systems and investments............. - (28) -
Equity in losses of investee companies after distributions............ 221 417 -
Changes in operating assets and liabilities, net of acquisitions........... (1,341) (812) 216
-------- ------- ------
Cash provided by operations................................................ 976 909 478
-------- ------- ------
INVESTING ACTIVITIES
Acquisition of Time Warner Inc. cash and equivalents....................... 690 - -
Investments and acquisitions............................................... (973) (823) (502)
Capital expenditures....................................................... (906) (741) (197)
Investment proceeds........................................................ 1,649 474 269
Other...................................................................... - (16) (16)
-------- ------- ------
Cash provided (used) by investing activities............................... 460 (1,106) (446)
-------- ------- ------
FINANCING ACTIVITIES
Borrowings................................................................. 2,247 1,083 32
Debt repayments............................................................ (4,091) (1,401) (3)
Borrowings against future stock option proceeds............................ - 2 -
Redemption of mandatorily redeemable preferred securities of subsidiary.... (575) - -
Proceeds from exercise of stock option and dividend reimbursement plans.... 277 367 77
Repurchases of common stock................................................ (615) (65) -
Dividends paid and partnership distributions............................... (21) (85) -
Other...................................................................... - (2) -
-------- ------- ------
Cash provided (used) by financing activities............................... (2,778) (101) 106
-------- ------- ------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................ (1,342) (298) 138
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................ 2,610 3,838 2,554
-------- ------- ------
CASH AND EQUIVALENTS AT END OF PERIOD...................................... $1,268 $3,540 $2,692
====== ====== ======
-------------------
(a) AOL Time Warner's historical financial statements for prior periods
represent the financial results of America Online, as predecessor to AOL
Time Warner. In order to enhance comparability, pro forma financial
statements for 2000, are presented supplementally as if the merger of
America Online and Time Warner had occurred at the beginning of 2000,
including the reclassifications of each company's historical operating
results to conform to the combined Company's financial statement
presentation (Note 1).
See accompanying notes.
16
AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three Months Ended March 31,
(Unaudited)
2001 2000
Historical Historical
---------- ----------
(millions)
BALANCE AT BEGINNING OF PERIOD............................................................ $ 6,778 $6,331
Issuance of common stock in connection with America Online-Time Warner merger............. 146,430 -
Reversal of America Online's deferred tax valuation allowance............................. 4,419 -
-------- ------
Balance at beginning of period, adjusted to give effect to the America Online-
Time Warner merger..................................................................... 157,627 6,331
Net income (loss)......................................................................... (1,369) 433
Other comprehensive income (loss)(a)...................................................... 50 (652)
-------- ------
Comprehensive loss........................................................................ (1,319) (219)
Repurchases of AOL Time Warner common stock............................................... (615) -
Other, principally shares issued pursuant to stock option and benefit
plans, including $555 and $272 million of tax benefit.................................. 832 356
-------- ------
BALANCE AT END OF PERIOD.................................................................. $156,525 $6,468
======== ======
-------------------
(a) 2001 includes a $384 million reduction (net of an approximate $154 million
tax effect) related to the write-down of certain investments from a decline
in market value determined to be other-than-temporary.
See accompanying notes.
17
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
AOL Time Warner Inc. ("AOL Time Warner" or the "Company") is the
world's first fully integrated, Internet-powered media and communications
company. AOL Time Warner classifies its business interests into six fundamental
areas: AOL, consisting principally of interactive services, Web brands, Internet
technologies and electronic commerce services; Cable, consisting principally of
interests in cable television systems; Filmed Entertainment, consisting
principally of interests in filmed entertainment and television production;
Networks, consisting principally of interests in cable television and broadcast
network programming; Music, consisting principally of interests in recorded
music and music publishing; and Publishing, consisting principally of interests
in magazine publishing, book publishing and direct marketing.
Each of the business interests within AOL, Cable, Filmed Entertainment,
Networks, Music and Publishing is important to management's objective of
increasing shareholder value through the creation, extension and distribution of
recognizable brands and copyrights throughout the world. Such brands and
copyrights include (1) leading worldwide Internet services, such as the AOL and
Compuserve services, leading Web brands, such as Digital City, AOL Moviefone and
MapQuest, messaging services, such as ICQ and AOL Instant Messenger, and AOL
music properties, such as Spinner.com, Winamp and SHOUTcast, (2) Time Warner
Cable, currently the second largest operator of cable television systems in the
U.S., (3) the unique and extensive film, television and animation libraries
owned or managed by Warner Bros. and New Line Cinema, and trademarks such as the
Looney Tunes characters, Batman and The Flintstones, (4) leading television
networks, such as The WB Network, HBO, Cinemax, CNN, TNT and TBS Superstation,
(5) copyrighted music from many of the world's leading recording artists that is
produced and distributed by a family of established record labels such as Warner
Bros. Records, Atlantic Records, Elektra Entertainment and Warner Music
International and (6) magazine franchises, such as Time, People and Sports
Illustrated.
Financial information for AOL Time Warner's various business segments
is presented herein as an indication of financial performance (Note 10). AOL
Time Warner's principal business segments generate significant cash flow from
operations. The cash flow from operations generated by such business segments is
considerably greater than their operating income due to significant amounts of
noncash amortization of intangible assets recognized primarily in connection
with the America Online-Time Warner merger. Noncash amortization of intangible
assets recorded by AOL Time Warner's business segments amounted to $1.775
billion for the first quarter of 2001 and $1.752 billion on a pro forma basis
for the first quarter of 2000 ($19 million on a historical basis).
Basis of Presentation
America Online-Time Warner Merger
The company was formed in connection with the merger of America Online,
Inc. ("America Online") and Time Warner Inc. ("Time Warner") which was
consummated on January 11, 2001 (the "Merger"). As a result of the Merger,
America Online and Time Warner each became a wholly owned subsidiary of AOL Time
Warner.
18
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The Merger has been accounted for by AOL Time Warner as an acquisition
of Time Warner under the purchase method of accounting for business
combinations. The financial results for Time Warner have been included in AOL
Time Warner's results since January 1, 2001, as permitted under generally
accepted accounting principles. Under the purchase method of accounting, the
cost of approximately $147 billion to acquire Time Warner, including transaction
costs, was allocated to its underlying net assets, based on their respective
estimated fair values. The excess of the purchase price over the estimated fair
values of the net assets acquired was recorded as goodwill. A preliminary
allocation of the excess of the purchase price, including transaction costs,
over the book value of the net assets acquired has been made to goodwill and
other intangible assets, including film and television libraries, music
catalogues and music copyrights, cable television and sports franchises, and
brands and trademarks. The goodwill and identified intangible assets will be
amortized on a straight-line basis over the following weighted-average useful
lives:
Weighted-Average
Useful Life
-----------
(Years)
Film and television libraries........................ 17
Music catalogues and copyrights...................... 20
Cable television and sports franchises............... 25
Brands and trademarks................................ 34
Subscriber lists..................................... 5
Goodwill............................................. 25
The estimates of the fair values and weighted average useful lives of
net assets acquired, identified intangibles and goodwill are based on a
preliminary estimate. Additional work needs to be completed to finalize the
allocation of the purchase price to net assets, identified intangibles and
goodwill acquired. AOL Time Warner does not expect the final allocation of the
purchase price to differ materially from the amounts included in the
accompanying financial statements.
Because the Merger was not consummated on or before December 31, 2000,
the accompanying consolidated financial statements and notes for 2000 reflect
only the financial results of America Online, as predecessor to AOL Time Warner.
However, in order to enhance comparability, pro forma consolidated financial
statements are presented supplementally to illustrate the effects of the Merger
on the historical financial position and operating results of America Online.
The pro forma financial statements for AOL Time Warner are presented as if the
Merger between America Online and Time Warner had occurred on January 1, 2000.
These results also reflect reclassifications of each company's historical
operating results and segment information to conform to the combined Company's
financial statement presentation, as follows:
o Time Warner's digital media results have been allocated to the business
segments now responsible for managing those operations and are no longer
treated as a distinct line item;
o Income and losses related to equity-method investments and gains and losses
on the sale of investments have been reclassified from operating income
(loss) to other income (expense), net;
o Corporate expenses have been reclassified to selling, general and
administrative costs as a reduction of operating income (loss); and
o Merger-related costs have been moved from other income (expense), net, to
operating income (loss).
19
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Investment in Time Warner Entertainment Company, L.P.
A majority of AOL Time Warner's interests in filmed entertainment,
television production, television broadcasting and cable television systems, and
a portion of its interests in cable television programming are held through
Time Warner Entertainment Company, L.P. ("TWE"). AOL Time Warner owns general
and limited partnership interests in TWE consisting of 74.49% of the pro rata
priority capital ("Series A Capital") and residual equity capital ("Residual
Capital"), and 100% of the junior priority capital ("Series B Capital"). The
remaining 25.51% limited partnership interests in the Series A Capital and
Residual Capital of TWE are held by MediaOne TWE Holdings, Inc. ("MediaOne"), a
subsidiary of AT&T Corp.
Interim Financial Statements
The accompanying consolidated financial statements are unaudited but,
in the opinion of management, contain all the adjustments (consisting of those
of a normal recurring nature) considered necessary to present fairly the
financial position and the results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles applicable
to interim periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of
America Online, predecessor to AOL Time Warner, included in AOL Time Warner's
Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form
10-K") and the audited consolidated financial statements of Time Warner for the
year ended December 31, 2000, included in AOL Time Warner's Current Report on
Form 8-K/A, dated January 11, 2001 (filed February 9, 2001) (the "Time Warner
2000 Financial Statements"). Included in the Time Warner 2000 Financial
Statements is a summary of significant accounting policies used in determining
the financial position, cash flows and results of operations of Time Warner's
business segments.
Cumulative Effect of Change in Film Accounting Principle
In June 2000, Time Warner adopted Statement of Position 00-2,
"Accounting by Producers and Distributors of Films" ("SOP 00-2"). SOP 00-2
established new film accounting standards, including changes in revenue
recognition and accounting for advertising, development and overhead costs.
Specifically, SOP 00-2 requires advertising costs for theatrical and television
product to be expensed as incurred. This compares to Time Warner's previous
policy of first capitalizing and then expensing advertising costs for theatrical
product over the related revenue streams. In addition, SOP 00-2 requires
development costs for abandoned projects and certain indirect overhead costs to
be charged directly to expense, instead of those costs being capitalized to film
costs, which was required under the previous accounting model. SOP 00-2 also
requires all film costs to be classified in the balance sheet as noncurrent
assets.
Time Warner had adopted the provisions of SOP 00-2, retroactively to
the beginning of 2000. As a result, AOL Time Warner's pro forma net loss in 2000
includes a one-time, noncash, after-tax charge of $443 million, primarily to
reduce the carrying value of its film inventory. This charge has been reflected
as a cumulative effect of an accounting change.
Revenue Classification Changes
In the fourth quarter of 2000, both America Online and Time Warner
adopted Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
clarifies certain existing accounting principles for the timing of revenue
recognition and the classification of revenues in financial statements. While
both America Online's and Time Warner's existing revenue recognition policies
20
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
were consistent with the provisions of SAB 101, the new rules resulted in
changes as to how revenues from certain transactions are classified in the AOL,
Networks and Music segments. As a result of applying the provisions of SAB 101,
the Company's revenues and costs during the first quarter of 2000 were reduced
by an equal amount of $91 million on a pro forma basis ($33 million on a
historical basis).
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities--a Replacement of FASB Statement No. 125" ("FAS 140"). FAS 140
revises the criteria for accounting for securitizations and other transfers of
financial assets and collateral. In addition, FAS 140 requires certain
additional disclosures. Except for the new disclosure provisions, which were
effective for the year ended December 31, 2000, FAS 140 is effective for the
transfer of financial assets occurring after March 31, 2001. Management does not
expect the provisions of FAS 140 to have a significant effect on AOL Time
Warner's consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the prior year's financial
information to conform to the 2001 presentation, including reclassifications of
each company's historical results as previously discussed.
2. MERGER-RELATED COSTS
America Online-Time Warner Merger
In connection with the Merger, the Company has reviewed of its
operations and implemented several plans to restructure the operations of
America Online and Time Warner ("restructuring plans"). As part of the
restructuring plans, the Company recorded a restructuring liability of
approximately $965 million during the first quarter of 2001. The restructuring
liability is for costs to be incurred for exiting and consolidating activities
of the Company as well as costs incurred to terminate employees throughout the
Company.
The restructuring plans include approximately $70 million, primarily
related to the AOL segment, which was expensed in the first quarter of 2001 in
accordance with generally accepted accounting principles and is included in
"Merger-related costs" in the accompanying consolidated statement of operations.
The remaining costs to be incurred in connection with the restructuring plans
were recognized as liabilities assumed in the purchase business combination and
included in the allocation of the cost to acquire Time Warner. Accordingly, such
amounts resulted in additional goodwill being recorded in connection with the
Merger.
Of the total restructuring costs, $565 million related to work force
reductions and represented employee termination benefits. Because certain
employees can defer receipt of termination benefits for up to 24 months, cash
payments will continue after the employee has been terminated. Termination
payments of approximately $40 million were made in the first quarter of 2001. As
of March 31, 2001, the remaining liability of approximately $525 million was
primarily classified as a current liability in the accompanying consolidated
balance sheet.
The restructuring charge also includes approximately $400 million
associated with exiting certain activities, primarily related to lease and
contract termination costs. Specifically, the Company plans to consolidate
certain operations and exit other under-performing operations, including the
Studio Store operations included in the Filmed
21
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Entertainment segment and the World Championship Wrestling operations included
in the Networks segment. The restructuring charge associated with other exiting
activities specifically includes incremental costs and contractual termination
obligations for items such as leasehold termination payments and other facility
exit costs incurred as a direct result of these plans, which will not have
future benefits. As of March 31, 2001, the remaining liability of $380 million
was primarily classified as a current liability in the accompanying consolidated
balance sheet.
The restructuring costs recorded in the first quarter are based on the
Company's restructuring plans that have been committed to by management. These
restructuring plans may be broadened to include additional restructuring
initiatives as management continues to evaluate the integration of the combined
companies and completes its purchase price allocation.
Selected information relating to the restructuring plans follows (in
millions):
Employee Other
Termination Exit Costs Total
------------ ------------ ------------
Initial Accruals $565 $400 $965
Cash paid (40) (20) (60)
-------- -------- --------
Restructuring liability as of March 31, 2001 $525 $380 $905
======== ======== =========
3. SIGNIFICANT TRANSACTIONS
Investment-Related Activity
During the first quarter of 2001, there was a broad decline in the
public equity markets, particularly in technology stocks, including investments
held in the Company's portfolio. Similarly, the Company experienced significant
declines in the value of certain privately held investments and restricted
securities. As a result, the Company has recorded a $620 million noncash pretax
charge to reduce the carrying value of certain publicly traded and privately
held investments and restricted securities that had experienced
other-than-temporary declines. The charge has been included in other income
(expense), net, in the accompanying consolidated statement of operations.
During the first quarter of 2000, the Company recognized pretax gains
of approximately $285 million from the sale of certain investments ($275 million
on a historical basis). These gains have been included in other income
(expense), net, on both a historical and pro forma basis in the accompanying
consolidated statement of operations.
Gain on Sale or Exchange of Cable Television Systems And Investments
In 2000, largely in an ongoing effort to enhance its geographic
clustering of cable television properties, the Company sold or exchanged various
cable television systems and investments. For the three months ended March 31,
2000, the operating results of the Cable segment include net pretax gains of $28
million, on a pro forma basis.
Columbia House Investment Write-Down
In March 2000, the proposed merger between CDNOW, Inc. and Columbia
House was terminated. In connection with the termination of the merger, the risk
associated with the timely execution of certain strategic alternatives for
Columbia House's operations and the transformation of Columbia House's
traditional business model to an online one increased. As a result, Time
Warner's management concluded that the decline in Columbia House's
22
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
business was likely to continue through the near term. As such, the Company
recorded a $220 million noncash pretax charge in the first quarter of 2000 to
reduce the carrying value of its investment in Columbia House to an estimate of
its fair value. The charge has been included in other income (expense), net, on
a pro forma basis in the accompanying consolidated statement of operations.
4. BERTELSMANN AG ALLIANCE
In March 2000, America Online and Bertelsmann AG announced a global
alliance to expand the distribution of Bertelsmann's media content and
electronic commerce properties over America Online's interactive brands
worldwide. America Online and Bertelsmann also announced an agreement to
restructure their interests in the AOL Europe and AOL Australia joint ventures.
This restructuring consists of a put and call arrangement under which the
Company may purchase or be required to purchase, in two installments beginning
in January 2002, Bertelsmann's 49.5% interest in AOL Europe for consideration
ranging from $6.75 billion to $8.25 billion. On March 30, 2001, AOL Time Warner
and Bertelsmann agreed that, if Bertelsmann exercises its put right, $2.5
billion of the consideration would be paid in cash, with the remainder payable
at AOL Time Warner's option in cash, AOL Time Warner stock or a combination of
cash and stock. AOL Time Warner believes it will have adequate resources from
its cash reserves or from accessing its committed bank facilities, commercial
paper markets or capital markets to make any payments it is required or chooses
to make in cash upon exercise of a put or call right.
5. INVESTMENT IN TWE
TWE is a Delaware limited partnership that was capitalized in 1992 to
own and operate substantially all of the Filmed Entertainment-Warner Bros.,
Networks-HBO and The WB Network, and Cable businesses previously owned by
subsidiaries of AOL Time Warner. AOL Time Warner, through its wholly owned
subsidiaries, collectively owns general and limited partnership interests in TWE
consisting of 74.49% of the Series A Capital and Residual Capital and 100% of
the Series B Capital. The remaining 25.51% limited partnership interests in the
Series A Capital and Residual Capital of TWE are held by MediaOne. Certain AOL
Time Warner subsidiaries are the general partners of TWE ("AOL Time Warner
General Partners").
The TWE partnership agreement provides for special allocations of
income, loss and distributions of partnership capital, including priority
distributions in the event of liquidation. As a result of the Merger, a portion
of the $147 billion cost to acquire Time Warner was allocated to the underlying
net assets of TWE, to the extent acquired. TWE's net loss for the three months
ended March 31, 2001 reflects additional amortization generated by the
intangible assets and goodwill established in connection with this allocation.
TWE reported a net loss of $350 million in the first quarter of 2001 and a net
loss of $866 million, including a $524 million noncash charge related to the
cumulative effect of an accounting change, on a pro forma basis in the first
quarter of 2000 ($300 million net loss on a historical basis). Because of the
priority rights over allocations of income and distributions of TWE held by
the AOL Time Warner General Partners, $344 million of TWE's loss for the three
months ended March 31, 2001 was allocated to AOL Time Warner and $6 million was
allocated to MediaOne. For the three months ended March 31, 2000, all of TWE's
net loss of $300 million was allocated to AOL Time Warner and none was allocated
to MediaOne.
The assets and cash flows of TWE are restricted by the TWE partnership
and credit agreements. As such, they are unavailable for use by the partners
except through the payment of certain fees, reimbursements, cash distributions
and loans, which are subject to limitations.
23
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. INVENTORIES
Inventories and film costs consist of:
March 31, 2001 December 31, 2000
-------------- -----------------
Historical Pro Forma
---------- ---------
(millions)
Programming costs, less amortization.............................. $2,396 $2,097
Magazines, books, recorded music and other merchandise............ 614 614
Film costs-Theatrical:
Released, less amortization.................................. 828 916
Completed and not released................................... 374 242
In production................................................ 708 776
Development and pre-production............................... 77 91
Film costs-Television:
Released, less amortization.................................. 247 220
Completed and not released................................... 159 196
In production................................................ 39 76
Development and pre-production............................... 5 5
Film costs-Library, less amortization............................. 3,496 2,585
------ ------
Total inventories and film costs.................................. 8,943 7,818
Less current portion of inventory................................. 1,857 1,583
------ ------
Total noncurrent inventories and film costs....................... $7,086 $6,235
====== ======
At December 31, 2000, on a historical basis, AOL Time Warner had
current inventory of $47 million.
7. LONG-TERM DEBT
$10 Billion Shelf Registration Statement
In January 2001, AOL Time Warner filed a shelf registration statement
with the SEC, which allows AOL Time Warner to offer and sell from time to time,
debt securities, preferred stock, series common stock, common stock and/or
warrants to purchase debt and equity securities in amounts up to $10 billion in
initial aggregate public offering prices. Proceeds from any offerings will be
used for general corporate purposes, including investments, capital
expenditures, repayment of debt and financing acquisitions. On April 19, 2001,
AOL Time Warner issued an aggregate of $4 billion principal amount of debt
securities under this shelf registration statement at various fixed interest
rates and maturities of 5, 10 and 30 years. The net proceeds to the Company
were $3.964 billion and were used primarily to pay down bank debt. These
securities are guaranteed on an unsecured basis by each of America Online and
Time Warner. In addition, Time Warner Companies, Inc. ("TW Companies") and
Turner Broadcasting System, Inc. ("TBS") have guaranteed, on an unsecured
basis, Time Warner's guarantee of the securities.
$5 Billion Commercial Paper Program and Senior Unsecured Revolving
Credit Facility
In April 2001, AOL Time Warner established a $5 billion commercial
paper program which is backed by a $5 billion 364-day senior unsecured revolving
credit facility (the "revolving credit facility"), borrowings under which may be
repaid for a period up to two years following the initial term. The program will
allow AOL Time Warner to issue commercial paper to investors from time to time
in maturities of up to 365 days. Proceeds from the commercial paper offerings
will be used for general corporate purposes including investments, capital
expenditures, repayment of debt and financing acquisitions. The revolving credit
facility is available to support the commercial paper program and for general
corporate purposes. Borrowings under the $5 billion commercial paper program
and the revolving credit facility
24
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
are guaranteed on an unsecured basis, directly or indirectly, by each of America
Online, Time Warner, TW Companies and TBS.
Cross Guarantees of Bank and Public Debt
During 2001, in connection with the Merger, America Online and AOL Time
Warner were added as guarantors to (i) borrowings drawn against the Company's
$7.5 billion revolving credit facility by Time Warner and a number of its
consolidated subsidiaries, consisting of TW Companies, TWI Cable Inc. and TBS
and (ii) the public debt of Time Warner, TW Companies and TBS. In addition, AOL
Time Warner, Time Warner, TW Companies and TBS were added as guarantors to
America Online's zero-coupon convertible subordinated notes.
8. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In 1995, the Company, through TW Companies, issued approximately 23
million Company-obligated mandatorily redeemable preferred securities of a
wholly owned subsidiary ("Preferred Trust Securities") for aggregate gross
proceeds of $575 million. The sole assets of the subsidiary that was the obligor
on the Preferred Trust Securities were $592 million principal amount of 8 7/8%
subordinated debentures of TW Companies due December 31, 2025. Cumulative cash
distributions were payable on the Preferred Trust Securities at an annual rate
of 8 7/8%. The Preferred Trust Securities were mandatorily redeemable for cash
on December 31, 2025, and TW Companies had the right to redeem the Preferred
Trust Securities, in whole or in part, on or after December 31, 2000, or in
other certain circumstances.
On February 13, 2001, TW Companies redeemed all 23 million shares of
the Preferred Trust Securities. The redemption price was $25 per security, plus
accrued and unpaid distributions thereon equal to $0.265 per security. The total
redemption price of $581 million was funded with borrowings under the Company's
$7.5 billion revolving credit facility.
9. SHAREHOLDERS' EQUITY
Common Stock Repurchase Program
In January 2001, AOL Time Warner's Board of Directors authorized a
common stock repurchase program that allows AOL Time Warner to repurchase, from
time to time, up to $5 billion of common stock over a two-year period. During
the first quarter of 2001, the Company repurchased 14.1 million shares at an
aggregate cost of $615 million.
Income (Loss) Per Common Share Before Cumulative Effect of Accounting Change
Set forth below is a reconciliation of basic and diluted income (loss)
per common share before the cumulative effect of an accounting change for each
period.
25
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Three Months Ended March 31,
----------------------------
2001 2000 2000
Historical(a) Pro Forma(a) Historical(a)
---------- --------- ----------
(millions, except per share amounts)
Income (loss) applicable to common shares before
cumulative effect of accounting change - basic.................... $ (1,369) $ (1,017) $ 433
Interest savings, net of tax(b)........................................ - - 2
-------- -------- --------
Income (loss) applicable to common shares before
cumulative effect of accounting change - diluted.................. $ (1,369) $ (1,017) $ 435
======== ======== ========
Average number of common shares outstanding - basic.................... 4,412.7 4,250.3 2,298.0
Dilutive effect of stock options....................................... - - 272.0
Dilutive effect of convertible debt.................................... - - 38.0
-------- -------- --------
Average number of common shares outstanding - diluted.................. 4,412.7 4,250.3 2,608.0
======== ======== ========
Income (loss) per common share before cumulative
effect of accounting change:
Basic............................................................. $ (0.31) $ (0.24) $ 0.19
======== ======== ========
Diluted........................................................... $ (0.31) $ (0.24) $ 0.17
======== ======== ========
---------------
(a) In determining the average number of common shares outstanding on a
dilutive basis ("dilutive shares"), consideration is given to the
potentially dilutive effect of stock options, convertible debt and
convertible preferred stock ("common stock equivalents"). To the extent the
impact of any such common stock equivalents is antidilutive, they are
excluded from the calculation of dilutive shares. For the three months
ended March 31, 2001 and on a pro forma basis in 2000, the dilutive shares
excluded aggregate incremental shares related to these common stock
equivalents of approximately 193 million and 366 million (approximately 25
million on a historical basis in 2000), respectively.
(b) Reflects the savings associated with reduced interest expense that would be
forfeited if the convertible debt was converted to equity.
10. SEGMENT INFORMATION
AOL Time Warner classifies its business interests into six fundamental
areas: AOL, consisting principally of interactive services, Web brands, Internet
technologies and electronic commerce services; Cable, consisting principally of
interests in cable television systems; Filmed Entertainment, consisting
principally of interests in filmed entertainment and television production;
Networks, consisting principally of interests in cable television and broadcast
network programming; Music, consisting principally of interests in recorded
music and music publishing; and Publishing, consisting principally of interests
in magazine publishing, book publishing and direct marketing.
Information as to the operations of AOL Time Warner in different
business segments is set forth below based on the nature of the products and
services offered. AOL Time Warner evaluates performance based on several
factors, of which the primary financial measure is operating income (loss)
before noncash depreciation of tangible assets and amortization of intangible
assets ("EBITDA").
Prior to the Merger, America Online, predecessor to AOL Time Warner,
classified its business interests into two reportable segments, the Interactive
Services Group and the Netscape Enterprise Group. As a result of the Merger, and
the addition of Time Warner's business interests, AOL Time Warner management
assessed the manner in which financial information is reviewed in making
operating decisions and assessing performance, and concluded that America Online
would be treated as one separate and distinct reportable segment. In accordance
with Financial Accounting Standards Board No. 131, "Disclosures About Segments
of an Enterprise and Related Information," AOL Time Warner has reclassified its
2000 historical segment presentation to reflect America Online as one reportable
segment. In order to enhance comparability, supplemental pro forma operating
results for 2000 have been presented as if the Merger had occurred at the
beginning of the year.
26
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The accounting policies of the business segments are the same as those
described in the summary of significant accounting policies under Note 1 in the
2000 Form 10-K (for America Online business interests) and under Note 1 in
the Time Warner 2000 Financial Statements (for Time Warner's business
interests). Intersegment sales are accounted for at fair value as if the sales
were to third parties.
Three Months
Ended March 31,
----------------------
2001 2000(a)
Historical Pro Forma
---------- ---------
(millions)
Revenues
AOL............................................... $2,125 $1,814
Cable............................................. 1,625 1,447
Filmed Entertainment.............................. 2,212 1,896
Networks.......................................... 1,699 1,610
Music............................................. 881 934
Publishing........................................ 966 939
Intersegment elimination.......................... (428) (324)
------ ------
Total business segment revenues................... $9,080 $8,316
====== ======
-------------------
(a) 2001 revenues reflect the impact of the America Online-Time Warner merger.
In order to enhance comparability, pro forma revenues for 2000 are provided
as if the Merger had occurred at the beginning of 2000, including certain
reclassifications of each company's historical operating results to conform
to AOL Time Warner's financial statement presentation. AOL Time Warner's
historical revenues for the three months ended March 31, 2000 were $1.814
billion.
Three Months
Ended March 31,
----------------------
2001 2000(a)
Historical Pro Forma
---------- ---------
(millions)
EBITDA(b)
AOL .................................................... $ 684 $ 506
Cable(c)................................................. 768 694
Filmed Entertainment..................................... 113 185
Networks................................................. 449 335
Music.................................................... 94 101
Publishing............................................... 113 94
Corporate................................................ (74) (84)
Merger-related costs..................................... (71) (46)
Intersegment elimination................................. (1) (8)
------ ------
Total business segment EBITDA............................ $2,075 $1,777
====== ======
---------------
(a) 2001 EBITDA reflects the impact of the America Online-Time Warner merger.
In order to enhance comparability, pro forma EBITDA for 2000 is provided as
if the Merger had occurred at the beginning of 2000, including certain
reclassifications of each company's historical operating results to conform
to AOL Time Warner's financial statement presentation. AOL Time Warner's
historical EBITDA for the three months ended March 31, 2000, which includes
certain corporate-related expenses, was $484 million.
(b) EBITDA represents operating income (loss) before noncash depreciation of
tangible assets and amortization of intangible assets. After deducting
depreciation and amortization, AOL Time Warner's operating loss was $147
million in 2001 and $364 million on a pro forma basis in 2000 (operating
income of $376 million on a historical basis).
(c) Includes pretax gains of approximately $28 million in 2000 relating to the
sale or exchange of certain cable television systems and investments.
27
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Three Months
Ended March 31,
----------------------
2001 2000(a)
Historical Pro Forma
---------- ---------
(millions)
Depreciation of Property, Plant and Equipment
AOL............................................... $101 $ 89
Cable............................................. 242 199
Filmed Entertainment.............................. 22 25
Networks.......................................... 39 33
Music............................................. 22 20
Publishing........................................ 16 18
Corporate......................................... 5 5
---- ----
Total business segment depreciation............... $447 $389
==== ====
-------------------
(a) 2001 depreciation reflects the impact of the America Online-Time Warner
merger. In order to enhance comparability, pro forma depreciation for 2000
is provided as if the Merger had occurred at the beginning of 2000,
including certain reclassifications of each company's historical operating
results to conform to AOL Time Warner's financial statement presentation.
AOL Time Warner's historical deprecation for the three months ended March
31, 2000 was $89 million.
Three Months
Ended March 31,
----------------------
2001 2000(a)
Historical Pro Forma
---------- ---------
(millions)
Amortization of Intangible Assets(b)
AOL...................................................... $ 35 $ 19
Cable.................................................... 626 664
Filmed Entertainment..................................... 118 130
Networks................................................. 474 487
Music.................................................... 206 180
Publishing............................................... 233 205
Corporate................................................ 83 67
------ ------
Total business segment amortization...................... $1,775 $1,752
====== ======
-------------------
(a) 2001 amortization reflects the impact of the America Online-Time Warner
merger. In order to enhance comparability, pro forma amortization for 2000
is provided as if the Merger had occurred at the beginning of 2000,
including certain reclassifications of each company's historical operating
results to conform to AOL Time Warner's financial statement presentation.
AOL Time Warner's historical amortization for the three months ended March
31, 2000 was $19 million.
(b) Includes amortization relating to business combinations accounted for by
the purchase method, substantially all of which arose in the $147 billion
acquisition of Time Warner in 2001.
On a historical basis, AOL Time Warner's assets represent those of
America Online, as predecessor to AOL Time Warner, and were $10.827 billion at
December 31, 2000, including approximately $4.2 billion of corporate-related
assets such as cash and liquid investments. Due to the consummation of the
Merger and the allocation of the $147 billion cost to acquire Time Warner to the
underlying net assets of Time Warner based on their respective fair values, AOL
Time Warner's assets have significantly increased since December 31, 2000. Any
excess of the purchase price over estimated fair value of the net assets
acquired was recorded as goodwill and allocated among AOL Time Warner's business
segments. AOL Time Warner's assets by business segment, compared to the pro
forma assets as of December 31, 2000 as if the Merger had occurred at the
beginning of 2000, are as follows:
28
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
March 31, December 31,
2001 2000
Historical Pro Forma
---------- ---------
(millions)
Assets
AOL............................................... $ 6,500 $ 6,647
Cable............................................. 73,001 77,217
Filmed Entertainment.............................. 18,167 18,791
Networks.......................................... 52,845 54,152
Music............................................. 19,300 18,171
Publishing........................................ 27,517 25,130
Corporate......................................... 14,661 15,939
-------- --------
Total business segment assets..................... $211,991 $216,047
======== ========
11. COMMITMENTS AND CONTINGENCIES
America Online has been named as defendant in several putative class
action lawsuits brought by consumers and Internet service providers, alleging
certain injuries to have been caused by installation of AOL versions 5.0 and 6.0
software. These cases are in preliminary stages, but the Company believes that
they are without merit and intends to defend them vigorously. The Company is
unable, however, to predict the outcome of these cases, or reasonably estimate a
range of possible loss given their current status.
The Department of Labor has commenced an investigation into the
applicability of the Fair Labor Standards Act ("FLSA") to America Online's
Community Leader program. In addition, a putative class of former and current
Community Leader volunteers has brought a lawsuit against America Online
alleging violations of the FLSA and comparable state statutes. The Company
believes that America Online's actions concerning the Community Leader program
comply with the law and that the investigation and the private lawsuit by the
purported class of volunteers are without merit. The Company intends to defend
both the investigation and the lawsuit vigorously, but the Company is unable at
this time to predict the outcome of the investigation or the litigation, or
reasonably estimate a range of possible loss given their current status.
In Six Flags Over Georgia LLC et al. v. Time Warner Entertainment
Company et al., following a trial in December 1998, the jury returned a verdict
for plaintiffs and against defendants, including TWE, on plaintiffs' claims for
breaches of fiduciary duty. The jury awarded plaintiffs approximately $197
million in compensatory damages and $257 million in punitive damages, and
interest has been accruing on those amounts at the Georgia annual statutory rate
of twelve percent. The Company has since paid the compensatory damages with
accrued interest. Payment of the punitive damages portion of the award
with accrued interest was stayed by the United States Supreme Court on March 1,
2001 pending the disposition of a certiorari petition with that Court, which
has not yet been filed by TWE.
The Company is subject to a number of state and federal class action
lawsuits as well as an action brought by a number of state Attorneys General
alleging unlawful horizontal and vertical agreements to fix the prices of
compact discs by the major record companies. Although the Company believes that,
as to each of these actions, the cases have no merit, adverse jury verdicts
could result in a material loss to the Company. The Company is unable to predict
the outcomes of the litigation and cannot reasonably estimate a range of
possible loss given the current status of the cases. Two competition
investigations also are currently pending in Europe. The Company is cooperating
in these investigations, but is unable to predict their outcomes given their
current status.
29
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The costs and other effects of pending or future litigation,
governmental investigations, legal and administrative cases and proceedings
(whether civil or criminal), settlements, judgments and investigations, claims
and changes in those matters (including those matters described above), and
developments or assertions by or against the Company relating to intellectual
property rights and intellectual property licenses, could have a material
adverse effect on the Company's business, financial condition and operating
results.
12. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
Additional financial information with respect to cash flows is as
follows:
Three Months Ended March 31,
------------------------------------
2001 2000 2000
Historical Pro Forma Historical
---------- --------- ----------
(millions)
Cash payments made for interest................... $460 $473 $ 2
Interest income received.......................... 69 85 71
Cash payments made for income taxes............... 132 112 -
Income tax refunds received....................... 10 12 -
Other Income (Expense), Net
Other income (expense), net, consists of:
Three Months Ended March 31,
------------------------------------
2001 2000 2000
Historical Pro Forma Historical
---------- --------- ----------
(millions)
Write-down of investments.......................... $(620) $ - $ -
Write-down of investment in Columbia House......... - (220) -
Gains on sale of certain investments............... - 285 275
Other investment-related activity, principally
net losses of equity investees(a)............. (224) (128) 4
Losses on asset securitization programs............ (20) (25) -
Miscellaneous...................................... (8) (16) 1
----- ----- ----
Total other income (expense), net.................. $(872) $(104) $280
===== ===== ====
---------------
(a) Includes approximately $143 million in 2001 and $98 million on a pro forma
basis in 2000 of amortization of goodwill associated with certain
investments accounted for using the equity-method of accounting,
primarily related to the Merger.
Other Current Liabilities
Other current liabilities consist of:
March 31, December 31, December 31,
2001 2000 2000
Historical Pro Forma Historical
---------- --------- ----------
(millions)
Accrued expenses......................... $5,547 $4,936 $1,047
Accrued compensation..................... 735 1,085 111
Accrued income taxes..................... 96 142 -
------ ------ ------
Total.................................... $6,378 $6,163 $1,158
====== ====== ======
30
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(Unaudited)
America Online, Inc. ("America Online"), Time Warner Inc. ("Time
Warner"), Time Warner Companies, Inc. ("TW Companies") and Turner Broadcasting
System, Inc. ("TBS" and, together with America Online, Time Warner and TW
Companies, the "Guarantor Subsidiaries") are wholly owned subsidiaries of AOL
Time Warner Inc. ("AOL Time Warner"). AOL Time Warner, America Online, Time
Warner, TW Companies and TBS have fully and unconditionally, jointly and
severally, and directly or indirectly, guaranteed all of the outstanding
publicly traded indebtedness of each other. Set forth below are condensed
consolidating financial statements of AOL Time Warner, including each of the
Guarantor Subsidiaries, presented for the information of each company's public
debtholders. The following condensed consolidating financial statements
present the results of operations, financial position and cash flows of (i)
America Online, Time Warner, TW Companies and TBS (in each case, reflecting
investments in its consolidated subsidiaries under the equity method of
accounting), (ii) the direct and indirect non-guarantor subsidiaries of AOL
Time Warner and (iii) the eliminations necessary to arrive at the information
for AOL Time Warner on a consolidated basis. These condensed consolidating
financial statements should be read in conjunction with the accompanying
consolidated financial statements of AOL Time Warner.
Consolidating Statement of Operations
For The Three Months Ended March 31, 2001
AOL Non- AOL Time
Time America Time TW Guarantor Warner
Warner Online Warner Companies TBS Subsidiaries Eliminations Consolidated
------ ------ ------ --------- --- ------------ ------------ ------------
(millions)
Revenues....................................$ - $ 1,626 $ - $ - $ 197 $ 7,285 $ (28) $ 9,080
------- ------- ------- ----- ----- ------- ------ -------
Cost of revenues............................ - (882) - - (63) (4,093) 28 (5,010)
Selling, general and administrative......... (8) (390) (8) (4) (44) (1,917) - (2,371)
Amortization of goodwill and other
intangible assets........................ (83) (5) - - (56) (1,631) - (1,775)
Merger-related costs........................ - (67) - - - (4) - (71)
------- ------- ------- ----- ----- ------- ------ -------
Operating income (loss)..................... (91) 282 (8) (4) 34 (360) - (147)
Equity in pretax income of consolidated
subsidiaries............................. (1,350) 173 (1,197) (814) (205) - 3,393 -
Interest income (expense), net.............. 1 41 (21) (129) (48) (163) - (319)
Other expense, net.......................... (2) (598) (28) (24) (5) (215) - (872)
Minority interest........................... - - 6 - - (110) - (104)
------- ------- ------- ----- ----- ------ ------ -------
Loss before income taxes.................... (1,442) (102) (1,248) (971) (224) (848) 3,393 (1,442)
Income tax benefit (provision).............. 73 44 (8) (9) (48) (168) 189 73
------- ------- ------- ------ ----- ------ ------ -------
Net loss....................................$(1,369) $ (58) $(1,256) $(980) $(272) $(1,016) $3,582 $(1,369)
======= ======= ======= ===== ===== ======= ====== =======
31
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Consolidating Statement of Operations
For The Three Months Ended March 31, 2000
America
Online
(predecessor Non- AOL Time
to AOL Time TW Guarantor Warner
Time Warner) Warner Companies TBS Subsidiaries Eliminations Consolidated
----------- ------ --------- --- ------------ ------------ ------------
(millions)
Revenues........................................$1,425 $ - $ - $ - $ 389 $ - $1,814
------ ------ ------ ------ ----- ------ ------
Cost of revenues................................ (803) - - - (184) - (987)
Selling, general and administrative............. (328) - - - (104) - (432)
Amortization of goodwill and other
intangible assets............................ - - - - (19) - (19)
------ ------ ------ ------ ----- ------ ------
Operating income................................ 294 - - - 82 - 376
Equity in pretax income of consolidated
subsidiaries................................. 83 - - - - (83) -
Interest income, net............................ - - - - 58 - 58
Other income (expense), net..................... 336 - - - (56) - 280
Minority interest............................... - - - - (1) - (1)
------ ------ ------ ------ ----- ------ ------
Income before income taxes...................... 713 - - - 83 (83) 713
Income tax provision............................ (280) - - - - - (280)
------ ------ ------ ------ ----- ------ ------
Net income......................................$ 433 $ - $ - $ - $ 83 $ (83) $ 433
====== ====== ====== ====== ===== ====== ======
32
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Consolidating Balance Sheet
March 31, 2001
AOL Non- AOL Time
Time America Time TW Guarantor Warner
Warner Online Warner Companies TBS Subsidiaries Eliminations Consolidated
------ ------ ------ --------- --- ------------ ------------ ------------
(millions)
ASSETS
Current assets
Cash and equivalents....................$ 261 $ 123 $ - $ 274 $ 39 $ 773 $ (202) $ 1,268
Receivables, net........................ 11 379 17 20 97 4,433 - 4,957
Inventories............................. - - - - 108 1,749 - 1,857
Prepaid expenses and other current
assets............................... 24 277 - - 8 1,588 - 1,897
-------- ------ -------- -------- ------- -------- --------- --------
Total current assets.................... 296 779 17 294 252 8,543 (202) 9,979
Noncurrent inventories and film costs... - - - - 275 6,811 - 7,086
Investments in amounts due to and
from consolidated subsidiaries....... 161,287 1,726 179,626 139,884 37,527 - $(520,050) -
Investments, including available-
for-sale securities.................. - 2,847 (547) 657 24 8,583 - 11,564
Property, plant and equipment........... 27 867 6 - 82 10,532 - 11,514
Music catalogues and copyrights......... - - - - - 2,970 - 2,970
Cable television and sports franchises.. - - - - - 27,796 - 27,796
Brands and trademarks................... - - - - 655 10,175 - 10,830
Goodwill and other intangible assets.... 8,483 357 (40) - 7,057 112,050 - 127,907
Other assets............................ 28 32 137 62 74 2,012 - 2,345
-------- ------ -------- -------- ------- -------- --------- --------
Total assets............................$170,121 $6,608 $179,199 $140,897 $45,946 $189,472 $(520,252) $211,991
======== ====== ======== ======== ======= ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................$ 2 $ 171 $ 15 $ - $ 36 $ 1,631 $ - $ 1,855
Participations payable.................. - - - - - 1,201 - 1,201
Royalties and programming costs payable. - - - - 12 1,435 - 1,447
Deferred revenue........................ - 923 - - - 856 - 1,779
Debt due within one year................ - - - - - 17 - 17
Other current liabilities............... 433 1,081 97 104 360 4,222 81 6,378
-------- ------ -------- -------- ------- -------- --------- --------
Total current liabilities............... 435 2,175 112 104 408 9,362 81 12,677
Long-term debt.......................... - 1,420 2,842 6,745 793 8,578 (202) 20,176
Debt due to affiliates.................. - - - - 1,647 158 (1,805) -
Deferred income taxes................... 13,127 (4,538) 17,665 15,343 2,402 17,745 (48,617) 13,127
Deferred revenue........................ - 253 - - - 971 - 1,224
Other liabilities....................... 33 3 560 (43) 186 4,048 - 4,787
Minority interests...................... - - (6) - - 3,481 - 3,475
Shareholders' equity
Due (to) from AOL Time Warner and
subsidiaries......................... - 460 6,217 632 (1,227) (13,819) 7,737 -
Other shareholders' equity.............. 156,526 6,835 151,809 118,116 41,737 158,948 (477,446) 156,525
-------- ------ -------- -------- ------- -------- --------- --------
Total shareholders' equity.............. 156,526 7,295 158,026 118,748 40,510 145,129 (469,709) 156,525
-------- ------ -------- -------- ------- -------- --------- --------
Total liabilities and shareholders'
equity...............................$170,121 $6,608 $179,199 $140,897 $45,946 $189,472 $(520,252) $211,991
======== ====== ======== ======== ======= ======== ========= ========
33
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Consolidating Balance Sheet
December 31, 2000
America
Online
(predecessor Non- AOL Time
to AOL Time TW Guarantor Warner
Time Warner) Warner Companies TBS Subsidiaries Eliminations Consolidated
----------- ------ --------- --- ------------ ------------ ------------
(millions)
ASSETS
Current assets
Cash and equivalents...........................$ 2,530 $ - $ - $ - $ 80 $ - $ 2,610
Short-term investments......................... 880 - - - 6 - 886
Receivables, net............................... 455 - - - 158 - 613
Inventories.................................... - - - - 47 - 47
Prepaid expenses and other current assets...... 375 - - - 140 - 515
------- ---- ---- ---- ------ ------- -------
Total current assets........................... 4,240 - - - 431 - 4,671
Investments in amounts due to and from
consolidated subsidiaries................... 1,511 - - - - (1,511) -
Investments, including available-
for-sale securities......................... 3,734 - - - 90 - 3,824
Property, plant and equipment.................. 866 - - - 175 - 1,041
Goodwill and other intangible assets........... 169 - - - 647 - 816
Other assets................................... 190 - - - 285 - 475
------- ---- ---- ---- ------ ------- -------
Total assets...................................$10,710 $ - $ - $ - $1,628 $(1,511) $10,827
======= ==== ==== ==== ====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable...............................$ 46 $ - $ - $ - $ 59 $ - $ 105
Deferred revenue............................... 909 - - - 154 - 1,063
Debt due within one year....................... 2 - - - - - 2
Other current liabilities...................... 1,029 - - - 129 - 1,158
------- ---- ---- ---- ------ ------- -------
Total current liabilities...................... 1,986 - - - 342 - 2,328
Long-term debt ................................ 1,411 - - - - - 1,411
Deferred revenue............................... 223 - - - - - 223
Other liabilities.............................. 82 - - - 5 - 87
Minority interests............................. - - - - - - -
Shareholders' equity
Due from AOL Time Warner subsidiaries.......... 296 - - - (296) - -
Other shareholders' equity..................... 6,712 - - - 1,577 (1,511) 6,778
------- ---- ---- ---- ------ ------- -------
Total shareholders' equity..................... 7,008 - - - 1,281 (1,511) 6,778
------- ---- ---- ---- ------ ------- -------
Total liabilities and shareholders' equity.....$10,710 $ - $ - $ - $1,628 $(1,511) $10,827
======= ==== ==== ==== ====== ======= =======
34
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Three Months Ended March 31, 2001
AOL Non- AOL Time
Time America Time TW Guarantor Warner
Warner Online Warner Companies TBS Subsidiaries Eliminations Consolidated
------ ------ ------ --------- --- ------------ ------------ ------------
(millions)
OPERATIONS
Net loss................................$(1,369) $ (58) $(1,256) $ (980) $(272) $(1,016) $ 3,582 $(1,369)
Adjustments for noncash and
nonoperating items:
Depreciation and amortization........ 84 86 - - 57 1,995 - 2,222
Amortization of film costs........... - - - - - 626 - 626
Loss on writedown of investments..... - 587 - - - 33 - 620
Gain on sale of investments.......... - (3) - - - - - (3)
Excess (deficiency) of distributions
over equity in pretax income of
consolidated subsidiaries......... 234 (4,225) (1,936) 1,048 (136) - 5,015 -
Equity in losses of other investee
companies after distributions..... - 6 - 14 - 201 - 221
Changes in operating assets and
liabilities, net of acquisitions..... 2,871 4,090 (622) (3,511) 129 2,973 (7,271) (1,341)
------- ------- ------- ------- ----- ------- ------- -------
Cash provided (used) by operations...... 1,820 483 (3,814) (3,429) (222) 4,812 1,326 976
------- ------- ------- ------- ----- ------- ------- -------
INVESTING ACTIVITIES
Acquisition of Time Warner Inc. cash
and equivalents...................... - - (1) 198 40 453 - 690
Investments and acquisitions............ - (257) - - - (716) - (973)
Advances to parents and
consolidated subsidiaries............ - - - (1,680) - (1,444) 3,124 -
Capital expenditures.................... - (124) - - (12) (770) - (906)
Investment proceeds..................... - 1,609 - - - 40 - 1,649
------- ------- ------- ------- ----- ------- ------- -------
Cash provided (used) by investing
activities........................... - 1,228 (1) (1,482) 28 (2,437) 3,124 460
------- ------- ------- ------- ----- ------- ------- -------
FINANCING ACTIVITIES
Borrowings.............................. - - 1,380 - - 867 - 2,247
Debt repayments......................... - - - (25) - (4,066) - (4,091)
Change in due to/from parent............ (1,221) (4,118) 2,439 5,210 233 2,109 (4,652) -
Redemption of mandatorily redeemable
preferred securities of subsidiary... - - - - - (575) - (575)
Proceeds from exercise of stock option
and dividend reimbursement plans..... 277 - - - - - - 277
Repurchases of common stock............. (615) - - - - - - (615)
Dividends paid and partnership
distributions........................ - - (4) - - (17) - (21)
------- ------- ------- ------- ----- ------- ------- -------
Cash provided (used) by financing
activities........................... (1,559) (4,118) 3,815 5,185 233 (1,682) (4,652) (2,778)
------- ------- ------- ------- ----- ------- ------- -------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS.......................... 261 (2,407) - 274 39 693 (202) (1,342)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD.................. - 2,530 - - - 80 - 2,610
------- ------- ------- ------- ----- ------- ------- -------
CASH AND EQUIVALENTS AT END
OF PERIOD............................$ 261 $ 123 $ - $ 274 $ 39 $ 773 $ (202) $ 1,268
======= ======= ======= ======= ===== ======= ======= =======
35
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Three Months Ended March 31, 2000
America
Online
(predecessor Non- AOL Time
to AOL Time TW Guarantor Warner
Time Warner) Warner Companies TBS Subsidiaries Eliminations Consolidated
----------- ------ --------- --- ------------ ------------ ------------
(millions)
OPERATIONS
Net income........................................$ 433 $ - $ - $ - $ 83 $(83) $ 433
Adjustments for noncash and nonoperating items:
Depreciation and amortization.................. 57 - - - 51 - 108
Gain on sale of investments.................... (194) - - - (85) - (279)
Equity in losses of other investee companies
after distributions......................... (82) - - - 82 - -
Changes in operating assets and liabilities,
net of acquisitions............................ 167 - - - 49 - 216
------ ---- ---- ---- ---- ---- ------
Cash provided (used) by operations................ 381 - - - 180 (83) 478
------ ---- ---- ---- ---- ---- ------
INVESTING ACTIVITIES
Investments and acquisitions...................... (466) - - - (36) - (502)
Capital expenditures.............................. (183) - - - (14) - (197)
Investment proceeds............................... 210 - - - 59 - 269
Other............................................. (9) - - - (7) - (16)
------ ---- ---- ---- ---- ---- ------
Cash provided (used) by investing activities...... (448) - - - 2 - (446)
------ ---- ---- ---- ---- ---- ------
FINANCING ACTIVITIES
Borrowings........................................ 34 - - - (2) - 32
Debt repayments................................... (3) - - - - - (3)
Proceeds from exercise of stock option and
dividend reimbursement plans................... 74 - - - 3 - 77
------ ---- ---- ---- ---- ---- ------
Cash provided (used) by financing activities...... 105 - - - 1 - 106
------ ---- ---- ---- ---- ---- ------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS.................................... 38 - - - 183 (83) 138
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD............................ 2,393 - - - 161 - 2,554
------ ---- ---- ---- ---- ---- ------
CASH AND EQUIVALENTS AT END
OF PERIOD......................................$2,431 $ - $ - $ - $344 $(83) $2,692
====== ==== ==== ==== ==== ==== ======
36
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Description of Business
AOL Time Warner Inc. ("AOL Time Warner") is the world's first fully
integrated, Internet-powered media and communications company. The Company was
formed in connection with the merger of America Online, Inc. ("America Online")
and Time Warner Inc. ("Time Warner") which was consummated on January 11, 2001
(the "Merger"). As a result of the Merger, America Online and Time Warner each
became a wholly owned subsidiary of AOL Time Warner.
A majority of AOL Time Warner's interests in filmed entertainment,
television production and cable television systems, and a portion of its
interests in cable television and broadcast network programming, are held
through Time Warner Entertainment Company, L.P. ("TWE"). AOL Time Warner
owns general and limited partnership interests in TWE consisting of 74.49% of
the pro rata priority capital ("Series A Capital") and residual equity capital
("Residual Capital"), and 100% of the junior priority capital. The remaining
25.51% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by MediaOne TWE Holdings, Inc., a subsidiary of AT&T
Corp. ("AT&T").
As part of the integration of TWE's businesses into AOL Time Warner's
operating structure, management is pursuing various initiatives to enhance
efficiencies. Such initiatives, some of which have already been implemented,
include the consolidation of certain duplicative administrative and operational
functions and the restructuring of certain under-performing assets. For
additional information on the Merger and TWE's restructuring initiatives, see
Notes 1 and 2, respectively, to the accompanying consolidated financial
statements.
TWE classifies its business interests into three fundamental areas:
Cable, consisting principally of interests in cable television systems; Filmed
Entertainment, consisting principally of interests in filmed entertainment and
television production; and Networks, consisting principally of interests in
cable television and broadcast network programming. TWE also manages the cable
properties owned by AOL Time Warner and the combined cable television operations
are conducted under the name of Time Warner Cable.
AOL Time Warner and AT&T from time to time have engaged in discussions
regarding AT&T's interest in TWE. On February 28, 2001, AT&T delivered to AOL
Time Warner and TWE notice of its exercise of certain registration rights under
the TWE partnership agreement. Actions pursuant to the notice were then
suspended while discussions between AOL Time Warner and AT&T regarding AT&T's
interest in TWE continued. AT&T, AOL Time Warner and TWE have now recommenced
the registration rights process that could result in the registration for public
sale or the purchase by TWE of some or all of AT&T's interest in TWE.
Use of EBITDA
TWE evaluates operating performance based on several factors, including
its primary financial measure of operating income (loss) before noncash
depreciation of tangible assets and amortization of intangible assets
("EBITDA"). TWE 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. In addition, EBITDA
eliminates the uneven effect across all business segments of considerable
amounts of noncash depreciation of tangible assets and amortization of
intangible assets recognized in business combinations accounted for by the
37
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
purchase method. As such, the following comparative discussion of the results of
operations of TWE includes, among other factors, an analysis of changes in
business segment EBITDA. However, EBITDA should be considered in addition
to, not as a substitute for, operating income (loss), net income (loss) and
other measures of financial performance reported in accordance with generally
accepted accounting principles.
Transactions Affecting Comparability of Results of Operations
America Online-Time Warner Merger
The Merger was accounted for by AOL Time Warner as an acquisition of
Time Warner under the purchase method of accounting for business combinations.
Under the purchase method of accounting, the estimated cost of approximately
$147 billion to acquire Time Warner, including transaction costs, was allocated
to its underlying net assets, including the net assets of TWE to the extent
acquired, based on their respective estimated fair values. Any excess of the
purchase price over estimated fair values of the net assets acquired was
recorded as goodwill.
As a result of the Merger and the application of the purchase method of
accounting, the accompanying historical operating results and financial
condition are no longer comparable to 2001. Accordingly, in order to enhance
comparability and make an analysis of 2001 more meaningful, the following
discussion of results of operations and changes in financial condition and
liquidity is based upon pro forma financial information for 2000 as if the
Merger had occurred on January 1, 2000. These results also reflect
reclassifications of historical operating results and segment information to
conform to AOL Time Warner's financial statement presentation, as follows:
o TWE's digital media results have been allocated to the business segments
now responsible for managing those operations and are no longer treated as
a distinct line item;
o Income and losses related to equity-method investments and gains and losses
on the sale of investments have been reclassified from operating income
(loss) to other income (expense), net; and
o Corporate expenses have been reclassified to selling, general and
administrative costs as a reduction of operating income (loss).
Other Significant Transactions and Nonrecurring Items
As more fully described herein, the comparability of TWE's operating
results has been affected by certain significant transactions and nonrecurring
items in 2000. The operating results for the first three months of 2000, on both
a historical and pro forma basis, included (i) a pretax gain of $10 million
relating to the partial recognition of a deferred gain on the 1998 sale of Six
Flags Entertainment Corporation and (ii) a noncash charge of $524 million
reflecting the cumulative effect of an accounting change in connection with the
adoption of a new film accounting standard.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed after
excluding the effects of significant nonrecurring items. As such, the following
discussion and analysis focuses on amounts and trends adjusted to exclude the
impact of these unusual items. However, unusual items may occur in any period.
Accordingly, investors and other financial statement users individually should
consider the types of events and transactions for which adjustments have been
made.
38
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
RESULTS OF OPERATIONS
Consolidated Results
TWE had revenues of $3.542 billion and a net loss of $350 million for
the three months ended March 31, 2001, compared to revenues of $3.311 billion on
both a pro forma and historical basis and a loss before the cumulative effect of
an accounting change of $342 million on a pro forma basis (income before the
cumulative effect of an accounting change of $224 million on a historical basis)
for the three months ended March 31, 2000.
As previously described, in addition to the consummation of the Merger,
the comparability of TWE's operating results for the first quarter of 2000, on
both a pro forma and historical basis, has been affected by certain significant,
nonrecurring items aggregating approximately $514 million of net pretax losses.
Revenues. TWE's revenues increased to $3.542 billion in 2001, compared
to $3.311 billion in 2000. This increase was driven by an increase in
subscription revenues of 11% to $1.771 billion, an increase in advertising and
commerce revenues of 5% to $299 million and an increase in content and other
revenues of 3% to $1.472 billion. This compares to $1.594 billion, $284 million
and $1.433 billion, respectively, for the three months ended March 31, 2000 on a
pro forma basis.
As discussed more fully below, the increase in subscription revenues
was principally due to an increase in the number of subscribers and an increase
in subscription rates at both the Cable and Networks segments. The increase in
advertising and commerce revenues was principally due to increased advertising
at the Cable segment and advertising rate increases at The WB Network. The
increase in content and other revenues was principally due to increased
distribution of theatrical content at the Filmed Entertainment segment.
Net Loss. TWE's net loss decreased to $350 million in 2001, compared to
$866 million on a pro forma basis in 2000. Excluding the effect of the
nonrecurring items referred to earlier, TWE's net loss decreased marginally to
$350 million in 2001 from $353 million on a pro forma basis in 2000. TWE's net
loss decreased due to higher EBITDA and lower amortization expense, offset in
part by increases in depreciation expense, minority interest and interest
expense.
Depreciation and Amortization. Depreciation and amortization increased
to $898 million in 2001 from $912 million on a pro forma basis in 2000. This
increase was due to an increase in depreciation, primarily due to higher capital
spending at the Cable segment, offset in part by a decrease in amortization.
Interest Expense, Net. Interest expense increased to $153 million in
2001, compared to $138 million in 2000, principally as a result of higher
outstanding debt levels.
Other Expense, Net. Other expense, net, increased to $40 million of
expense in 2001, compared to $37 million of expense on a pro forma basis in
2000. Other expense, net, increased primarily due to higher losses from certain
investments accounted for under the equity method of accounting.
Minority Interest. Minority interest expense increased to $103 million
in 2001, compared to $40 million in 2000. Minority interest expense increased
principally due to pretax gains in 2001 on the exchange of various cable
television systems at an equity investee of the TWE-Advance/Newhouse Partnership
("TWE-A/N") attributable to the minority owners of TWE-A/N and a higher
allocation of losses in 2000 to a minority partner in The WB Network.
39
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Income Tax Expense. As a U.S. partnership, TWE is not subject to U.S.
federal and state income taxation. Income and withholding taxes of $32 million
in 2001 and $36 million on both a pro forma and historical basis in 2000, have
been provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Business Segment Results
Revenues and EBITDA are as follows:
Three Months Ended March 31,
-----------------------------------------------
Revenues EBITDA
---------------------- -----------------------
2001 2000 2001 2000(a)
Historical Pro Forma Historical Pro Forma
---------- --------- ---------- ---------
(millions)
Cable............................................... $1,387 $1,231 $ 661 $ 579
Filmed Entertainment-Warner Bros.................... 1,603 1,568 100 144
Networks............................................ 724 656 158 103
Corporate........................................... - - (19) (19)
Intersegment elimination............................ (172) (144) - -
------ ------ ----- -----
Total revenues and EBITDA........................... $3,542 $3,311 $ 900 $ 807
Depreciation and amortization....................... - - (922) (898)
------ ------ ----- -----
Total revenues and operating loss................... $3,542 $3,311 $ (22) $ (91)
====== ====== ===== =====
-------------------
(a) 2001 operating results reflect the impact of the America Online-Time Warner
merger. In order to enhance comparability, pro forma financial information
for 2000 is provided as if the Merger had occurred at the beginning of
2000, including certain reclassifications of TWE's historical operating
results to conform to AOL Time Warner's financial statement presentation.
TWE's historical EBITDA and operating income for the three months ended
March 31, 2000 were $810 million and $453 million, respectively.
Cable. Revenues increased to $1.387 billion in 2001, compared to $1.231
billion in 2000. EBITDA increased to $661 million in 2001 from $579 million on a
pro forma basis in 2000. Revenues increased due to a 12% increase in
subscription revenues and an 18% increase in advertising and commerce revenues.
The increase in subscription revenues was due to an increase in basic cable
rates, an increase in basic cable subscribers, an increase in digital cable
subscribers and an increase in subscribers to high-speed online services.
EBITDA increased principally as a result of the revenue gains, offset in part by
higher programming costs, principally due to programming rate increases.
Filmed Entertainment-Warner Bros. Revenues increased to $1.603 billion
in 2001, compared to $1.568 billion in 2000. EBITDA decreased to $100 million in
2001 from $144 million on a pro forma basis in 2000. Revenues benefited from
increased worldwide revenues from the distribution of theatrical product,
principally due to higher worldwide DVD sales, and increased television
licensing fees. EBITDA decreased principally due to higher advertising and
distribution costs due to a higher number and different timing of new theatrical
releases in comparison to the prior year's quarter, offset in part by the
revenue gains.
Networks. Revenues increased to $724 million in 2001, compared to $656
million in 2000. EBITDA increased to $158 million in 2001 from $103 million on a
pro forma basis in 2000. Revenues grew primarily due to an increase in
subscription revenues at HBO, primarily from an increase in the number of
subscribers. For The WB Network, revenues increased primarily due to an increase
in advertising and commerce revenues driven by advertising rate increases.
40
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
For HBO, the increase in EBITDA was principally due to the revenue
gains and increased cost savings from management's overhead cost management
program. For The WB Network, the increase in EBITDA was principally due to the
revenue gains.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 2001
Financial Condition
At March 31, 2001, TWE had $8.2 billion of debt, $384 million of cash
and equivalents (net debt of $7.8 billion) and $65.8 billion of partners'
capital, this was comparable to $7.1 billion of debt, $306 million of cash and
equivalents (net debt of $6.8 billion) and $66.4 billion of partners' capital
on a pro forma basis at December 31, 2000. On a historical basis, TWE had $7.1
billion of debt, $306 million of cash and equivalents (net debt of $6.8 billion)
and $6.9 billion of partners' capital at December 31, 2000.
Cash Flows
During the first three months of 2001, TWE's cash provided by
operations amounted to $600 million and reflected $900 million of business
segment EBITDA, less $163 million of net interest payments, $66 million of net
income taxes paid, $49 million of proceeds repaid under TWE's asset
securitization program and $22 million related to an increase in other working
capital requirements. Cash provided by operations of $776 million in the first
three months of 2000 reflected $807 million of pro forma business segment EBITDA
and $140 million related to a decrease in other working capital requirements,
less $150 million of net interest payments, $19 million of net income taxes
paid and $2 million of proceeds repaid under TWE's asset securitization program.
Cash used by investing activities was $1.117 billion in the first three
months of 2001, compared to $599 million in 2000, principally as a result of an
increase in cash used for investments and acquisitions and an increase in
capital expenditures. Capital expenditures increased to $512 million in the
first three months of 2001, compared to $391 million in 2000, primarily due to
increased capital spending in the Cable segment related to digital cable boxes,
high-speed modems and associated equipment.
Cash provided by financing activities was $595 million in the first
three months of 2001, compared to cash used by financing activities of $334
million in 2000. Cash provided by financing activities in 2001 primarily related
to $810 million of net borrowings, offset in part by capital distributions of
$197 million. Cash used in financing activities in 2000 primarily related to
$308 million of capital distributions.
Management believes that TWE's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to fund its capital
and liquidity needs for the foreseeable future.
Cable Capital Spending
As discussed previously, TWE's capital spending primarily relates to
spending at Time Warner Cable. Time Warner Cable has been engaged in a plan to
upgrade the technological capability and reliability of its cable television
systems and develop new services, which management believes will position the
business for sustained, long-term growth. Capital spending by TWE's Cable
division amounted to $489 million in 2001, compared to $360 million in
41
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
2000. Cable capital spending for the remainder of 2001 is expected to remain at
comparable levels, reflecting spending on variable capital to facilitate the
continued roll-out of Time Warner Cable's popular digital services, including
digital cable and high-speed online services. At March 31, 2001, the Cable
segment had 2.1 million digital cable subscribers, a 16.7% penetration of basic
cable subscribers. This compares to 613,000 digital cable subscribers, or a
4.8% penetration of basic cable subscribers at March 31, 2000. Similarly, the
number of high-speed online customers grew to 1.2 million, or 7.4% of eligible
homes, from 447,000, or 4.4% of eligible homes at March 31, 2000. Such rapid
growth of subscribers to these digital services increased the variable capital
spending for digital cable boxes, high-speed modems and associated equipment.
Capital spending is expected to continue to be funded by Time Warner Cable's
operating cash flow.
Caution Concerning Forward-Looking Statements
The Securities and Exchange Commission (the "SEC") encourages companies
to disclose forward-looking information so that investors can better understand
a company's future prospects and make informed investment decisions. This
document contains such "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, particularly statements
anticipating future growth in revenues, EBITDA and cash flow. Words such as
"anticipates," "estimates," "expects," "projects," "intends," "plans,"
"believes" and words and terms of similar substance used in connection with any
discussion of future operating or financial performance identify such
forward-looking statements. Those forward-looking statements are based on
management's present expectations about future events. As with any projection or
forecast, they are inherently susceptible to uncertainty and changes in
circumstances, and TWE is under no obligation to (and expressly disclaims any
such obligation to) update or alter its forward-looking statements whether as a
result of such changes, new information, future events or otherwise.
TWE operates in highly competitive, consumer driven and rapidly
changing media and entertainment businesses that are dependent on government
regulation and economic, political and social conditions in the countries in
which they operate, consumer demand for their products and services,
technological developments and (particularly in view of technological changes)
protection of their intellectual property rights. TWE's actual results could
differ materially from management's expectations because of changes in such
factors. Other factors could also cause actual results to differ from those
contained in the forward-looking statements, including those identified in
TWE's other filings with the SEC and the following:
o For TWE's cable business, more aggressive than expected competition from
new technologies and other types of video programming distributors,
including DBS and DSL; increases in government regulation of basic cable or
equipment rates or other terms of service (such as "digital must-carry,"
open access or common carrier requirements); government regulation of other
services, such as broadband cable modem service; increased difficulty in
obtaining franchise renewals; the failure of new equipment (such as digital
set-top boxes) or services (such as digital cable, high-speed online
services, telephony over cable or video on demand) to appeal to enough
consumers or to be available at reasonable prices, to function as expected
and to be delivered in a timely fashion; fluctuations in spending levels by
business and consumers; and greater than expected increases in programming
or other costs.
o For TWE's cable and broadcast television programming businesses, greater
than expected programming or production costs; a strike by television
actors and writers; public and cable operator resistance to price increases
(and the negative impact on premium programmers of increases in basic cable
rates); increased regulation of distribution agreements; the sensitivity of
advertising to economic cyclicality; the development of new technologies
that alter the role of programming networks and services; and greater
than expected fragmentation of consumer
42
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
viewership due to an increased number of programming services or the
increased popularity of alternatives to television.
o For TWE's film businesses, their ability to continue to attract and select
desirable talent and scripts at manageable costs; a strike by screen actors
and writers; general increases in production costs; fragmentation of
consumer leisure and entertainment time (and its possible negative effects
on the broadcast and cable networks, which are significant customers of
these businesses); continued popularity of merchandising; and the
uncertain impact of technological developments, such as the Internet.
In addition, TWE's overall financial strategy, including growth in
operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions, economic
slowdowns, consequences of the euro conversion and changes in TWE's plans,
strategies and intentions.
43
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31, December 31,
2001 2000 2000
Historical Pro Forma(a) Historical(a)
----------- ---------- -----------
(millions)
ASSETS
Current assets
Cash and equivalents....................................................... $ 384 $ 306 $ 306
Receivables, including $1.452, $1.556 and $1.556 billion due from AOL
Time Warner, less allowances of $707, $677 and $677 million............ 3,317 3,643 3,643
Inventories................................................................ 756 762 762
Prepaid expenses........................................................... 264 200 200
------- ------- -------
Total current assets....................................................... 4,721 4,911 4,911
Noncurrent inventories and film costs...................................... 4,799 3,938 2,579
Investments................................................................ 2,722 2,218 543
Property, plant and equipment.............................................. 7,700 7,468 7,493
Cable television franchises................................................ 20,470 23,100 5,329
Brands and trademarks...................................................... 2,135 2,500 -
Goodwill and other intangible assets....................................... 42,118 39,882 3,603
Other assets............................................................... 905 959 1,000
------- ------- -------
Total assets............................................................... $85,570 $84,976 $25,458
======= ======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable........................................................... $ 2,329 $ 2,272 $ 2,272
Participations payable..................................................... 973 969 969
Programming costs payable.................................................. 518 455 455
Debt due within one year................................................... 2 3 3
Other current liabilities, including $1.323, $1.223 and $1.223 billion due
to AOL Time Warner..................................................... 2,566 2,799 2,799
------- ------- -------
Total current liabilities.................................................. 6,388 6,498 6,498
Long-term debt, including $202 million due to AOL Time Warner at
March 31, 2001......................................................... 8,172 7,108 7,108
Other long-term liabilities, including $828, $681 and $681 million due to
AOL Time Warner........................................................ 3,280 3,045 3,045
Minority interests......................................................... 1,969 1,881 1,881
Partners' capital
Contributed capital........................................................ 66,795 66,793 7,349
Partnership deficit........................................................ (1,034) (349) (423)
------- ------- -------
Total partners' capital.................................................... 65,761 66,444 6,926
------- ------- -------
Total liabilities and partners' capital.................................... $85,570 $84,976 $25,458
======= ======= =======
-------------------
(a) TWE's historical financial statements for the prior period represent
the financial results of TWE prior to the America Online-Time Warner
merger. In order to enhance comparability, pro forma financial statements
for 2000 are presented supplementally as if the merger of America Online
and Time Warner had occurred at the beginning of 2000 (Note 1).
See accompanying notes.
44
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31,
(Unaudited)
2001 2000 2000
Historical Pro Forma(a) Historical(a)
---------- --------- ----------
(millions)
Revenues:
Subscriptions................................................................ $ 1,771 $ 1,594 $ 1,594
Advertising and commerce..................................................... 299 284 284
Content and other............................................................ 1,472 1,433 1,433
------- ------- -------
Total revenues(b)............................................................... 3,542 3,311 3,311
Cost of revenues(b)............................................................. (2,258) (2,084) (2,098)
Selling, general and administrative(b).......................................... (625) (623) (620)
Amortization of goodwill and other intangible assets............................ (681) (695) (140)
------- ------- -------
Operating income (loss)......................................................... (22) (91) 453
Interest expense, net........................................................... (153) (138) (138)
Other expense, net(b)........................................................... (40) (37) (15)
Minority interest............................................................... (103) (40) (40)
------- ------- -------
Income (loss) before income taxes and cumulative effect of accounting change.... (318) (306) 260
Income taxes.................................................................... (32) (36) (36)
------- ------- -------
Income (loss) before cumulative effect of accounting change..................... (350) (342) 224
Cumulative effect of accounting change.......................................... - (524) (524)
------- ------- -------
Net loss........................................................................ $ (350) $ (866) $ (300)
======= ====== ======
---------------
(a) TWE's historical financial statements for prior periods represent the
financial results of TWE prior to the America Online-Time Warner merger. In
order to enhance comparability, pro forma financial statements for 2000 are
presented supplementally as if the merger of America Online and Time Warner
had occurred at the beginning of 2000, including certain reclassifications
of TWE's historical operating results to conform to AOL Time Warner's
financial statement presentation (Note 1).
(b) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies:
Revenues................................................................. $207 $ 93 $ 93
Cost of revenues......................................................... (123) (63) (63)
Selling, general and administrative...................................... (36) (43) (43)
Other expense, net....................................................... 8 3 3
See accompanying notes.
45
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
------------------------------------
2001 2000 2000
Historical Pro Forma(a) Historical(a)
---------- --------- ----------
(millions)
OPERATIONS
Net loss......................................................... $ (350) $(866) $ (300)
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change........................ - 524 524
Depreciation and amortization................................. 922 898 357
Amortization of film costs.................................... 452 416 416
Equity in losses of investee companies after distributions.... 48 53 31
Changes in operating assets and liabilities...................... (472) (249) (252)
------- ----- -----
Cash provided by operations...................................... 600 776 776
------- ----- -----
INVESTING ACTIVITIES
Investments and acquisitions..................................... (605) (272) (272)
Capital expenditures............................................. (512) (391) (391)
Investment proceeds.............................................. - 64 64
------- ----- -----
Cash used by investing activities................................ (1,117) (599) (599)
------- ----- -----
FINANCING ACTIVITIES
Borrowings....................................................... 819 894 894
Debt repayments.................................................. (9) (901) (901)
Capital distributions............................................ (198) (308) (308)
Other............................................................ (17) (19) (19)
------- ----- -----
Cash provided (used) by financing activities..................... 595 (334) (334)
------- ----- -----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS...................... 78 (157) (157)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD...................... 306 517 517
------- ----- -----
CASH AND EQUIVALENTS AT END OF PERIOD............................ $ 384 $ 360 $ 360
======= ===== =====
-------------------
(a) TWE's historical financial statements for prior periods represent the
financial results of TWE prior to the America Online-Time Warner merger. In
order to enhance comparability, pro forma financial statements for 2000,
are presented supplementally as if the merger of America Online and Time
Warner had occurred at the beginning of 2000, including certain
reclassifications of TWE's historical operating results to conform to AOL
Time Warner's financial statement presentation (Note 1).
See accompanying notes.
46
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(Unaudited)
Three Months
Ended March 31,
-----------------------
2001 2000
Historical Historical
---------- ----------
(millions)
BALANCE AT BEGINNING OF PERIOD.............................................................. $ 6,926 $ 7,149
Allocation of a portion of the purchase price in connection with America Online-Time
Warner merger to TWE..................................................................... 59,518 -
------ -------
Balance at beginning of period, adjusted to give effect to the America Online-Time Warner
merger................................................................................... 66,444 7,149
Net income (loss)........................................................................... (350) (300)
Other comprehensive income (loss)........................................................... 14 (9)
------- -------
Comprehensive income........................................................................ (336) (309)
Distributions............................................................................... (345) (1,030)
Other....................................................................................... (2) 11
------- -------
BALANCE AT END OF PERIOD.................................................................... $65,761 $ 5,821
======= =======
See accompanying notes.
47
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
AOL Time Warner Inc. ("AOL Time Warner") is the world's first fully
integrated, Internet-powered media and communications company. The Company was
formed in connection with the merger of America Online, Inc. ("America Online")
and Time Warner Inc. ("Time Warner") which was consummated on January 11, 2001
(the "Merger"). As a result of the Merger, America Online and Time Warner
each became a wholly owned subsidiary of AOL Time Warner.
A majority of AOL Time Warner's interests in filmed entertainment,
television production and cable television systems, and a portion of its
interests in cable television and broadcast network programming, are
held through Time Warner Entertainment Company, L.P. ("TWE"). AOL Time Warner
owns general and limited partnership interests in TWE consisting of 74.49% of
the pro rata priority capital ("Series A Capital") and residual equity capital
("Residual Capital"), and 100% of the junior priority capital. The remaining
25.51% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by MediaOne TWE Holdings, Inc., a subsidiary of AT&T
Corp.
TWE, a Delaware limited partnership, classifies its business interests
into three fundamental areas: Cable, consisting principally of interests in
cable television systems; Filmed Entertainment, consisting principally of
interests in filmed entertainment and television production; and Networks,
consisting principally of interests in cable television and broadcast network
programming.
Each of the business interests within Cable, Filmed Entertainment and
Networks is important to TWE's objective of increasing partner value through the
creation, extension and distribution of recognizable brands and copyrights
throughout the world. Such brands and copyrights include (1) Time Warner Cable,
currently the second largest operator of cable television systems in the U.S.,
(2) the unique and extensive film, television and animation libraries of Warner
Bros. and trademarks such as the Looney Tunes characters and Batman, (3) HBO and
Cinemax, the leading pay-television services and (4) The WB Network, a national
broadcasting network launched in 1995 as an extension of the Warner Bros. brand
and as an additional distribution outlet for Warner Bros.'s collection of
children's cartoons and television programming.
The operating results of TWE's various business segments are presented
herein as an indication of financial performance (Note 5). TWE's business
segments generate significant cash flow from operations. The cash flow from
operations generated by such business segments is considerably greater than
their operating income due to significant amounts of noncash amortization of
intangible assets recognized principally in the merger of America Online
and Time Warner. Noncash amortization of intangible assets recorded by TWE's
business segments amounted to $681 million in the first quarter of 2001 and
$695 million on a pro forma basis in the first quarter of 2000 ($140 million
on a historical basis).
48
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Basis of Presentation
America Online-Time Warner Merger
The Merger has been accounted for by AOL Time Warner as an acquisition
of Time Warner under the purchase method of accounting for business
combinations. Under the purchase method of accounting, the cost of approximately
$147 billion to acquire Time Warner, including transaction costs, was allocated
to its underlying net assets, including the net assets of TWE to the extent
acquired, based on their respective estimated fair values. The excess of the
purchase price over the estimated fair values of the net assets acquired was
recorded as goodwill. A preliminary allocation of the excess of the purchase
price, including transaction costs, over the book value of TWE's net assets to
the extent acquired has been made to goodwill and other intangible assets,
including film and television libraries, cable television franchises and brands
and trademarks. The goodwill and identified intangible assets will be amortized
on a straight-line basis over the following weighted-average useful lives:
Weighted-Average
Useful Life
-----------
(Years)
Film and television libraries................... 17
Cable television franchises..................... 25
Brands and trademarks........................... 34
Goodwill........................................ 25
The estimates of the fair values and weighted average useful lives of
net assets acquired, identified intangibles and goodwill are based upon a
preliminary estimate. Additional work needs to be completed in finalizing the
allocation of the purchase price to net assets, identified intangibles and
goodwill acquired. TWE does not expect the final allocation of the purchase
price to differ materially from the amounts included in the accompanying
consolidated financial statements.
Because the Merger was not consummated on or before December 31, 2000,
the accompanying consolidated financial statements and notes for 2000 reflect
only the financial results of TWE on a historical basis without the significant
amortization created by the Merger. However, in order to enhance comparability,
pro forma consolidated financial statements are presented supplementally to
illustrate the effects of the Merger on the historical financial position and
operating results of TWE. The pro forma financial statements for TWE are
presented as if the Merger between America Online and Time Warner had occurred
on January 1, 2000. These results also reflect reclassifications TWE's
historical operating results and segment information to conform to the combined
AOL Time Warner's financial statement presentation, as follows:
o TWE's digital media results have been allocated to the business segments
now responsible for managing those operations and are no longer treated as
a distinct line item;
o Income and losses related to equity-method investments and gains and losses
on the sale of investments have been reclassified from operating income
(loss) to other income (expense), net; and
o Corporate services have been reclassified to selling, general and
administrative costs as a reduction of operating income (loss).
49
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Interim Financial Statements
The accompanying consolidated financial statements are unaudited but,
in the opinion of management, contain all the adjustments (consisting of those
of a normal recurring nature) considered necessary to present fairly the
financial position and the results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles applicable
to interim periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of TWE
included in AOL Time Warner's Current Report on Form 8-K/A dated January 11,
2001, filed February 9, 2001 (the "2000 Financial Statements").
Cumulative Effect of Change in Film Accounting Principle
In June 2000, TWE adopted Statement of Position 00-2, "Accounting by
Producers and Distributors of Films" ("SOP 00-2"). SOP 00-2 established new film
accounting standards, including changes in revenue recognition and accounting
for advertising, development and overhead costs. Specifically, SOP 00-2 requires
advertising costs for theatrical and television product to be expensed as
incurred. This compares to TWE's previous policy of first capitalizing and then
expensing advertising costs for theatrical product over the related revenue
streams. In addition, SOP 00-2 requires development costs for abandoned projects
and certain indirect overhead costs to be charged directly to expense, instead
of those costs being capitalized to film costs, which was required under the
previous accounting model. SOP 00-2 also requires all film costs to be
classified in the balance sheet as noncurrent assets. Provisions of SOP 00-2 in
other areas, such as revenue recognition, generally are consistent with TWE's
existing accounting policies.
TWE adopted the provisions of SOP 00-2 retroactively to the beginning
of 2000. As a result, TWE's net income in 2000 includes a one-time, noncash
charge of $524 million, primarily to reduce the carrying value of its film
inventory. This charge has been reflected as a cumulative effect of an
accounting change in the accompanying consolidated statement of operations.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
Replacement of FASB Statement No. 125" ("FAS 140"). FAS 140 revises the criteria
for accounting for securitizations and other transfers of financial assets and
collateral. In addition, FAS 140 requires certain additional disclosures. Except
for the new disclosure provisions, which were effective for the year ended
December 31, 2000, FAS 140 is effective for the transfer of financial assets
occurring after March 31, 2001. Management does not expect the provisions of FAS
140 to have a significant effect on TWE's consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the 2001 presentation.
50
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
2. MERGER-RELATED COSTS
America Online-Time Warner Merger
In connection with the Merger, TWE has reviewed its operations and
implemented several plans to restructure the operations of America Online and
Time Warner ("restructuring plans"). As part of the restructuring plans, TWE
recorded a restructuring liability of approximately $210 million during the
first quarter of 2001. The restructuring liability is for costs to be incurred
for exiting and consolidating activities at TWE, as well as costs incurred to
terminate employees throughout TWE.
Of the total restructuring costs, $55 million related to work force
reductions and represented employee termination benefits. Because certain
employees can defer receipt of termination benefits for up to 24 months, cash
payments will continue after the employee has been terminated. As of March 31,
2001, the liability was primarily classified as a current liability in the
accompanying consolidated balance sheet.
The restructuring charge also includes approximately $155 million
associated with exiting certain activities, primarily related to lease and
contract termination costs. Specifically, TWE plans to exit certain under-
performing operations, including the Studio Store operations included in the
Filmed Entertainment segment. The restructuring charge associated with other
exiting activities specifically includes incremental costs and contractual
obligations for items such as leasehold termination payments and other facility
exit costs incurred as a direct result of these plans, which will not have
future benefits. As of March 31, 2001, the remaining liability of $150 million
was primarily classified as a current liability in the accompanying consolidated
balance sheet.
The restructuring costs recorded in the first quarter are based on
TWE's restructuring plans that have been committed to by management. These
integration plans may be broadened to include additional restructure initiatives
as management continues to evaluate the integration of the combined companies
and complete its purchase price allocation.
Selected information relating to the restructuring plans follows:
Employee Other
Termination Exit Costs Total
----------- ---------- -----
Initial Accruals $ 55 $155 $210
Cash paid - (5) (5)
---- ---- ----
Restructuring liability as of March 31, 2001 $ 55 $150 $205
==== ==== ====
51
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
3. INVENTORIES AND FILM COSTS
Inventories and film costs consist of:
March 31, 2001 December 31, 2000 December 31, 2000
Historical Pro Forma Historical
---------- --------- ----------
(millions)
Programming costs, less amortization.......................... $1,153 $1,029 $1,014
Film costs-Theatrical:
Released, less amortization................................ 647 711 711
Completed and not released................................. 292 113 113
In production.............................................. 407 386 386
Development and pre-production............................. 27 25 25
Film costs-Television:
Released, less amortization................................ 201 133 133
Completed and not released................................. 159 194 194
In production.............................................. 38 76 76
Development and pre-production............................. 5 5 5
Film costs-Library, less amortization......................... 2,481 1,800 456
Merchandise................................................... 145 228 228
------ ------ ------
Total inventories and film costs.............................. 5,555 4,700 3,341
Less current portion of inventory............................. 756 762 762
------ ------ ------
Total noncurrent inventories and film costs................... $4,799 $3,938 $2,579
====== ====== ======
4. PARTNERS' CAPITAL
TWE is required to make distributions to reimburse the partners for
income taxes at statutory rates based on their allocable share of taxable
income, and to reimburse AOL Time Warner for stock options granted to employees
of TWE based on the amount by which the market price of AOL Time Warner common
stock exceeds the option exercise price on the exercise date or, with respect to
options granted prior to the TWE capitalization on June 30, 1992, the greater of
the exercise price or the $9.25 market price of AOL Time Warner common stock
(adjusted for the Merger) at the time of the TWE capitalization. TWE accrues a
stock option distribution and a corresponding liability with respect to
unexercised options when the market price of AOL Time Warner common stock
increases during the accounting period, and reverses previously accrued stock
option distributions and the corresponding liability when the market price of
AOL Time Warner common stock declines.
During the three months ended March 31, 2001, TWE accrued $35 million
of tax-related distributions and $310 million of stock option distributions,
based on closing prices of AOL Time Warner common stock of $40.15 at March 31,
2001 and $34.80 at December 31, 2000. During the three months ended March 31,
2000, TWE accrued $145 million of tax-related distributions and $885 million of
stock option distributions as a result of an increase at that time in the market
price of AOL Time Warner common stock. During the three months ended March 31,
2001, TWE paid distributions to the AOL Time Warner General Partners in the
amount of $198 million, consisting of $35 million of tax-related distributions
and $163 million of stock option related distributions. During the three months
ended March 31, 2000, TWE paid the AOL Time Warner General Partners
distributions in the amount of $308 million, consisting of $145 million of
tax-related distributions and $163 million of stock option related
distributions.
52
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
5. SEGMENT INFORMATION
As a result of the Merger, AOL Time Warner management assessed the
manner in which financial information of TWE is reviewed in making operating
decisions and assessing performance. In accordance with Financial Accounting
Standards Board No. 131 "Disclosures About Segments of an Enterprise and Related
Information," TWE reclassified its 2000 historical segment presentation to
conform to the current presentation.
TWE classifies its business interests into three fundamental areas:
Cable, consisting principally of interests in cable television systems; Filmed
Entertainment, consisting principally of interests in filmed entertainment and
television production; and Networks, consisting principally of interests in
cable television and broadcast network programming.
Information as to the operations of TWE in different business segments
is set forth below based on the nature of the products and services offered. TWE
evaluates performance based on several factors, of which the primary financial
measure is operating income (loss) before noncash depreciation of tangible
assets and amortization of intangible assets ("EBITDA"). The accounting policies
of the business segments are the same as those described in the summary of
significant accounting policies under Note 1 in TWE's 2000 Financial Statements.
Intersegment sales are accounted for at fair value as if the sales were to third
parties.
Three Months Ended March 31,
----------------------------
2001 2000 2000
Historical Pro Forma(a) Historical
---------- --------- ----------
(millions)
Revenues
Cable.............................................. $1,387 $1,231 $1,231
Filmed Entertainment-Warner Bros................... 1,603 1,568 1,568
Networks........................................... 724 656 656
Intersegment elimination........................... (172) (144) (144)
------ ------ ------
Total.............................................. $3,542 $3,311 $3,311
====== ====== ======
-------------------
(a) Pro forma revenues for 2000 include certain reclassifications of each
segment's historical operating results to conform to AOL Time Warner's
financial statement presentation. On a pro forma basis, the Merger had no
impact on TWE's historical consolidated revenues for the three months ended
March 31, 2000.
Three Months Ended March 31,
----------------------------
2001 2000 2000
Historical Pro Forma(a) Historical
---------- --------- ----------
(millions)
EBITDA(b)
Cable............................................... $ 661 $ 579 $ 580
Filmed Entertainment-Warner Bros.................... 100 144 145
Networks............................................ 158 103 104
Corporate........................................... (19) (19) (19)
----- ----- -----
Total............................................... $ 900 $ 807 810
===== ===== =====
---------------
(a) 2001 EBITDA reflects the impact of the America Online-Time Warner merger.
In order to enhance comparability, pro forma EBITDA for 2000 is provided as
if the Merger had occurred at the beginning of 2000, including certain
reclassifications of TWE's historical operating results to conform to AOL
Time Warner's financial statement presentation.
(b) EBITDA represents business segment operating income (loss) before
depreciation and amortization of intangible assets. After deducting
depreciation of tangible assets and amortization of intangible assets, TWE
reported an operating loss of $22 million in 2001 and $91 million in 2000
on a pro forma basis (operating income of $453 million on a historical
basis).
53
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Three Months Ended March 31,
----------------------------
2001 2000 2000
Historical Pro Forma(a) Historical
---------- --------- ----------
(millions)
Depreciation of Property, Plant and Equipment
Cable..................................................... $ 211 $ 172 $ 186
Filmed Entertainment-Warner Bros.......................... 21 22 22
Networks.................................................. 8 7 7
Corporate................................................. 1 2 2
------ ------ ------
Total..................................................... $ 241 $ 203 $ 217
====== ====== ======
-------------------
(a) 2001 depreciation reflects the impact of the America Online-Time Warner
merger. In order to enhance comparability, pro forma depreciation for 2000
is provided as if the Merger had occurred at the beginning of 2000,
including certain reclassifications of TWE's historical operating results
to conform to AOL Time Warner's financial statement presentation.
Three Months Ended March 31,
----------------------------
2001 2000 2000
Historical Pro Forma(a) Historical
---------- --------- ----------
(millions)
Amortization of Intangible Assets(b)
Cable................................................... $ 488 $ 491 $ 109
Filmed Entertainment-Warner Bros........................ 98 102 30
Networks................................................ 95 102 1
------ ------ ------
Total................................................... $ 681 $ 695 $ 140
====== ====== ======
----------------------------
(a) 2001 amortization reflects the impact of the America Online-Time Warner
merger. In order to enhance comparability, pro forma amortization for 2000
is provided as if the Merger had occurred at the beginning of 2000,
including certain reclassifications of TWE's historical operating results
to conform to AOL Time Warner's financial statement presentation.
(b) Includes amortization relating to business combinations accounted for by
the purchase method, substantially all of which arose in the merger of
America Online and Time Warner in 2001.
TWE's assets have significantly increased since December 31, 2000 due
to the consummation of the Merger and the allocation of the $147 billion cost to
acquire Time Warner to the underlying net assets of Time Warner, including the
net assets of TWE to the extent acquired, based on their respective estimated
fair values. Any excess of the purchase price over estimated fair value of the
net assets acquired was recorded as goodwill and allocated among AOL Time
Warner's business segments, including the business segments of TWE. As such,
TWE's assets by business segment are as follows:
March 31, December 31,
2001 2000
Historical Pro Forma(a)
---------- ---------
(millions)
Assets
Cable........................................... $56,685 $56,097
Filmed Entertainment-Warner Bros................ 16,915 16,825
Networks........................................ 11,446 11,654
Corporate....................................... 524 400
------- -------
Total business segment assets................... $85,570 $84,976
======= =======
-------------------
(a) 2001 assets reflect the impact of the America Online-Time Warner merger. In
order to enhance comparability, pro forma assets as of December 31, 2000
are provided as if the Merger had occurred at the beginning of 2000. TWE's
historical assets as of December 31, 2000 were $25.458 billion.
54
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES
In Six Flags Over Georgia LLC et al. v. Time Warner Entertainment
Company et al., following a trial in December 1998, the jury returned a verdict
for plaintiffs and against defendants, including TWE, on plaintiffs' claims for
breaches of fiduciary duty. The jury awarded plaintiffs approximately $197
million in compensatory damages and $257 million in punitive damages, and
interest has been accruing on those amounts at the Georgia annual statutory rate
of twelve percent. The Company has since paid the compensatory damages with
accrued interest. Payment of the punitive damages portion of the award with
accrued interest was stayed by the United States Supreme Court on March 1, 2001
pending the disposition of a certiorari petition with that Court, which has
not yet been filed by TWE.
The costs and other effects of pending or future litigation,
governmental investigations, legal and administrative cases and proceedings
(whether civil or criminal), settlements, judgements and investigations, claims
and changes in those matters (including the matter described above), and
developments or assertions by or against TWE relatig to intellectual property
rights and intellectual property licenses, could have a material adverse effect
on TWE's business, financial condition and operating results.
7. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
Additional financial information with respect to cash flows is as
follows:
Three Months Ended March 31,
----------------------------
2001 2000 2000
Historical Pro Forma Historical
---------- --------- ----------
(millions)
Cash payments made for interest, net.................. $163 $150 $150
Cash payments made for income taxes, net.............. 66 19 19
Noncash capital distributions......................... 147 722 722
Other Expense, Net
Other expense, net, consists of:
Three Months Ended March 31,
----------------------------
2001 2000 2000
Historical Pro Forma Historical
---------- --------- ----------
(millions)
Other investment-related activity, principally
net losses on equity investees....................... $(33) $(22) $ -
Losses on asset securitization programs................ (6) (3) (3)
Miscellaneous.......................................... (1) (12) (12)
---- ---- ----
Total other income (expense), net...................... $(40) $(37) $(15)
==== ==== ====
55
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Other Current Liabilities
Other current liabilities consist of:
March 31, December 31, December 31,
2001 2000 2000
Historical Pro Forma Historical
---------- --------- ----------
Accrued expenses.................. $1,994 $2,071 $2,071
Accrued compensation.............. 227 352 352
Deferred revenues................. 302 297 297
Accrued income taxes.............. 43 79 79
------ ------ ------
Total............................. $2,566 $2,799 $2,799
====== ====== ======
56
Part II. Other Information
Item 1. Legal Proceedings.
Reference is made to the consolidated putative class action litigation
against America Online, Inc. ("America Online") concerning AOL version 5.0
software, described on page I-34 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 (the "2000 Form 10-K"). On April 19, 2001, the
court ruled on America Online's motion to dismiss and dismissed all but one of
the consumer claims brought under the Computer Fraud and Abuse Act ("CFAA") with
prejudice and dismissed the remaining consumer CFAA claim without prejudice.
Regarding the claims brought by competing Internet service providers, the court
dismissed one CFAA claim with prejudice, allowed one CFAA claim to remain and
dismissed all remaining claims without prejudice, including claims alleging
unfair business practices and tortious interference.
Reference is made to Ottinger & Silvey et al. v. EMI Music
Distribution, Inc. et al., and related suits described on page I-35 of the
Company's 2000 Form 10-K, which were brought purportedly on behalf of persons in
sixteen states and the District of Columbia. On March 27, 2001, the Tennessee
trial court ruled that the case must be limited to Tennessee plaintiffs and
dismissed the action as to the other plaintiffs. Similar cases are pending in
nine other states; motions to dismiss are pending in eight of these actions.
Reference is made to the lawsuit brought by the former President of
Indonesia, H.M. Suharto, against Time Inc. Asia and certain individuals,
described on page I-35 of the Company's 2000 Form 10-K. Suharto's appeal to the
intermediate appellate court in Indonesia has been denied.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as a part of this report and such Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K dated January 11,
2001 in which it reported in Item 2 the closing of the merger
between America Online and Time Warner Inc. ("Time Warner")
(filing date January 12, 2001).
(ii) The Company filed a Current Report on Form 8-K dated January 18,
2001 setting forth in Item 5 financial statements of America
Online for the three months ended September 30, 2000 adjusted to
reflect purchase rather than pooling accounting treatment for
three acquisitions (filing date January 26, 2001).
(iii) The Company filed a Current Report on Form 8-K/A dated January
11, 2001 setting forth in Item 7 pro forma financial statements
of the Company for the period ended September 30, 2000 (filing
date January 26, 2001).
(iv) The Company filed a Current Report on Form 8-K/A dated January
11, 2001 setting forth in Item 7 consolidated financial
statements of Time Warner, Time Warner Entertainment Company,
L.P. ("TWE") and the TWE General Partners for the quarter and
year ended December 31, 2000 (filing date February 9, 2001).
57
(v) The Company filed a Current Report on Form 8-K/A dated January
11, 2001 setting forth in Item 7 pro forma financial statements
of the Company for the period ended December 31, 2000 (filing
date March 30, 2001).
(vi) The Company filed a Current Report on Form 8-K dated April 18,
2001 in which it reported in Item 5 that the Company announced
its results of operations for the quarter ended March 31, 2001
(filing date April 19, 2001).
58
AOL TIME WARNER INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
AOL TIME WARNER INC.
(Registrant)
By: /s/ J. Michael Kelly
------------------------------------
Name: J. Michael Kelly
Title: Executive Vice President and
Chief Financial Officer
Dated: May 16, 2001
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
----------- ----------------------
4 Indenture dated as of April 19, 2001 among the Company, America Online,
Time Warner, Time Warner Companies, Inc. ("TWCI") and Turner Broadcasting
System, Inc. ("TBS"), and The Chase Manhattan Bank, as Trustee (incorporated
by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001 (the "March 2001 Form 10-Q")).
10.1 Credit Agreement dated as of April 6, 2001 among the Company, as Borrower,
The Chase Manhattan Bank, as Administrative Agent, Citibank, N.A. and
Bank of America N.A. as Co-Syndication Agents, and ABN AMRO Bank, N.V.,
as Documentation Agent (incorporated by reference to Exhibit 10.1 to the
March 2001 Form 10-Q).
10.2 Amended and Restated Employment Agreement made as of March 19, 1998,
as amended through April 20, 2001, between Gerald M. Levin and the
Company, as assignee of Time Warner (incorporated by reference to
Exhibit 10.2 to the March 2001 Form 10-Q).
10.3 Amended and Restated Employment Agreement made as of March 25, 1999,
as amended through April 20, 2001, between Richard D. Parsons and the
Company, as assignee of Time Warner (incorporated by reference to
Exhibit 10.3 to the March 2001 Form 10-Q).
12.1 Statement regarding the computation of the ratio of earnings to fixed
charges of the Company (incorporated by reference to Exhibit 12.1 to
the March 2001 Form 10-Q).
12.2 Statement regarding the computation of the ratio of earnings to fixed
charges of America Online (incorporated by reference to Exhibit 12.2
to the March 2001 Form 10-Q).
12.3 Statement regarding the computation of the ratio of earnings to fixed
charges of Time Warner (incorporated by reference to Exhibit 12.3 to
the March 2001 Form 10-Q).
12.4 Statement regarding the computation of the ratio of earnings to fixed
charges of TWCI (incorporated by reference to Exhibit 12.4 to the
March 2001 Form 10-Q).
12.5 Statement regarding the computation of the ratio of earnings to fixed
charges of TBS (incorporated by reference to Exhibit 12.5 to
the March 2001 Form 10-Q).
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as ............................. 'SS'