SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 18, 2001
AOL TIME WARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 1-15062 13-4099534
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
75 Rockefeller Plaza, New York, NY 10019
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(Address of principal executive offices) (zip code)
(212) 484-8000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address, if changed since last report)
Item 5. Other Events.
On April 18, 2001, AOL Time Warner Inc. announced its results for
the quarter ended March 31, 2001 as set forth below.
AOL TIME WARNER INC.
BALANCE SHEET
(millions, except per share amounts)
(unaudited)
March 31, December 31,
2001 2000
Actual Pro Forma
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ASSETS
Current assets
Cash and equivalents $ 1,268 $ 3,300
Short-term investments - 886
Receivables, less allowances of $1.732 and
$1.725 billion 4,957 6,033
Inventories 1,857 1,583
Prepaid expenses and other current assets 1,897 1,908
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Total current assets 9,979 13,710
Noncurrent inventories and film costs 7,086 6,235
Investments, including available-for-sale securities 11,564 9,472
Property, plant and equipment at cost, net 11,514 11,174
Music catalogues, contracts 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, net 127,907 128,927
Other assets 2,345 2,329
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Total assets $211,991 $216,047
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,855 $ 2,125
Participations payable 1,201 1,190
Royalties and programming costs payable 1,447 1,488
Deferred revenue 1,779 1,660
Debt due within one year 17 45
Other current liabilities 6,378 6,163
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Total current liabilities 12,677 12,671
Long-term debt 20,176 21,318
Deferred income taxes 13,127 15,165
Deferred revenue 1,224 1,277
Other liabilities 4,787 4,050
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 2 2
Common stock, $.01 par value, 4.127 and 4.101
billion shares outstanding 41 41
Paid-in capital 156,018 155,796
Accumulated other comprehensive income, net 101 61
Retained earnings 363 1,727
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Total shareholders' equity 156,525 157,627
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Total liabilities and shareholders' equity $211,991 $216,047
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See accompanying notes.
AOL TIME WARNER INC.
STATEMENT OF OPERATIONS
Three Months Ended March 31,
(millions, except per share amounts)
(Unaudited)
2001 2000
Actual Pro Forma
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Revenues:
Subscriptions $ 3,857 $ 3,528
Advertising and commerce 2,053 1,865
Content and other 3,170 2,923
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Total revenues 9,080 8,316
Cost of revenues (5,010) (4,583)
Selling, general and administrative (2,371) (2,327)
Amortization of goodwill and other intangible assets (1,775) (1,752)
Gain on sale or exchange of cable television systems - 28
Merger-related costs (71) (46)
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Operating loss (147) (364)
Interest expense, net (319) (328)
Other income (expense), net (872) (104)
Minority interest (104) (55)
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Loss before income taxes and cumulative effect of
accounting change (1,442) (851)
Income tax benefit (provision) 73 (161)
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Loss before cumulative effect of accounting change (1,369) (1,012)
Cumulative effect of accounting change, net of
$295 million income tax benefit - (443)
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Net loss (1,369) (1,455)
Preferred dividend requirements - (5)
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Net loss applicable to common shares $(1,369) $(1,460)
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Basic and diluted loss per common share before
cumulative effect of accounting change $(0.31) $(0.24)
Cumulative effect of accounting change - (0.10)
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Basic and diluted net loss per common share $(0.31) $(0.34)
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Diluted cash earnings per share $ 0.08 $ 0.20
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Basic common shares 4,412.7 4,250.3
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Diluted common shares for cash earnings per share 4,591.6 4,616.8
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See accompanying notes.
AOL TIME WARNER INC.
STATEMENT OF CASH FLOWS
Three Months Ended March 31,
(millions; unaudited)
2001 2000
Actual Pro Forma
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OPERATIONS
Net loss $(1,369) $(1,455)
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change - 443
Depreciation and amortization 2,222 2,141
Amortization of film costs 626 500
Loss on writedown of investments 620 -
Gain on sale of investments (3) (297)
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)
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Cash provided by operations 976 909
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INVESTING ACTIVITIES
Acquisition of Time Warner Inc. cash and equivalents 690 -
Investments and acquisitions (973) (823)
Capital expenditures (906) (741)
Investment proceeds 1,649 474
Other - (16)
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Cash provided (used) by investing activities 460 (1,106)
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FINANCING ACTIVITIES
Borrowings 2,247 1,083
Debt repayments (4,091) (1,401)
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
Repurchases of common stock (615) (65)
Dividends paid (4) (67)
Other (17) (20)
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Cash used by financing activities (2,778) (101)
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DECREASE IN CASH AND EQUIVALENTS (1,342) (298)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 2,610 3,838
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CASH AND EQUIVALENTS AT END OF PERIOD $ 1,268 $ 3,540
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See accompanying notes.
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
Basis of Presentation
On January 11, 2001, America Online, Inc. ("America Online") and Time
Warner Inc. ("Time Warner") completed their previously announced merger.
The combined company is named AOL Time Warner Inc. ("AOL Time Warner" or
the "Company"). The financial statements of AOL Time Warner reflect the
application of the purchase method of accounting. Under the purchase method
of accounting, the estimated costs of approximately $147 billion to acquire
Time Warner, including transaction costs, have been allocated to Time
Warner's underlying net assets in proportion to their respective values.
However, because the valuation of certain of Time Warner's underlying
assets and liabilities continues to be refined, such allocation is subject
to change.
The 2000 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, based on a preliminary allocation of purchase accounting.
These results 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 separate reportable business segment;
o Income and losses related to equity-method investments and gains and
losses on the sale of investments have been reclassified from EBITDA
and operating income (loss) to other income (expense), net, to better
reflect the core operations of the business segments;
o Corporate expenses have been reclassified to selling, general and
administrative costs as a reduction of EBITDA and operating income
(loss); and
o Merger-related costs have been moved from other income (expense), net,
to EBITDA and operating income (loss).
Description of Business
The Company 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.
A majority of the Company's interests in Filmed Entertainment and Cable
segments, and a portion of its interests in the Networks segment are held
through Time Warner Entertainment Company, L.P.
Revenue Classification Changes
In the fourth quarter of 2000, the Company adopted Securities and Exchange
Commission 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 America Online's
and Time Warner's revenue recognition policies were consistent with the
provisions of SAB 101, the new rules result 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.
Adjusted Results
In order to meaningfully assess underlying operating trends, management
believes that operating results for each period should be analyzed after
excluding the effects of certain significant and nonrecurring items
discussed in Note 2. As such, the foregoing 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 users of this financial information individually should
consider the types of events and transactions for which adjustments have
been made.
Note 2: Significant Gains, Charges and Other Nonrecurring Items
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 statement of operations
for the three months ended March 31, 2001.
During the first quarter of 2000, the Company recognized gains of
approximately $285 million from the sale of certain investments. These
gains have been included in other income (expense), net, on a pro forma
basis, in the accompanying statement of operations for the three months
ended March 31, 2000.
Gains on the 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
consolidated cable television systems and investments. For the three months
ended March 31, 2000, the operating income 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,
management concluded that the decline in Columbia House's 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 statement of operations for
the three months ended March 31, 2000.
Merger-Related Costs
Merger-related costs consist of special charges related to mergers and
merger-related restructurings, including the America Online-Time Warner
merger.
In connection with the America Online-Time Warner merger, the Company has
incurred one-time merger-related costs, which are required to be expensed
in accordance with generally accepted accounting principles. Merger-related
costs for the first quarter amounted to $71 million in 2001, primarily
related to the AOL segment and $46 million in 2000 on a pro forma basis.
These costs have been included in operating income in the accompanying
statements of operations.
Cumulative Effect of Change in Film Accounting Principle
In June 2000, the Company 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. The Company
adopted the provisions of SOP 00-2 retroactive to the beginning of 2000. As
a result, the Company's operating results for the three months ended March
31, 2000 include a one-time, noncash, after-tax charge of approximately
$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 in the accompanying pro forma statement of operations.
Note 3: Income Taxes
The relationship between income before income taxes and income tax expense
of the Company is affected by the amortization of goodwill and certain
other financial statement expenses that are not deductible for income tax
purposes.
Note 4: Net Loss per Common Share
Basic net loss per common share is based upon the net loss applicable to
common shares after preferred dividend requirements and the weighted
average of common shares outstanding during the period. Diluted net loss
per common share adjusts for the effect of convertible securities, stock
options and other potentially dilutive financial instruments only in the
periods in which such effect would have been dilutive.
Note 5: Comparability of Net Loss per Common Share
As described more fully above, net loss per common share has been affected
by certain significant, nonrecurring items recognized in 2001 and 2000. The
aggregate net effect of these items was to increase basic net loss per
common share by $0.09 for the first quarter of 2001 and by $0.10 in 2000,
on a pro forma basis.
Note 6: Diluted Cash Earnings Per Share
Diluted cash earnings per share is defined as pretax income excluding the
effect of noncash amortization expense for consolidated and unconsolidated
entities, less cash paid for taxes. Diluted cash earnings per share is
calculated using weighted average shares outstanding after considering all
outstanding options and dilutive securities. As described more fully above,
diluted cash earnings per share has been affected by certain significant,
nonrecurring items recognized in 2001 and 2000. The aggregate net effect of
these items was to increase (decrease) diluted cash earnings per share by
$(0.15) for the first quarter of 2001 and $0.01 in 2000, on a pro forma
basis.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AOL TIME WARNER INC.
By: /s/ J. Michael Kelly
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Name: J. Michael Kelly
Title: Executive Vice President and
Chief Financial Officer
Date: April 18, 2001
By: /s/ James W. Barge
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Name: James W. Barge
Title: Vice President and Controller
Date: April 18, 2001