SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended June 30, 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)
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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 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 July 31, 2001
-------------------- -------------------
Common Stock - $.01 par value 4,271,787,903
Series LMCN-V Common Stock - $.01 par value 171,185,826
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AOL TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO FORM 10-Q
Page
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AOL Time
Warner TWE
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PART I. FINANCIAL INFORMATION
Management's discussion and analysis of results of operations and financial condition..... 1 46
Consolidated balance sheet at June 30, 2001 and December 31, 2000......................... 18 55
Consolidated statement of operations for the three and six months ended
June 30, 2001 and 2000............................................................... 19 56
Consolidated statement of cash flows for the six months ended June 30, 2001
and 2000............................................................................. 20 57
Consolidated statement of shareholders' equity and partnership capital for the six months
ended June 30, 2001 and 2000......................................................... 21 58
Notes to consolidated financial statements................................................ 22 59
Supplementary information................................................................. 38
PART II. OTHER INFORMATION.................................................................... 69
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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. ("MediaOne"), 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
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
resumed 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 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 separate reportable segment;
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.
For the six months ended June 30, 2001, these items included (i) merger-related costs in the first quarter of $71 million, relating to the Merger, and (ii) a $620 million noncash pretax charge to reduce the carrying value of certain
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
investments in AOL Time Warner's investment portfolio, primarily due to declines in market values experienced in the first quarter and deemed to be other than temporary.
For the six months ended June 30, 2000 on a pro forma basis, these
items included (i) merger-related costs of approximately $46 million in the
first quarter and $41 million in the second quarter relating to the Merger, (ii)
net pretax gains of approximately $28 million recognized in the first quarter
and net pretax losses of approximately $7 million in the second quarter relating
to the sale or exchange of various cable television systems and investments,
(iii) a $50 million pretax charge in the second quarter relating to the Six
Flags Entertainment Corporation ("Six Flags") litigation, (iv) pretax gains of
approximately $285 million in the first quarter from the sale or exchange of
certain investments, (v) a noncash, pretax charge of approximately $220 million
in the first quarter 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 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 six months ended June 30, 2000 on a historical basis, these items included (i) pretax gains of approximately $275 million in the first quarter from the sale or exchange of certain investments and (ii) approximately $10 million of merger-related costs in the second quarter.
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.
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
RESULTS OF OPERATIONS
Revenues and EBITDA by business segment are as follows:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------- -----------------------------------------
Revenues EBITDA Revenues EBITDA
----------------------- ---------------- --------------------- ------------------
2001 2000(a)(b) 2001 2000(b) 2001 2000(a)(b) 2001 2000(b)
Pro Pro Pro Pro
Historical Forma Historical Forma Historical Forma Historical Forma
---------- ----- ---------- ----- ---------- ----- ---------- -----
(millions)
AOL............................. $2,138 $1,885 $ 801 $ 583 $ 4,263 $ 3,699 $1,485 $1,089
Cable(c)........................ 1,711 1,502 777 685 3,336 2,949 1,545 1,379
Filmed Entertainment............ 1,893 1,804 250 213 4,105 3,700 363 398
Networks........................ 1,828 1,796 444 376 3,527 3,406 893 711
Music........................... 895 1,001 87 129 1,776 1,935 181 230
Publishing...................... 1,187 1,196 271 224 2,153 2,135 384 318
Corporate....................... - - (71) (76) - - (145) (160)
Merger-related costs............ - - - (41) - - (71) (87)
Intersegment elimination........ (450) (276) (22) (16) (878) (600) (23) (24)
------ ------ ------ ------ ------- ------- ------ ------
Total revenues and EBITDA....... $9,202 $8,908 $2,537 $2,077 $18,282 $17,224 $4,612 $3,854
Depreciation and amortization... - - (2,261) (2,139) - - (4,483) (4,280)
------ ------ ------ ------ ------- ------- ------ ------
Total revenues and operating
income (loss).................. $9,202 $8,908 $ 276 $ (62) $18,282 $17,224 $ 129 $ (426)
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(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 June 30, 2000 were $1.885 billion, $554 million and $456 million, respectively. AOL Time Warner's historical revenues, EBITDA and operating income for the six months ended June 30, 2000 were $3.699 billion, $1.038 billion and $832 million, respectively.
(c) EBITDA includes pretax gains of approximately $28 million in the first six months of 2000 relating to the sale or exchange of certain consolidated cable television systems.
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Consolidated Results
AOL Time Warner had revenues of $9.202 billion and a net loss of $734 million for the three months ended June 30, 2001, compared to revenues of $8.908 billion on a pro forma basis ($1.885 billion on a historical basis) and a net loss of $924 million on a pro forma basis (net income of $338 million on a historical basis) for the three months ended June 30, 2000. After preferred dividend requirements, AOL Time Warner had basic and diluted net loss per common share of $.17 in 2001, compared to basic and diluted net loss of $.22 per common share on a pro forma basis in 2000 (basic earnings per share of $.15 and diluted earnings per share of $.13 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 second quarter of 2000 has been affected by the recognition of certain significant, nonrecurring items. These nonrecurring items consisted of $98 million of net pretax losses on a pro forma basis in 2000 (net pretax losses of $10 million on a historical basis). The aggregate net effect if these items were excluded from
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
earnings would be to decrease basic and diluted net loss per common share by $.02 on a pro forma basis in 2000 (there was no impact on basic and diluted earnings per share on a historical basis).
Revenues. AOL Time Warner's revenues increased to $9.202 billion in 2001, compared to $8.908 billion on a pro forma basis in 2000 ($1.885 billion on a historical basis). This overall increase in revenues was driven by an increase in subscription revenues of 10% to $4.058 billion and an increase in advertising and commerce revenues of 1% to $2.278 billion, offset in part by a decrease in content and other revenues of 4% to $2.866 billion. This compares to $3.682 billion, $2.254 billion and $2.972 billion, respectively, on a pro forma basis in 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 due to increased advertising at the AOL and Cable segments and advertising rate increases and ratings increases in key demographic groups at The WB Network, almost fully offset by advertising decreases at the Publishing segment and the Turner cable networks, reflecting the overall weakness in the advertising market, which may impact operating results for the third and fourth quarters. The decrease in content and other revenues was principally due to lower revenue at the Music segment from the negative effect of changes in foreign currency rates on international recorded music sales and lower industry-wide international and domestic recorded music sales, which could continue for the remainder of the year. This decline was offset in part by increased distribution of theatrical content at the Filmed Entertainment segment.
Also contributing to the advertising revenue growth at the segment level is an increase in intercompany advertising transactions ($84 million in the second quarter of 2001, compared to $4 million in the second quarter of 2000). This growth reflects the Company's belief in the effectiveness of advertising on AOL Time Warner properties. Consistent with this view, the Company has re-directed, and will continue to re-direct where possible, advertising to AOL Time Warner properties. This will serve to enhance the overall operating efficiencies and profitability of the Company through the cross-promotion of each segment's products and services. Such intercompany advertising sales, which are recorded by each segment at fair value as if the transactions were with third parties, benefit the revenues and EBITDA of the individual segments. These intercompany transactions are eliminated on a consolidated basis and, therefore, do not themselves impact consolidated revenues and EBITDA. However, to the extent third-party advertising spending has been substituted with advertising on AOL Time Warner properties, the Company's consolidated advertising expense, which reflects its level of spending with third parties, has been reduced and, as a result, the consolidated EBITDA and related profit margin has benefited.
Net Income (Loss) and Net Income (Loss) Per Common Share. AOL Time Warner's net loss decreased by $190 million to $734 million in 2001, compared to $924 million on a pro forma basis in 2000 (net income of $338 million on a historical basis). However, excluding the significant effect of the nonrecurring items referred to earlier, the net loss decreased by $117 million to $734 million in 2001 from $851 million on a pro forma basis in 2000. Similarly, adjusted basic and diluted net loss per common share, excluding the effect of significant nonrecurring items, decreased to $.17 in 2001, compared to an adjusted basic and diluted net loss per common share of $.20 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 and lower losses associated with the Company's asset securitization programs, offset in part by higher depreciation and higher amortization of goodwill associated with certain investments accounted for under the equity method of accounting.
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Depreciation and Amortization. Depreciation and amortization increased to $2.261 billion in 2001 from $2.139 billion on a pro forma basis in 2000 ($98 million on a historical basis). This increase was due to increases in both depreciation, primarily due to higher levels of capital spending at the Cable segment over the past year, and amortization. The higher amortization in the second quarter of 2001 was primarily due to goodwill generated from certain restructuring liabilities that were committed to by management in both the first and second quarters 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 second quarter of 2000 that were accounted for under the purchase method of accounting.
Interest Income (Expense), Net. Interest expense, net, increased to $352 million in 2001, from $340 million on a pro forma basis in 2000 (interest income, net, of $73 million on a historical basis), principally as a result of lower interest income due to the sale in 2001 of short-term investments, offset in part by lower market interest rates in 2001 and by the absence in 2001 of additional interest expense recognized in the second quarter of 2000 related to the Six Flags litigation.
Other Income (Expense), Net. Other expense, net, decreased to $233 million in 2001 from $274 million on a pro forma basis in 2000 (other income, net, of $7 million on a historical basis). Other expense, net, decreased primarily because of lower losses associated with the Company's asset securitization programs, pretax gains on the exchange of various unconsolidated cable television systems in 2001 at TWE (attributable to MediaOne's minority interest) and the absence in 2001 of a noncash pretax charge of $24 million recognized in 2000 related to the Six Flags litigation, offset in part by higher amortization of goodwill associated with certain investments accounted for under the equity method of accounting. In addition, the Company recognized a noncash pretax charge in 2001 of approximately $54 million to reduce the carrying value of certain investments, primarily due to declines in market values deemed to be other-than-temporary. This charge was almost entirely offset by pretax gains related to derivative instruments and the sale of certain investments.
Minority Interest Income (Expense). Minority interest expense increased to $76 million in 2001, compared to $56 million on a pro forma basis in 2000 (minority interest income of $1 million on a historical basis). Minority interest expense increased principally due to the allocation of pretax gains related to the exchange of various unconsolidated cable television systems in 2001 at TWE attributable to MediaOne and a higher allocation of losses in 2000 to a minority partner in The WB Network, offset in part by a higher allocation of losses at TWE in 2001 to MediaOne.
Income Tax 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 income tax expense of $349 million in the second quarter of 2001, compared to $192 million on a pro forma basis in the second quarter of 2000 ($199 million on a historical basis). Income tax expense increased due to increases in EBITDA and the absence of one-time losses recorded in 2000, offset in part by an increase in depreciation expense. As of June 30, 2001, the Company had net operating loss carryforwards of approximately $11.8 billion, primarily resulting from stock option exercises, available to offset future U.S. federal taxable income.
Business Segment Results
AOL. Revenues increased to $2.138 billion in 2001, compared to $1.885 billion in 2000. EBITDA increased to $801 million in 2001, compared to $583 million in 2000. Revenues increased due to an 8% increase in subscription
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
revenues and a 26% increase in advertising and commerce revenues. During the quarter, AOL announced a price increase of $1.95 per month in its unlimited usage plan for the domestic AOL service, effective for billing cycles after July 1, 2001.
The growth in subscription revenues was principally due to an increase in subscribers, offset in part by a decline in the average subscription revenue per subscriber. The decrease in the average subscription revenue per subscriber is primarily due to certain promotional bundling programs that generate lower subscription revenues during introductory periods. The growth in advertising and commerce revenues was due to an overall increase in advertising, which also benefited from third-party advertising packages sold across multiple business segments of the Company and the intercompany sale of advertising to other business segments of AOL Time Warner. The 37% growth in EBITDA in 2001 is primarily due to the strong revenue growth and a decrease in network costs and selling, general and administrative costs as a percentage of subscription revenues, reflecting efficiencies AOL continues to gain as a result of its size and scale, as well as lower negotiated rates with its network providers. AOL's operating results also benefited from lower sales taxes and a reduction in bad debt expense associated with a substantial improvement in cash collections.
Cable. Revenues increased to $1.711 billion in 2001, compared to $1.502 billion on a pro forma basis in 2000. EBITDA increased to $777 million in 2001 from $685 million on a pro forma basis in 2000. Revenues increased due to a 13% increase in subscription revenues and a 19% 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. The increase in advertising and commerce revenues was primarily related to third-party advertising packages sold across multiple business segments of the Company and the intercompany sale of advertising to other business segments of AOL Time Warner. 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 $1.893 billion in 2001, compared to $1.804 billion on a pro forma basis in 2000. EBITDA increased to $250 million in 2001, compared to $213 million on a pro forma basis in 2000. Revenues grew due to an increase at Warner Bros., offset in part by a reduction in revenues at 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 the increased domestic distribution of theatrical product, principally due to higher domestic DVD sales, and increased television licensing fees. For the Turner filmed entertainment businesses, revenues decreased primarily due to lower worldwide theatrical revenues, offset in part by higher revenues from the distribution of theatrical product through pay-television and basic cable exhibition. For Warner Bros., EBITDA increased principally due to the increased revenues, offset in part by increased advertising and distribution costs because of an increase in the number and timing of new theatrical releases in comparison to the prior year's quarter. For the Turner filmed entertainment businesses, EBITDA increased principally due to lower losses on theatrical releases in comparison to the prior year's quarter, offset in part by the revenue declines.
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Networks. Revenues increased to $1.828 billion in 2001, compared to $1.796 billion on a pro forma basis in 2000. EBITDA increased to $444 million in 2001 from $376 million on a pro forma basis in 2000. Revenues grew primarily due to an increase in subscription revenues with growth at the Turner cable networks and HBO and an increase in advertising and commerce revenues at The WB Network, offset in part by lower advertising and commerce revenues and lower content and other revenues at the Turner cable networks.
For the Turner cable networks, 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. The decline in advertising and commerce revenues reflects the overall weakness in the advertising market, offset in part by the intercompany sale of advertising to other business segments of AOL Time Warner. The decline in content and other revenues is due to the absence in 2001 of revenues from World Championship Wrestling, an underperforming operation that the Company exited in 2001. For HBO, subscription revenues benefited primarily from an increase in the number of subscribers. For The WB Network, the increase in advertising and commerce revenues was driven by advertising rate increases, ratings increases in key demographic groups and the intercompany sale of advertising to other business segments of AOL Time Warner. EBITDA was higher due to improved results at the Turner cable networks, HBO and The WB Network. For the Turner cable networks, the increase in EBITDA was principally due to the increased subscription revenues, lower programming and marketing costs and other cost savings, offset in part by the advertising and commerce revenue declines. For HBO, the increase in EBITDA was principally due to the increase in revenues and increased cost savings from HBO's overhead cost management program. For The WB Network, the lower EBITDA losses were principally due to the increase in revenues.
Music. Revenues decreased to $895 million in 2001, compared to $1.001 billion on a pro forma basis in 2000. EBITDA decreased to $87 million in 2001 from $129 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, lower industry-wide recorded music sales and higher product returns. The decrease in EBITDA principally related to the reduction in revenues and higher marketing costs, including the cost of promoting new artists, offset in part by higher income from DVD manufacturing operations and lower artist royalty costs.
Publishing. Revenues decreased to $1.187 billion in 2001, compared to $1.196 billion on a pro forma basis in 2000. EBITDA increased to $271 million in 2001 from $224 million on a pro forma basis in 2000. Revenues decreased primarily due to the reduction in domestic trade book publishing revenues from the sale of fewer major bestsellers in 2001, which more than offset a modest increase in revenues at magazine publishing. Advertising and commerce revenues increased slightly due to higher advertising and commerce revenues from the acquisition of the Times Mirror magazines group in the fourth quarter of 2000 and higher commerce revenues from direct marketing efforts at Time Life, offset almost entirely by lower advertising revenues that reflects the overall weakness in the advertising market. Subscription revenues increased slightly primarily from the acquisition of the Times Mirror magazines group. EBITDA increased principally as a result of increased cost savings and the absence in 2001 of digital media development costs and losses generated in 2000 by American Family Enterprises ("AFE"), which was liquidated in the first quarter of 2001.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Consolidated Results
AOL Time Warner had revenues of $18.282 billion and a net loss of $2.103 billion for the six months ended June 30, 2001, compared to revenues of $17.224 billion on a pro forma basis ($3.699 billion on a historical basis) and
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
a loss before the cumulative effect of an accounting change of $1.936 billion on a pro forma basis (net income of $771 million on a historical basis) for the six months ended June 30, 2000. After preferred dividend requirements, AOL Time Warner had basic and diluted net loss per common share of $.48 in 2001, compared to basic and diluted loss before the cumulative effect of an accounting change of $.46 per common share on a pro forma basis in 2000 (basic earnings per share of $.34 and diluted earnings per share of $.30 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 six months 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 2001 and net pretax losses of $789 million on a pro forma basis in 2000 (net pretax income of $265 million on a historical basis). The aggregate net effect if these items were excluded from earnings would be to decrease basic and diluted net loss per common share by $.10 in 2001 and $.12 on a pro forma basis in 2000 (a decrease in basic and diluted earnings per share of $0.07 on a historical basis).
Revenues. AOL Time Warner's revenues increased to $18.282 billion in 2001, compared to $17.224 billion on a pro forma basis in 2000 ($3.699 billion on a historical basis). This overall increase in revenues was driven by an increase in subscription revenues of 10% to $7.915 billion, an increase in advertising and commerce revenues of 5% to $4.331 billion and an increase in content and other revenues of 2% to $6.036 billion. This compares to $7.210 billion, $4.119 billion and $5.895 billion, respectively, on a pro forma basis for the six months ended June 30, 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 and Cable segments and advertising rate increases and ratings increases in key demographic groups at The WB Network, offset in part by advertising declines at the Publishing segment and the Turner cable networks, reflecting the overall weakness in the advertising market, which may impact operating results for the third and fourth quarters. The increase in content and other revenues was principally due to increased revenues at the Filmed Entertainment segment, including the increased distribution of theatrical content, 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 industry-wide international and domestic recorded music sales, which could continue for the remainder of the year.
Also contributing to the advertising revenue growth at the segment level is an increase in intercompany advertising transactions ($155 million for the first six months of 2001, compared to $11 million for the first six months of 2000). This growth reflects the Company's belief in the effectiveness of advertising on AOL Time Warner properties. Consistent with this view, the Company has re-directed, and will continue to re-direct where possible, advertising to AOL Time Warner properties. This will serve to enhance the overall operating efficiencies and profitability of the Company through the cross-promotion of each segment's products and services. Such intercompany advertising sales, which are recorded by each segment at fair value as if the transactions were with third parties, benefit the revenues and EBITDA of the individual segments. These intercompany transactions are eliminated on a consolidated basis and, therefore, do not themselves impact consolidated revenues and EBITDA. However, to the extent third-party advertising spending has been substituted with advertising on AOL Time Warner properties, the Company's consolidated advertising expense, which reflects its level of spending with third parties, has been reduced and, as a result, the consolidated EBITDA and related profit margin has benefited.
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Net Income (Loss) and Net Income (Loss) Per Common Share. AOL Time Warner's net loss decreased by $276 million to $2.103 billion in 2001, compared to $2.379 billion on a pro forma basis in 2000 (net income of $771 million on a historical basis). However, excluding the significant effect of the nonrecurring items referred to earlier, the net loss decreased by $188 million to $1.688 billion in 2001 from $1.876 billion on a pro forma basis in 2000. Similarly, adjusted basic and diluted net loss per common share, excluding the effect of significant nonrecurring items, decreased to $.38 in 2001, compared to an adjusted basic and diluted net loss per common share of $.44 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 and lower losses associated with the Company's asset securitization program, offset in part by higher depreciation, higher amortization and higher amortization of goodwill associated with certain investments accounted for under the equity method of accounting.
Depreciation and Amortization. Depreciation and amortization increased to $4.483 billion in 2001 from $4.280 billion on a pro forma basis in 2000 ($206 million on a historical basis). 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 2001 was primarily due to goodwill generated from certain restructuring liabilities that were committed to by management in both the first and second quarters 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 second quarter of 2000 that were accounted for under the purchase method of accounting.
Interest Income (Expense), Net. Interest expense, net, increased to $671 million in 2001, from $668 million on a pro forma basis in 2000 (interest income, net, of $131 million on a historical basis), principally as a result of lower interest income due to the sale in 2001 of short-term investments, offset in part by lower market interest rates in 2001 and by the absence in 2001 of additional interest expense recognized in the second quarter of 2000 related to the Six Flags litigation.
Other Income (Expense), Net. Other expense, net, increased to $1.105 billion in 2001 from $378 million on a pro forma basis in 2000 (other income, net, of $287 million on a historical basis). Other expense, net, increased primarily because of a noncash pretax charge in 2001 of $674 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 increase was offset in part by lower losses on the Company's asset securitization programs, pretax gains on the exchange of various unconsolidated cable television systems in 2001 at TWE and the TWE Advance/Newhouse Partnership ("TWE-A/N") (attributable to the minority owners of TWE and TWE-A/N), pretax gains related to derivative instruments and the sale of certain investments and the absence in 2001 of noncash pretax charges in 2000 of $220 million to reduce the carrying value of the Company's investment in Columbia House and $24 million related to Six Flags litigation.
Minority Interest (Expense). Minority interest expense increased to $180 million in 2001, compared to $111 million on a pro forma basis in 2000 (there was no minority interest expense on a historical basis). Minority interest expense increased principally due to the allocation of pretax gains related to the exchange of various unconsolidated cable television systems in 2001 at TWE and TWE-A/N attributable to the minority owners of TWE and TWE-A/N and a higher allocation of losses in 2000 to a minority partner in The WB Network, offset in part by a higher allocation of losses at TWE in 2001 to MediaOne.
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Income Tax 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 income tax expense of $276 million in the first half of 2001, compared to $353 million on a pro forma basis in the first half of 2000 ($479 million on a historical basis). Income taxes, for financial reporting purposes, benefited from the tax effect of the $674 million noncash pretax charge to reduce the carrying value of certain investments in the first six months of 2001, while $21 million of net pretax gains related to the sale or exchange of various cable television systems and investments in the first six months of 2000 resulted in additional income tax expense in that quarter. Excluding the tax effect of these items, the effective tax rate was consistent in each period. Income tax expense increased due to increases in EBITDA and the absence of one-time losses recorded in 2000, offset in part by an increase in depreciation expense. As of June 30, 2001, the Company had net operating loss carryforwards of approximately $11.8 billion, primarily resulting from stock option exercises, available to offset future U.S. federal taxable income.
Business Segment Results
AOL. Revenues increased to $4.263 billion in 2001, compared to $3.699 billion in 2000. EBITDA increased to $1.485 billion in 2001, compared to $1.089 billion in 2000. Revenues increased due to an 8% increase in subscription revenues and a 31% increase in advertising and commerce revenues. During the second quarter, AOL announced a price increase of $1.95 per month in its unlimited usage plan for the domestic AOL service, effective for billing cycles after July 1, 2001.
The growth in subscription revenues was principally due to an increase in subscribers, offset in part by a decline in the average subscription revenue per subscriber. The decrease in the average subscription revenue per subscriber is primarily due to certain promotional bundling programs that generate lower subscription revenues during introductory periods. The growth in advertising and commerce revenues was due to an overall increase in advertising, which also benefited from third-party advertising packages sold across multiple business segments of the Company and the intercompany sale of advertising to other business segments of AOL Time Warner. The 36% growth in EBITDA in 2001 is primarily due to the strong revenue growth and a decrease in network costs and selling, general and administrative costs as a percentage of subscription revenues, reflecting efficiencies AOL continues to gain as a result of its size and scale, as well as lower negotiated rates with its network providers. AOL's operating results also benefited from lower sales taxes and a reduction in bad debt expense associated with a substantial improvement in cash collections.
Cable. Revenues increased to $3.336 billion in 2001, compared to $2.949 billion on a pro forma basis in 2000. EBITDA increased to $1.545 billion in 2001 from $1.379 billion on a pro forma basis in 2000. Revenues increased due to a 13% 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. The increase in advertising and commerce revenues included the impact of third- party advertising packages sold across multiple business segments of the Company that were entered into in the second quarter and the intercompany sale of advertising to other business segments of AOL Time Warner. 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
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
television systems. 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 $4.105 billion in 2001, compared to $3.700 billion on a pro forma basis in 2000. EBITDA decreased to $363 million in 2001, compared to $398 million on a pro forma basis in 2000. Revenues grew due to increases at both Warner Bros. and the Turner filmed entertainment businesses.
For Warner Bros., revenues benefited from the increased worldwide 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 because of an increase in the number and timing of new theatrical releases in comparison to the prior year comparable period, offset in part by the increased revenues. For the Turner filmed entertainment businesses, EBITDA decreased principally due to higher losses on the theatrical releases in comparison to the prior year comparable period, offset in part by the revenue gains.
Networks. Revenues increased to $3.527 billion in 2001, compared to $3.406 billion on a pro forma basis in 2000. EBITDA increased to $893 million in 2001 from $711 million on a pro forma basis in 2000. Revenues grew primarily due to an increase in subscription revenues with growth at the Turner cable networks and HBO and an increase in advertising and commerce revenues at The WB Network, offset in part by lower advertising and commerce revenues and lower content and other revenues at the Turner cable networks.
For the Turner cable networks, 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. Advertising and commerce revenues declined due to the overall weakness in the advertising market, offset in part by the intercompany sale of advertising to other business segments of AOL Time Warner. The decline in content and other revenues is due to the absence in 2001 of revenues from World Championship Wrestling, an underperforming operation that the Company exited in 2001. For HBO, subscription revenues benefited primarily from an increase in the number of subscribers. For The WB Network, the increase in advertising and commerce revenues was driven by advertising rate increases, ratings increases in key demographic groups and the intercompany sale of advertising to other business segments of AOL Time Warner. EBITDA was higher due to improved results at the Turner cable networks, HBO and The WB Network. For the Turner cable networks, the increase in EBITDA was principally due to the increased subscription revenues, lower programming and marketing costs and other cost savings, offset in part by the advertising and commerce revenue declines. For HBO, the increase in EBITDA was principally due to the increase in revenues and increased cost savings from HBO's overhead cost management program. For The WB Network, the lower EBITDA losses were principally due to the revenue gains.
Music. Revenues decreased to $1.776 billion in 2001, compared to $1.935 billion on a pro forma basis in 2000. EBITDA decreased to $181 million in 2001 from $230 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, lower industry-wide recorded music sales and higher product returns. The decrease in EBITDA principally related to the reduction in revenues and higher marketing costs, including the cost of promoting new artists, offset in part by higher income from DVD manufacturing operations and lower artist royalty costs.
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Publishing. Revenues increased to $2.153 billion in 2001, compared to $2.135 billion on a pro forma basis in 2000. EBITDA increased to $384 million in 2001 from $318 million on a pro forma basis in 2000. Revenues increased primarily from a 5% increase in advertising and commerce revenues, offset in part by a decline in content and other revenues. Subscription revenues were relatively flat. The increase in advertising and commerce revenues was primarily due to increased advertising at In Style and Southern Living, the acquisition of the Times Mirror magazines group in the fourth quarter of 2000 and higher commerce revenues from direct marketing efforts at Time Life. EBITDA increased principally as a result of the increase in revenues, increased cost savings and the absence in 2001 of digital media development costs and losses generated by AFE, which was liquidated in the first quarter of 2001.
Acquisition of IPC Group Limited
In July 2001, AOL Time Warner's Publishing segment entered into an agreement to acquire IPC Group Limited, the parent company of IPC Media ("IPC"), from Cinven, one of Europe's leading private equity firms, for approximately $1.5 billion. IPC is the leading consumer magazine publisher in the United Kingdom with approximately 100 brands, including Woman's Own, Marie Claire and Horse & Hound. The transaction is expected to close in the Fall of 2001 and is subject to customary closing conditions, including all necessary regulatory approvals. The acquisition will be accounted for by AOL Time Warner under the purchase method of accounting for business combinations.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 2001
Financial Condition
At June 30, 2001, AOL Time Warner had $20.5 billion of debt, $1.4 billion of cash and equivalents (net debt of $19.1 billion) and $156.1 billion of shareholders' equity, compared 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 six months of 2001, AOL Time Warner's cash provided by operations amounted to $2.269 billion and reflected $4.612 billion of EBITDA and $206 million of proceeds received from AOL Time Warner's asset securitization program, less $592 million of net interest payments, $204 million of net income taxes paid, and $1.753 billion related to an increase in other working capital requirements. Cash provided by operations of $2.227 billion on a pro forma basis in the first six months of 2000 reflected $3.854 billion of EBITDA and $208 million of proceeds received from AOL Time Warner's asset securitization program, less $571 million of net interest payments, $190 million of net income taxes paid and $1.074 billion related to an increase in other working capital requirements.
Cash used by investing activities was $675 million in the first six months of 2001, compared to $2.748 billion of cash used by investing activities on a pro forma basis in the first six months of 2000. The decrease in cash used by investing activities included $690 million of cash acquired in the Merger, $1.687 billion of proceeds received from the
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
sale of investments, offset in part by a $1.218 billion increase in the acquisitions of investments and capital expenditures of $1.834 billion. The proceeds received from the sale of investments primarily consist 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 $2.847 billion in the first six months of 2001, compared to $368 million on a pro forma basis in the first six months of 2000. The use of cash in 2001 resulted primarily from $1.589 billion of debt reduction, the repurchase of approximately 30.2 million shares of AOL Time Warner common stock at an aggregate cost of $1.376 billion under AOL Time Warner's $5 billion common stock repurchase program authorized in January 2001 and the redemption of mandatorily redeemable preferred securities of a subsidiary of $575 million, offset in part by $727 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 six months of 2000 principally resulted from $501 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 $131 million of dividends, offset in part by $479 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. 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 six months ended June 30, 2001, these items aggregated approximately $788 million of cash payments, primarily related to the Merger and certain litigation payments. For the six months ended June 30, 2000, these items aggregated approximately $104 million, also primarily related to the Merger. Excluding the effect of these nonrecurring items, free cash flow increased from $446 million on a pro forma basis in the first half of 2000 to $1.170 billion in the first half of 2001, primarily due to an increase in EBITDA. On an as reported basis, free cash flow for the six months ended June 30, 2001 was $382 million, compared to $342 million on a pro forma basis for the six months ended June 30, 2000.
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.
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.
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
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 six months of 2001, the Company repurchased 30.2 million shares at an aggregate cost of $1.376 billion.
Capital Spending
AOL Time Warner's overall capital spending for the six months ended June 30, 2001 was $1.834 billion, an increase of $122 million over capital spending for the six months ended June 30, 2000 of $1.712 billion on a pro forma basis. 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, which includes expenditures related to product development, offset in part by lower capital spending levels at AOL Time Warner's other business segments.
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 $1.141 billion in the first six months of 2001, compared to $1.010 billion 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 June 30, 2001, the Cable segment had 2.511 million digital cable subscribers, a 19.8% penetration of basic cable subscribers. This compares to 889 thousand digital cable subscribers, or a 7.1% penetration of basic cable subscribers at June 30, 2000. Similarly, the number of high-speed online customers grew to 1.409 million, or 8.1% of eligible homes, from 573 thousand, or 5.3% of eligible homes at June 30, 2000. Such rapid growth of subscribers to these digital services increased the variable
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
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.
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 and risks 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 unanticipated 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; 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; general increases in production costs; fragmentation of consumer leisure and entertainment time
AOL TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
(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.
o For AOL Time Warner's network businesses, greater than expected programming or production costs; 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, unanticipated increases in paper, postal and distribution costs; the introduction and increased popularity of alternative technologies for the provision of news and information; 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 continued successful integration of the businesses of America Online and Time Warner, including the costs related to the integration; and the failure of the Company to continue 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 value 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.
AOL TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31, December 31,
2001 2000 2000
Historical Pro Forma(a) Historical(a)
---------- --------- ----------
ASSETS (millions, except per share amounts)
Current assets
Cash and equivalents....................................................... $ 1,357 $ 3,300 $ 2,610
Short-term investments..................................................... - 886 886
Receivables, less allowances of $1.446 billion, $1.725 billion and $97
million............................................................... 5,106 6,033 613
Inventories................................................................ 1,644 1,583 47
Prepaid expenses and other current assets.................................. 1,987 1,908 515
-------- -------- -------
Total current assets....................................................... 10,094 13,710 4,671
Noncurrent inventories and film costs...................................... 7,248 6,235 -
Investments, including available-for-sale securities....................... 11,313 9,472 3,824
Property, plant and equipment.............................................. 11,973 11,174 1,041
Music catalogues and copyrights............................................ 2,942 2,500 -
Cable television and sports franchises..................................... 27,629 31,700 -
Brands and trademarks...................................................... 10,750 10,000 -
Goodwill and other intangible assets....................................... 126,618 128,927 816
Other assets............................................................... 2,255 2,329 475
-------- -------- -------
Total assets............................................................... $210,822 $216,047 $10,827
======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................................................... $ 1,976 $ 2,125 $ 105
Participations payable..................................................... 1,153 1,190 -
Royalties and programming costs payable.................................... 1,450 1,488 -
Deferred revenue........................................................... 1,620 1,660 1,063
Debt due within one year................................................... 20 45 2
Other current liabilities.................................................. 5,824 6,163 1,158
-------- -------- -------
Total current liabilities.................................................. 12,043 12,671 2,328
Long-term debt ............................................................ 20,457 21,318 1,411
Deferred income taxes...................................................... 12,622 15,165 -
Deferred revenue........................................................... 1,212 1,277 223
Other liabilities.......................................................... 4,920 4,050 87
Minority interests......................................................... 3,481 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 June 30, 2001 and December 31, 2000 pro forma.......... 2 2 -
AOL Time Warner (and America Online, as predecessor) Common Stock,
$.01 par value, 4.273, 4.101 and 2.379 billion shares outstanding..... 42 41 24
Paid-in capital............................................................ 156,371 155,796 4,966
Accumulated other comprehensive income, net................................ 48 61 61
Retained earnings.......................................................... (376) 1,727 1,727
-------- -------- -------
Total shareholders' equity................................................. 156,087 157,627 6,778
-------- -------- -------
Total liabilities and shareholders' equity................................. $210,822 $216,047 $10,827
======== ======== =======
|
See accompanying notes.
AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- -------------------------------------
2001 2000 2000 2001 2000 2000
Historical Pro Forma(a) Historical(a) Historical Pro Forma(a) Historical(a)
---------- --------- ---------- ---------- --------- ----------
(millions, except per share amounts)
Revenues:
Subscriptions ............................. $ 4,058 $ 3,682 $ 1,185 $ 7,915 $ 7,210 $ 2,338
Advertising and commerce .................. 2,278 2,254 561 4,331 4,119 1,089
Content and other ......................... 2,866 2,972 139 6,036 5,895 272
-------- -------- -------- -------- -------- --------
Total revenues(b) ......................... 9,202 8,908 1,885 18,282 17,224 3,699
Costs of revenues(b) ........................... (4,818) (4,692) (924) (9,828) (9,347) (1,911)
Selling, general and administrative(b) ......... (2,327) (2,485) (476) (4,698) (4,740) (908)
Amortization of goodwill and other intangible
assets .................................... (1,781) (1,752) (19) (3,556) (3,504) (38)
Gain on sale or exchange of cable television
systems ................................... -- -- -- -- 28 --
Merger-related costs ........................... -- (41) (10) (71) (87) (10)
-------- -------- -------- -------- -------- --------
Operating income (loss) ........................ 276 (62) 456 129 (426) 832
Interest income (expense), net ................. (352) (340) 73 (671) (668) 131
Other income (expense), net(b) ................. (233) (274) 7 (1,105) (378) 287
Minority interest income (expense) ............. (76) (56) 1 (180) (111) --
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes and cumulative
effect of accounting change ............... (385) (732) 537 (1,827) (1,583) 1,250
Income tax provision ........................... (349) (192) (199) (276) (353) (479)
-------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect of
accounting change ......................... (734) (924) 338 (2,103) (1,936) 771
Cumulative effect of accounting change, net of
$295 million income tax benefit ........... -- -- -- -- (443) --
-------- -------- -------- -------- -------- --------
Net income (loss) .............................. (734) (924) 338 (2,103) (2,379) 771
Preferred dividend requirements ................ -- (3) -- -- (8) --
-------- -------- -------- -------- -------- --------
Net income (loss) applicable to common shares .. $ (734) $ (927) $ 338 $ (2,103) $ (2,387) $ 771
======== ======== ======== ======== ======== ========
Basic income (loss) per common share before
cumulative effect of accounting change .... $ (0.17) $ (0.22) $ 0.15 $ (0.48) $ (0.46) $ 0.34
Cumulative effect of accounting change ......... -- -- -- -- (0.10) --
-------- -------- -------- -------- -------- --------
Basic net income (loss) per common share ....... $ (0.17) $ (0.22) $ 0.15 $ (0.48) $ (0.56) $ 0.34
======== ======== ======== ======== ======== ========
Average basic common shares .................... 4,434.9 4,291.1 2,312.0 4,423.8 4,270.6 2,305.0
======== ======== ======== ======== ======== ========
Diluted income (loss) per common share before
cumulative effect of accounting change .... $ (0.17) $ (0.22) $ 0.13 $ (0.48) $ (0.46) $ 0.30
Cumulative effect of accounting change ......... -- -- -- -- (0.10) --
-------- -------- -------- -------- -------- --------
Diluted net income (loss) per common share ..... $ (0.17) $ (0.22) $ 0.13 $ (0.48) $ (0.56) $ 0.30
======== ======== ======== ======== ======== ========
Average diluted common shares .................. 4,434.9 4,291.1 2,599.0 4,423.8 4,270.6 2,603.5
======== ======== ======== ======== ======== ========
|
Revenues................................ $ 229 $ 106 $ 13 $ 466 $ 215 $ 30 Cost of revenues........................ (74) (35) (7) (177) (75) (18) Selling, general and administrative..... 1 (7) 3 (12) (10) 5 Other income (expense), net............. (1) (7) - (2) (14) - |
See accompanying notes.
AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
(Unaudited)
2001 2000 2000
Historical Pro Forma(a) Historical(a)
---------- --------- ----------
(millions)
OPERATIONS
Net income (loss).......................................................... $(2,103) $(2,379) $ 771
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change................................ - 443 -
Depreciation and amortization......................................... 4,483 4,280 206
Amortization of film costs............................................ 1,066 910 -
Loss on writedown of investments...................................... 674 - -
Gain on sale of investments........................................... (33) (334) (289)
Gain on sale or exchange of cable systems and investments............. - (21) -
Equity in losses of investee companies after distributions............ 584 670 4
Changes in operating assets and liabilities, net of acquisitions........... (2,402) (1,342) 297
------ ------ ------
Cash provided by operations................................................ 2,269 2,227 989
------ ------ ------
INVESTING ACTIVITIES
Acquisition of Time Warner Inc. cash and equivalents....................... 690 - -
Investments and acquisitions............................................... (1,218) (1,713) (1,410)
Capital expenditures....................................................... (1,834) (1,712) (364)
Investment proceeds........................................................ 1,687 755 498
Other...................................................................... - (78) (54)
------ ------ ------
Cash used by investing activities.......................................... (675) (2,748) (1,330)
------ ------ ------
FINANCING ACTIVITIES
Borrowings................................................................. 6,245 1,374 112
Debt repayments............................................................ (7,834) (1,875) (4)
Borrowings against future stock option proceeds............................ - 2 -
Repayments of borrowings against future stock option proceeds.............. - (110) -
Redemption of mandatorily redeemable preferred securities of subsidiary.... (575) - -
Proceeds from exercise of stock option and dividend reimbursement plans.... 727 479 169
Repurchases of common stock................................................ (1,376) (65) -
Dividends paid and partnership distributions............................... (53) (173) -
Other...................................................................... 19 - -
------ ------ ------
Cash provided (used) by financing activities............................... (2,847) (368) 277
------ ------ ------
DECREASE IN CASH AND EQUIVALENTS........................................... (1,253) (889) (64)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................ 2,610 3,838 2,554
------ ------ ------
CASH AND EQUIVALENTS AT END OF PERIOD...................................... $1,357 $2,949 $2,490
====== ====== ======
|
See accompanying notes.
AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months Ended June 30,
(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)......................................................................... (2,103) 771
Other comprehensive loss (a)(b)........................................................... (3) (1,591)
-------- -------
Comprehensive loss........................................................................ (2,106) (820)
Repurchases of AOL Time Warner common stock............................................... (1,376) -
Other, principally shares issued pursuant to stock option and benefit plans,
including $1.180 billion and $469 million of tax benefit............................... 1,942 649
-------- ------
BALANCE AT END OF PERIOD.................................................................. $156,087 $6,160
======== ======
|
See accompanying notes.
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, Netscape, AOL
Moviefone and MapQuest, instant 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, TBS
Superstation and Cartoon Network, (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 $1.781 billion for the second quarter of 2001 and $1.752 billion on a pro forma basis for the second quarter of 2000 ($19 million on a historical basis). Noncash amortization of intangible assets recorded by AOL Time Warner's business segments amounted to $3.556 billion for the six months ended June 30, 2001 and $3.504 billion on a pro forma basis for the six months ended June 30, 2000 ($38 million on a historical basis).
Acquisition of IPC Group Limited
In July 2001, AOL Time Warner's Publishing segment entered into an agreement to acquire IPC Group Limited, the parent company of IPC Media ("IPC"), from Cinven, one of Europe's leading private equity firms, for approximately $1.5 billion. IPC is the leading consumer magazine publisher in the United Kingdom with approximately 100 brands, including Woman's Own, Marie Claire and Horse & Hound. The transaction is expected to close in the Fall of 2001 and is subject to customary closing conditions, including all necessary regulatory approvals. The acquisition will be
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
accounted for by AOL Time Warner under the purchase method of accounting for business combinations.
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.
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 copyrights, cable television and sports franchises, and brands and trademarks. The goodwill and identified intangible assets are being 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.
As discussed further below, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which provides, among other things, for the nonamortization of goodwill and intangible assets with indefinite useful lives. Consequently, goodwill and some intangible assets recognized in connection with the Merger will no longer be amortized, beginning in the first quarter of 2002.
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
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 separate reportable segment;
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).
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 of 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, as amended (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
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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
Securities and Exchange Commission Staff Accounting Bulletin No. 101
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 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 were reduced by an equal amount of $97 million on a pro forma basis during the second quarter of 2000 ($44 million on a historical basis) and $188 million on a pro forma basis for the six months ended June 30, 2000 ($77 million on a historical basis).
Emerging Issues Task Force Issue No. 00-25
In April 2001, the FASB's Emerging Issues Task Force ("EITF") reached a final consensus EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" ("EITF 00-25"). EITF 00-25 will be effective for AOL Time Warner in the first quarter of 2002. EITF 00-25 clarifies the income statement classification of costs incurred by a vendor in connection with the reseller's purchase or promotion of the vendor's products, resulting in certain cooperative advertising and product placement costs previously classified as selling expenses to be reflected as a reduction of revenues earned from that activity. While AOL Time Warner is in the process of evaluating the overall impact of EITF 00-25 on its consolidated financial statements, it is not expected that EITF 00-25 will have a material impact on AOL Time Warner's consolidated financial statements.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
In September 2000, the FASB 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 was effective for the transfer of financial assets
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
occurring after March 31, 2001. The provisions of FAS 140 did not have a significant effect on AOL Time Warner's consolidated financial statements.
Accounting for Business Combinations
In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141, "Business Combinations" ("FAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life created by business combinations accounted for using the purchase method of accounting. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. The new standards generally will be effective for AOL Time Warner in the first quarter of 2002 and for purchase business combinations consummated after June 30, 2001. AOL Time Warner is in the process of quantifying the anticipated impact of adopting the provisions of FAS 142, which is expected to be significant.
Upon adoption, AOL Time Warner will stop amortizing goodwill, including goodwill included in the carrying value of certain investments accounted for under the equity method of accounting. Based on the current levels of goodwill, this would reduce amortization expense and, with respect to equity investees, it would reduce other expense, net, by approximately $5.3 billion and $600 million, respectively. Because goodwill amortization is nondeductible for tax purposes, the impact of stopping goodwill amortization and the amortization of goodwill included in the carrying value of equity investees would be to increase AOL Time Warner's annual net income by approximately $5.9 billion. In addition, AOL Time Warner is in the process of evaluating certain intangible assets to determine whether they are deemed to have an indefinite useful life. As a result of this process, AOL Time Warner may stop amortizing an additional $25 billion to $40 billion of intangible assets. This could result in an additional reduction of pretax amortization of approximately $1.0 billion to $1.5 billion, which will have a corresponding after-tax increase in AOL Time Warner's net income of $600 million to $900 million.
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 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 Company recorded an additional $65 million liability during the second quarter as additional initiatives met the accounting criteria required for recognition. The restructuring liability represents costs to be incurred for exiting and consolidating activities of the Company, as well as costs incurred to terminate employees throughout the Company.
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The restructuring plans also include $71 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. These merger- related costs were expensed as they either related to the AOL operations or otherwise did not qualify as a liability or cost assumed in the purchase of Time Warner. 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, $630 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 $95 million were made in the second quarter of 2001 and approximately $135 million were made in the first six months of 2001. As of June 30, 2001, the remaining liability of approximately $495 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 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. Payments related to exiting activities were approximately $40 million in the second quarter of 2001 and approximately $60 million in the first six months of 2001. As of June 30, 2001, the remaining liability of $340 million was primarily classified as a current liability in the accompanying consolidated balance sheet.
The merger-related costs and restructuring liabilities recorded are based on the Company's restructuring plans that have been committed to by management. These restructuring plans are expected to be broadened to include additional restructuring initiatives in the third and fourth quarters as management continues to evaluate the integration of the combined companies and completes its purchase price allocation. Depending on the nature of the restructuring, such costs will either become part of the restructuring liability or included in merger-related costs.
Selected information relating to the restructuring plans follows (in millions):
Employee Other
Termination Exit Costs Total
------------ ------------ ------------
Initial accruals $565 $400 $965
Incremental accruals 65 - 65
Cash paid (135) (60) (195)
------------ ------------ ------------
Restructuring liability as of June 30, 2001 $495 $340 $835
============ ============ ============
|
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 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 for the six months ended June 30, 2001. In addition, the Company recognized a noncash pretax charge in the second quarter of 2001 of approximately $54 million to reduce the carrying value of certain investments, primarily due to declines in market values deemed to be other-than-temporary. This charge was almost entirely offset by pretax gains related to derivative instruments and the sale of certain investments also in the second quarter of 2001.
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 for the six months ended June 30, 2001.
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. In connection with the sale or exchange of consolidated cable television systems, $28 million of net pretax gains were recognized in the first quarter of 2000 and are included in operating income (loss) in the accompanying consolidated statement of operations on a pro forma basis for the six months ended June 30, 2000. In connection with the sale or exchange of unconsolidated cable television systems, approximately $7 million of net pretax losses were recognized in the second quarter of 2000 and are included in other income (expense), net, in the accompanying consolidated statement of operations on a pro forma basis for the three and six months ended June 30, 2000.
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 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.
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Six Flags
In December 1998, a jury returned an adverse verdict in the Six Flags Entertainment Corporation ("Six Flags") litigation in the amount of $454 million. TWE and its former 51% partner in Six Flags were financially responsible for this judgment. TWE appealed the verdict, but, in July 2000, an appellate court unexpectedly affirmed the jury's verdict. As a result, TWE revised its estimate of its financial exposure and recorded a one-time, pretax charge of $50 million in the second quarter of 2000 to cover its additional financial exposure in excess of established reserves, which consisted of the unrecognized portion of the deferred gain on the 1998 sale of Six Flags and accrued interest. The $50 million charge is classified in two components in the accompanying consolidated statement of operations on a pro forma basis for the three and six months ended June 30, 2000; $26 million of the charge, representing an accrual for additional interest, is included in interest income (expense), net, and the remaining $24 million is included in other income (expense), net.
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 six months ended June 30, 2001 reflects additional amortization generated by the intangible assets and goodwill established in connection with this allocation. TWE reported a net loss of $582 million for the six months ended June 30, 2001 and a net loss of $1.287 billion, including a $524 million noncash charge related to the cumulative effect of an accounting change, on a pro forma basis for the first six months in 2000 ($155 million net loss on a historical basis). Because of the priority rights over allocations of income/loss and distributions of TWE held by the AOL Time Warner
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
General Partners, $540 million of TWE's loss for the six months ended June 30, 2001 was allocated to AOL Time Warner and $42 million was allocated to MediaOne. However, the allocation of a portion of TWE's loss to MediaOne in 2001 was entirely offset by the allocation to MediaOne of pretax gains attributable to MediaOne that were recognized in connection with the sale or exchange of various cable television systems at TWE. For the six months ended June 30, 2000, all of TWE's net loss 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.
6. INVENTORIES
Inventories and film costs consist of:
June 30, 2001 December 31, 2000
------------- -----------------
Historical Pro Forma
---------- ---------
(millions)
Programming costs, less amortization.............................................. $2,362 $2,097
Magazines, books, recorded music and other merchandise............................ 591 614
Film costs-Theatrical:
Released, less amortization.................................................. 755 916
Completed and not released................................................... 368 242
In production................................................................ 971 776
Development and pre-production............................................... 65 91
Film costs-Television:
Released, less amortization.................................................. 282 220
Completed and not released................................................... 36 196
In production................................................................ 9 76
Development and pre-production............................................... 4 5
Film costs-Library, less amortization............................................. 3,449 2,585
------ -----
Total inventories and film costs.................................................. 8,892 7,818
Less current portion of inventory................................................. 1,644 1,583
------ -----
Total noncurrent inventories and film costs....................................... $7,248 $6,235
====== ======
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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
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
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.
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 six months of 2001, the Company repurchased 30.2 million shares at an aggregate cost of $1.376 billion.
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.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ -------------------------------------
2001 2000 2000 2001 2000 2000
Pro Pro
Historical(a) Forma(a) Historical(a) Historical(a) Forma(a) Historical(a)
---------- ----- ---------- ---------- ----- ----------
(millions, except per share amounts)
Income (loss) applicable to common
shares before cumulative effect of
accounting change - basic.............. $(734) $(927) $ 338 $(2,103) $(1,944) $ 771
Interest savings, net of tax(b)............. - - 2 - - 4
------- ------- ------- ------- ------- -------
Income (loss) applicable to common shares
before cumulative effect of accounting
change - diluted....................... $(734) $(927) $ 340 $(2,103) $(1,944) $ 775
======= ======= ======= ======= ======= =======
Average number of common shares
outstanding - basic.................... 4,434.9 4,291.1 2,312.0 4,423.8 4,270.6 2,305.0
Dilutive effect of stock options............ - - 249.0 - - 260.5
Dilutive effect of convertible debt......... - - 38.0 - - 38.0
------- ------- ------- ------- ------- -------
Average number of common shares
outstanding - diluted.................. 4,434.9 4,291.1 2,599.0 4,423.8 4,270.6 2,603.5
======= ======= ======= ======= ======= =======
Income (loss) per common share before
cumulative effect of accounting change:
Basic................................ $ (0.17) $(0.22) $0.15 $(0.48) $(0.46) $0.34
Diluted.............................. $ (0.17) $(0.22) $0.13 $(0.48) $(0.46) $0.30
|
(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.
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 FASB Statement of Financial Accounting Standards 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.
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 Six Months
Ended June 30, Ended June 30,
---------------------------- ---------------------
2001 2000(a) 2001 2000(a)
Historical Pro Forma Historical Pro Forma
---------- --------- ---------- ---------
(millions)
Revenues
AOL.................................................................... $2,138 $1,885 $ 4,263 $ 3,699
Cable.................................................................. 1,711 1,502 3,336 2,949
Filmed Entertainment................................................... 1,893 1,804 4,105 3,700
Networks............................................................... 1,828 1,796 3,527 3,406
Music.................................................................. 895 1,001 1,776 1,935
Publishing............................................................. 1,187 1,196 2,153 2,135
Intersegment elimination............................................... (450) (276) (878) (600)
------ ------ ------- -------
Total business segment revenues........................................ $9,202 $8,908 $18,282 $17,224
====== ====== ======= =======
|
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -------------------
2001 2000(a) 2001 2000(a)
Historical Pro Forma Historical Pro Forma
---------- --------- ---------- ---------
(millions)
EBITDA(b)
AOL.................................................................... $ 801 $ 583 $1,485 $1,089
Cable(c)............................................................... 777 685 1,545 1,379
Filmed Entertainment................................................... 250 213 363 398
Networks............................................................... 444 376 893 711
Music.................................................................. 87 129 181 230
Publishing............................................................. 271 224 384 318
Corporate.............................................................. (71) (76) (145) (160)
Merger-related costs................................................... - (41) (71) (87)
Intersegment elimination............................................... (22) (16) (23) (24)
------ ------ ------ ------
Total business segment EBITDA.......................................... $2,537 $2,077 $4,612 $3,854
====== ====== ====== ======
|
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- -------------------
2001 2000(a) 2001 2000(a)
Historical Pro Forma Historical Pro Forma
---------- --------- ---------- ---------
(millions)
Depreciation of Property, Plant and Equipment
AOL.................................................................... $ 99 $ 79 $200 $168
Cable.................................................................. 272 203 514 402
Filmed Entertainment................................................... 23 23 45 48
Networks............................................................... 39 42 78 75
Music.................................................................. 24 21 46 41
Publishing............................................................. 17 15 33 33
Corporate.............................................................. 6 4 11 9
---- ---- ---- ----
Total business segment depreciation.................................... $480 $387 $927 $776
==== ==== ==== ====
|
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ---------------------
2001 2000(a) 2001 2000(a)
Historical Pro Forma Historical Pro Forma
---------- --------- ---------- ---------
(millions)
Amortization of Intangible Assets(b)
AOL.................................................................... $ 33 $ 19 $ 68 $ 38
Cable.................................................................. 630 664 1,256 1,328
Filmed Entertainment................................................... 119 130 237 260
Networks............................................................... 479 487 953 974
Music.................................................................. 209 180 415 360
Publishing............................................................. 231 205 464 410
Corporate.............................................................. 80 67 163 134
------ ------ ------ ------
Total business segment amortization.................................... $1,781 $1,752 $3,556 $3,504
====== ====== ====== ======
|
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:
June 30, December 31,
2001 2000
Historical Pro Forma
---------- ---------
(millions)
Assets
AOL......................................................................................... $ 6,626 $ 6,647
Cable....................................................................................... 72,921 77,217
Filmed Entertainment........................................................................ 18,602 18,791
Networks.................................................................................... 52,238 54,152
Music....................................................................................... 18,689 18,171
Publishing.................................................................................. 27,225 25,130
Corporate................................................................................... 14,521 15,939
-------- --------
Total business segment assets............................................................... $210,822 $216,047
======== ========
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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
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
On April 17, 2001, plaintiffs in Playmedia Systems Inc. v. AOL Time Warner Inc. et al. filed a complaint in the U.S. District Court for the Central District of California asserting copyright infringement based on a claim that use of a software decoder in the AOL Media Player exceeds the scope of the prior license Playmedia had granted to a subsidiary of America Online. Plaintiffs have filed a motion for preliminary injunction, which is to be heard August 30, 2001. The Company believes that the lawsuit is without merit and intends to defend against it vigorously, but is unable to predict the outcome or reasonably estimate a range of possible loss given its 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 was filed by TWE on June 15, 2001.
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.
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.
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
12. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
Additional financial information with respect to cash flows is as follows:
Six months ended June 30,
--------------------------------------------
2001 2000 2000
Historical Pro Forma Historical
---------- --------- ----------
(millions)
Cash payments made for interest................................... $ 705 $ 753 $ 7
Interest income received.......................................... 113 182 158
Cash payments made for income taxes............................... 229 209 -
Income tax refunds received....................................... 25 19 -
|
Other Income (Expense), Net
Other income (expense), net, consists of:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -----------------------------
2001 2000 2000 2001 2000 2000
Historical Pro Forma Historical Historical Pro Forma Historical
---------- --------- ---------- ---------- --------- ----------
(millions)
Write-down of investments(a)................................ $ (54) $ - $ - $ (674) $ - $ -
Write-down of investment in Columbia House.................. - - - - (220) -
Net gains on derivative instruments and the sale of
investments(b)......................................... 50 9 10 42 342 289
Other investment-related activity, principally
losses of equity investees(c).......................... (211) (233) 5 (427) (409) 5
Losses on asset securitization programs..................... (16) (49) - (36) (74) -
Miscellaneous............................................... (2) (1) (8) (10) (17) (7)
----- ----- ----- ------- ------ -----
Total other income (expense), net........................... $(233) $(274) $ 7 $(1,105) $(378) $ 287
====== ===== ===== ======= ====== =====
|
(a) For the first six months of 2001, includes a $620 million noncash pretax
charge to reduce the carrying value of certain investments in AOL Time
Warner's investment portfolio, primarily due to declines in the market
values deemed to be other than temporary.
(b) For the first six months of 2000 on a pro forma basis, includes $285
million ($275 million on a historical basis) related to the sale of certain
investments.
(c) For the three months ended June 30, 2001, 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. For
the first six months of 2001, includes approximately $286 million in 2001
and $196 million on a pro forma basis in 2000 of goodwill amortization
associated with certain investments accounted for using the equity method
of accounting.
Other Current Liabilities
Other current liabilities consist of:
June 30, December 31, December 31,
2001 2000 2000
Historical Pro Forma Historical
---------- --------- ----------
(millions)
Accrued expenses.................................................. $5,021 $4,936 $1,047
Accrued compensation.............................................. 740 1,085 111
Accrued income taxes.............................................. 63 142 -
------- ------- ---------
Total............................................................. $5,824 $6,163 $1,158
====== ====== ======
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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 June 30, 2001
AOL Non- AOL Time
Time America Time TW Guarantor Warner
Warner Online Warner Companies TBS Subsidiaries Eliminations Consolidated
------ ------ ------ --------- --- ------------ ------------ ------------
(millions)
Revenues................................ $ - $1,598 $ - $ - $ 223 $ 7,420 $ (39) $ 9,202
----- ------ ------- ----- ----- ------- ------ -------
Cost of revenues........................ - (797) - - (112) (3,948) 39 (4,818)
Selling, general and administrative..... (9) (342) (8) (3) (34) (1,931) - (2,327)
Amortization of goodwill and other
intangible assets.................... (84) (5) - - (93) (1,599) - (1,781)
Merger-related costs.................... - - - - - - - -
----- ------ ------- ----- ----- ------- ------ -------
Operating income (loss)................. (93) 454 (8) (3) (16) (58) - 276
Equity in pretax income of consolidated
subsidiaries......................... (237) 198 (873) (556) (94) - 1,562 -
Interest income (expense), net.......... (57) 15 (3) (93) (38) (176) - (352)
Other income (expense), net............. 2 (15) 1 (9) (3) (153) (56) (233)
Minority interest....................... - - (6) - - (70) - (76)
----- ------ ------- ----- ----- ------- ------ -------
Income (loss) before income taxes....... (385) 652 (889) (661) (151) (457) 1,506 (385)
Income tax benefit (provision).......... (349) (258) (151) (131) (78) (324) 942 (349)
----- ------ ------- ----- ----- ------- ------ -------
Net income (loss)....................... $(734) $ 394 $(1,040) $(792) $(229) $ (781) $2,448 $ (734)
===== ====== ======= ===== ===== ======= ====== =======
|
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Consolidating Statement of Operations
For The Three Months Ended June 30, 2000
America
Online
(predecessor Non- AOL Time
to AOL Time TW Guarantor Warner
Time Warner) Warner Companies TBS Subsidiaries Eliminations Consolidated
------------ ------ --------- ---- ------------ ------------ ------------
(millions)
Revenues..................................... $ 1,479 $ - $ - $ - $ 406 $ - $ 1,885
------- ------ ------ ------ ------ ------ -----
Cost of revenues............................. (749) - - - (175) - (924)
Selling, general and administrative.......... (372) - - - (104) - (476)
Amortization of goodwill and other
intangible assets......................... - - - - (19) - (19)
Merger-related costs......................... 3 - - - (13) - (10)
------- ------ ------ ------ ------ ------ -----
Operating income............................. 361 - - - 95 - 456
Equity in pretax income of consolidated
subsidiaries.............................. 101 - - - - (101) -
Interest income, net......................... - - - - 73 - 73
Other income (expense), net.................. 77 - - - (70) - 7
Minority interest............................ - - - - 1 - 1
------- ------ ------ ------ ------ ------ -----
Income before income taxes................... 539 - - - 99 (101) 537
Income tax provision......................... (201) - - - 2 - (199)
------- ------ ------ ------ ------ ------ -----
Net income................................... $ 338 $ - $ - $ - $ 101 $ (101) $ 338
======= ====== ====== ====== ====== ====== =====
|
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Consolidating Statement of Operations
For The Six Months Ended June 30, 2001
America
Online
AOL (predecessor Non- AOL Time
Time to AOL Time TW Guarantor Warner
Warner Time Warner) Warner Companies TBS Subsidiaries Eliminations Consolidated
------- ------------ ------ --------- --- ------------ ------------ ------------
(millions)
Revenues.............................. $ - $3,224 $ - $ - $ 420 $14,705 $ (67) $18,282
------- ------ ------- ------- ----- ------- ------ -------
Cost of revenues...................... - (1,679) - - (175) (8,041) 67 (9,828)
Selling, general and administrative... (17) (732) (16) (7) (78) (3,848) - (4,698)
Amortization of goodwill and other
intangible assets.................. (167) (10) - - (149) (3,230) - (3,556)
Merger-related costs.................. - (67) - - - (4) - (71)
------- ------ ------- ------- ----- ------- ------ -------
Operating income (loss)............... (184) 736 (16) (7) 18 (418) - 129
Equity in pretax income (loss) of
consolidated subsidiaries.......... (1,587) 371 (2,070) (1,370) (299) - 4,955 -
Interest income (expense), net........ (56) 56 (24) (222) (86) (339) - (671)
Other expense, net.................... - (613) (27) (33) (8) (368) (56) (1,105)
Minority interest..................... - - - - - (180) - (180)
------- ------ ------- ------- ----- --------- ------ -------
Income (loss) before income taxes..... (1,827) 550 (2,137) (1,632) (375) (1,305) 4,899 (1,827)
Income tax provision.................. (276) (214) (159) (140) (126) (492) 1,131 (276)
------- ------ ------- ------- ----- ------- ------ -------
Net income (loss)..................... $(2,103) $ 336 $(2,296) $(1,772) $(501) $(1,797) $6,030 $(2,103)
======= ====== ======= ======= ===== ======= ====== =======
|
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Consolidating Statement of Operations
For The Six Months Ended June 30, 2000
America
Online
(predecessor Non- AOL Time
to AOL Time TW Guarantor Warner
Time Warner) Warner Companies TBS Subsidiaries Eliminations Consolidated
------------ ------ --------- --- ------------ ------------ ------------
(millions)
Revenues....................................... $ 2,904 $ - $ - $ - $ 795 $ $ 3,699
------- ---- ----- ---- ------ ----- -------
Cost of revenues............................... (1,552) - - - (359) - (1,911)
Selling, general and administrative............ (700) - - - (208) - (908)
Amortization of goodwill and other
intangible assets........................... - - - - (38) - (38)
Merger-related costs........................... 3 - - - (13) - (10)
------- ---- ----- ---- ------ ----- -------
Operating income............................... 655 - - - 177 - 832
Equity in pretax income of consolidated
subsidiaries................................ 184 - - - - (184) -
Interest income, net........................... - - - - 131 - 131
Other income (expense), net.................... 413 - - - (126) - 287
Minority interest.............................. - - - - - - -
------- ---- ----- ---- ------ ----- -------
Income before income taxes..................... 1,252 - - 182 (184) 1,250
Income tax provision........................... (481) - - - 2 - (479)
------- ---- ----- ---- ------ ----- -------
Net income..................................... $ 771 $ $ $ $ 184 $(184) $ 771
======= ==== ===== ==== ====== ===== =======
|
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Consolidating Balance Sheet
June 30, 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..................... $ 393 $ 49 $ - $ 3,047 $ 33 $ 649 $ (2,814) $ 1,357
Receivables, net......................... 29 521 16 21 104 4,415 - 5,106
Inventories.............................. - - - - 157 1,487 - 1,644
Prepaid expenses and other
current assets........................ 19 282 - - 5 1,681 - 1,987
-------- ------ -------- -------- ------- -------- --------- --------
Total current assets..................... 441 852 16 3,068 299 8,232 (2,814) 10,094
Noncurrent inventories and film costs.... - - - - 255 6,993 - 7,248
Investments in amounts due to and from
consolidated subsidiaries............. 164,215 1,897 180,037 138,942 34,775 - (519,866) -
Investments, including available-for-sale
securities............................ - 2,806 235 639 94 8,378 (839) 11,313
Property, plant and equipment............ 56 929 14 - 78 10,896 - 11,973
Music catalogues and copyrights.......... - - - - - 2,942 - 2,942
Cable television and sports franchises... - - - - - 27,629 - 27,629
Brands and trademarks.................... - - - - 650 10,100 - 10,750
Goodwill and other intangible assets..... 8,090 213 - - 6,860 111,455 - 126,618
Other assets............................. 38 211 138 47 75 1,746 - 2,255
-------- ------ -------- -------- ------- -------- --------- --------
Total assets............................. $172,840 $6,908 $180,440 $142,696 $43,086 $188,371 $(523,519) $210,822
======== ====== ======== ======== ======= ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable......................... $ 15 $ 186 $ 4 $ - $ 7 $ 1,764 $ - $ 1,976
Participations payable................... - - - - - 1,153 - 1,153
Royalties and programming costs payable.. - - - - 16 1,434 - 1,450
Deferred revenue......................... - 861 - - - 759 - 1,620
Debt due within one year................. - - - - - 20 - 20
Other current liabilities................ 323 1,040 34 188 140 4,110 (11) 5,824
-------- ------ -------- -------- -------- -------- --------- --------
Total current liabilities................ 338 2,087 38 188 163 9,240 (11) 12,043
Long-term debt........................... 3,992 1,430 1,463 6,741 793 8,852 (2,814) 20,457
Debt due to affiliates................... - - - - 1,647 158 (1,805) -
Deferred income taxes.................... 12,622 (4,672) 17,294 15,106 2,268 17,374 (47,370) 12,622
Deferred revenue......................... - 183 - - - 1,029 - 1,212
Other liabilities........................ (199) 1 569 - 145 4,404 - 4,920
Minority interests....................... - - - - - 3,481 - 3,481
Shareholders' equity
Due (to) from AOL Time Warner and
subsidiaries......................... - 695 10,065 3,279 (1,434) (15,643) 3,038 -
Other shareholders' equity............... 156,087 7,184 151,011 117,382 39,504 159,476 (474,557) 156,087
-------- ------ -------- -------- ------- -------- --------- --------
Total shareholders' equity............... 156,087 7,879 161,076 120,661 38,070 143,833 (471,519) 156,087
-------- ------ -------- -------- ------- -------- --------- --------
Total liabilities and
shareholders' equity................. $172,840 $6,908 $180,440 $142,696 $43,086 $188,371 $(523,519) $210,822
======== ====== ======== ======== ======= ======== ========= ========
|
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
======= ==== ==== ==== ====== ======= =======
|
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Six Months Ended June 30, 2001
AOL Non- AOL Time
Time America Time TW Guarantor Warner
Warner Online Warner Companies TBS Subsidiaries Eliminations Consolidated
------ ------ ------ --------- --- ------------ ------------ ------------
(millions)
OPERATIONS
Net income (loss)........................ $(2,103) $ 336 $(2,296) $(1,772) $(501) $(1,797) $ 6,030 $(2,103)
Adjustments for noncash and
nonoperating items:
Depreciation and amortization......... 174 167 1 - 151 3,990 - 4,483
Amortization of film costs............ - - - - - 1,066 - 1,066
Loss on writedown of investments...... - 624 - - - 50 - 674
Gain on sale of investments........... - (33) - - - - - (33)
Excess (deficiency) of distributions
over equity in pretax income of
consolidated subsidiaries.......... (2,638) (4,471) (3,331) 7,213 891 - 2,336 -
Equity in losses of other investee
companies after distributions...... - 11 - 30 - 543 - 584
Changes in operating assets and
liabilities, net of acquisitions...... 6,220 4,140 (658) (5,848) (546) (2,895) (2,815) (2,402)
------- ------ ------- ------- ----- ------- ------- -------
Cash provided (used) by operations....... 1,653 774 (6,284) (377) (5) 957 5,551 2,269
------- ------ ------- ------- ----- ------- ------- -------
INVESTING ACTIVITIES
Acquisition of Time Warner Inc. cash
and equivalents....................... - - (1) 198 40 453 - 690
Investments and acquisitions............. - (316) - - - (902) - (1,218)
Advances to parents and consolidated
subsidiaries.......................... - - - (1,689) - 3,774 (2,085) -
Capital expenditures..................... - (303) - - (28) (1,503) - (1,834)
Investment proceeds...................... - 1,607 - - 80 1,687
------- ------ ------- ------- ----- ------- ------- -------
Cash provided (used) by investing
activities........................... - 988 (1) (1,491) 12 1,902 (2,085) (675)
------- ------ ------- ------- ----- ------- ------- -------
FINANCING ACTIVITIES
Borrowings............................... 3,967 - 1,380 - - 3,914 (3,016) 6,245
Debt repayments.......................... - - (1,380) (337) - (6,320) 203 (7,834)
Change in due to/from parent............. (4,597) (4,243) 6,289 5,252 26 740 (3,467) -
Redemption of mandatorily redeemable
preferred securities of subsidiary.... - - - - - (575) - (575)
Proceeds from exercise of stock option
and dividend reimbursement plans...... 727 - - - - - - 727
Repurchases of common stock.............. (1,376) - - - - - - (1,376)
Dividends paid and partnership
distributions......................... - - (4) - - (49) - (53)
Other.................................... 19 - - - - - - 19
------- ------ ------- ------- ----- ------- ------- -------
Cash provided (used) by financing
activities............................ (1,260) (4,243) 6,285 4,915 26 (2,290) (6,280) (2,847)
------- ------ ------- ------- ----- ------- ------- -------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS........................... 393 (2,481) - 3,047 33 569 (2,814) (1,253)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD................... - 2,530 - - - 80 - 2,610
------- ------ ------- ------- ----- ------- ------- -------
CASH AND EQUIVALENTS AT END
OF PERIOD............................. $ 393 $ 49 - $ 3,047 $ 33 $ 649 $(2,814) $1,357
======= ====== ======= ======= ===== ======= ======= ======
|
AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Six Months Ended June 30, 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...................................... $ 771 $ - $ - $ - $ 184 $(184) $ 771
Adjustments for noncash and nonoperating items:
Depreciation and amortization................ 102 - - - 104 - 206
Gain on sale of investments.................. (204) - - - (85) - (289)
Equity in (income) losses of other investee
companies after distributions............ (183) - - - 187 - 4
Changes in operating assets and liabilities,
net of acquisitions.......................... 378 - - - (81) - 297
------- ---- ---- ---- ----- ----- -------
Cash provided by operations..................... 864 - - - 309 (184) 989
------- ---- ---- ---- ----- ----- -------
INVESTING ACTIVITIES
Investments and acquisitions.................... (1,352) - - - (58) - (1,410)
Capital expenditures............................ (250) - - - (114) - (364)
Investment proceeds............................. 497 - - - 1 - 498
Other........................................... 37 - - - (91) - (54)
------- ---- ---- ---- ----- ----- -------
Cash used by investing activities.............. (1,068) - - - (262) - (1,330)
------- ---- ---- ---- ----- ----- -------
FINANCING ACTIVITIES
Borrowings...................................... 34 - - - 78 - 112
Debt repayments................................. (7) - - - 3 - (4)
Proceeds from exercise of stock option and
dividend reimbursement plans................. 166 - - - 3 - 169
------- ---- ---- ---- ----- ----- -------
Cash provided by financing activities........... 193 - - - 84 - 277
------- ---- ---- ---- ----- ----- -------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS.................................. (11) - - - 131 (184) (64)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD.......................... 2,393 - - - 161 - 2,554
------- ---- ---- ---- ----- ----- -------
CASH AND EQUIVALENTS AT END
OF PERIOD.................................... $ 2,382 - - - $ 292 $(184) $ 2,490
======= ==== ==== ==== ===== ===== =======
|
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 resumed 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 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
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
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 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 separate reportable segment;
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 six months of 2000, on both a historical and pro forma basis, included (i) a pretax gain of $10 million in the first quarter relating to the partial recognition of a deferred gain on the 1998 sale of Six Flags Entertainment Corporation ("Six Flags"), (ii) a $50 million pretax charge in the second quarter relating to the Six Flags litigation, (iii) a pretax loss of $8 million in the second quarter relating to the sale or exchange of certain cable systems and investments and (iv) a noncash charge of $524 million in the first quarter 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.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
RESULTS OF OPERATIONS
Revenues and EBITDA by business segment are as follows:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------- --------------------------------------------
Revenues EBITDA Revenues EBITDA
--------------------- --------------------- --------------------- ---------------------
2001 2000(a) 2001 2000(a) 2001 2000(a) 2001 2000(a)
Historical Pro Forma Historical Pro Forma Historical Pro Forma Historical Pro Forma
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(millions)
Cable............................. $1,462 $1,280 $ 667 $ 589 $2,849 $2,511 $ 1,328 $ 1,168
Filmed Entertainment.............. 1,590 1,454 161 158 3,193 3,022 261 302
Networks.......................... 745 679 156 118 1,469 1,335 314 221
Corporate......................... - - (20) (18) - - (39) (37)
Intersegment elimination.......... (169) (100) - - (341) (244) - -
------ ------ ----- ----- ------ ------ ------- -------
Total revenues and EBITDA......... $3,628 $3,313 $ 964 $ 847 $7,170 $6,624 $ 1,864 $ 1,654
Depreciation and amortization..... - - (931) (905) - - (1,853) (1,803)
------ ------ ----- ----- ------ ------ ------- -------
Total revenues and operating
income (loss)................... $3,628 $3,313 $ 33 $ (58) $7,170 $6,624 $ 11 $ (149)
====== ====== ===== ===== ====== ====== ======= ========
|
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Consolidated Results
TWE had revenues of $3.628 billion and a net loss of $232 million for the three months ended June 30, 2001, compared to revenues of $3.313 billion on both a pro forma and historical basis and a net loss of $421 million on a pro forma basis (net income of $145 million on a historical basis) for the three months ended June 30, 2000.
As previously described, in addition to the consummation of the Merger, the comparability of TWE's operating results for the second quarter of 2000, on both a pro forma and historical basis, has been affected by the recognition of certain significant, nonrecurring items aggregating approximately $58 million of net pretax losses.
Revenues. TWE's revenues increased to $3.628 billion in 2001, compared to $3.313 billion on both a pro forma and historical basis in 2000. This increase was driven by an increase in subscription revenues of 11% to $1.838 billion, an increase in advertising and commerce revenues of 2% to $314 million and an increase in content and other revenues of 9% to $1.476 billion. This compares to $1.649 billion, $307 million and $1.357 billion, respectively, for the three months ended June 30, 2000 on both a pro forma and historical basis.
As discussed more fully below, the increase in subscription revenues was principally due to an increase in the number of subscribers at both the Cable and Networks segments and an increase in subscription rates at the Cable segment. The increase in advertising and commerce revenues was principally due to increased advertising at the Cable segment and advertising rate increases and ratings increases in key demographic groups 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.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Net Income (Loss). TWE's net loss decreased by $189 million to $232 million in 2001, compared to $421 million on a pro forma basis in 2000 (net income of $145 million on a historical basis). Excluding the effect of the nonrecurring items referred to earlier, TWE's net loss decreased to $232 million in 2001 from $363 million on a pro forma basis in 2000. TWE's net loss decreased due to higher EBITDA, gains on the sale of certain cable-related investments, lower amortization expense and lower interest expense, offset in part by increases in depreciation expense and minority interest.
Depreciation and Amortization. Depreciation and amortization increased to $931 million in 2001 from $905 million on a pro forma basis in 2000 ($364 million on a historical basis). This increase was due to an increase in depreciation, primarily due to higher levels of capital spending over the past year at the Cable segment, offset in part by a decrease in amortization.
Interest Expense, Net. Interest expense decreased to $142 million in 2001, compared to $163 million on both a pro forma and historical basis in 2000, principally as a result of lower market interest rates and the absence in 2001 of additional interest expense recognized in the second quarter of 2000 related to the Six Flags litigation, offset in part by higher outstanding debt levels.
Other Expense, Net. Other expense, net, decreased to $47 million in 2001, compared to $132 million on a pro forma basis in 2000 ($109 million on a historical basis), primarily due to higher net gains on the sale or exchange of various unconsolidated cable television systems and investments and the absence in 2001 of a noncash pretax charge of $24 million recognized in 2000 related to the Six Flags litigation.
Minority Interest Expense. Minority interest expense increased to $70 million in 2001, compared to $43 million on both a pro forma and historical basis in 2000, principally due to a higher allocation of losses in 2000 to a minority partner in The WB Network.
Income Tax Provision. As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $6 million in 2001 and $25 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
Cable. Revenues increased to $1.462 billion in 2001, compared to $1.280 billion in 2000. EBITDA increased to $667 million in 2001 from $589 million on a pro forma basis in 2000. Revenues increased due to a 14% 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, an increase in digital cable subscribers and an increase in subscribers to high-speed online services. The increase in advertising and commerce revenues was primarily related to third-party advertising packages sold across multiple business segments of AOL Time Warner and TWE and the intercompany sale of advertising to other business segments of TWE. 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 $1.590 billion in 2001, compared to $1.454 billion in 2000. EBITDA increased to $161 million in 2001 from $158 million on a pro forma basis in 2000. Revenues benefited from the increased domestic distribution of theatrical product, principally due to higher domestic DVD sales, and increased television licensing fees. EBITDA increased principally due to the increased revenues, offset in part by increased advertising and distribution costs because of an increase in the number and timing of new theatrical releases in comparison to the prior year's quarter.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Networks. Revenues increased to $745 million in 2001, compared to $679 million in 2000. EBITDA increased to $156 million in 2001 from $118 million on a pro forma basis in 2000. Revenues grew primarily due to an increase in subscription revenues at HBO and an increase in advertising and commerce revenues at The WB Network. For HBO, subscription revenues benefited primarily from an increase in the number of subscribers. For The WB Network, the increase in advertising and commerce revenues was driven by advertising rate increases, ratings increases in key demographic groups and the intercompany sale of advertising to other business segments of TWE. EBITDA was higher due to improved results at both HBO and The WB Network. For HBO, the increase in EBITDA was principally due to the increase in revenues and increased cost savings from HBO's overhead cost management program. For The WB Network, the lower EBITDA losses were principally due to the increase in revenues.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Consolidated Results
TWE had revenues of $7.170 billion and a net loss of $582 million for the six months ended June 30, 2001, compared to revenues of $6.624 billion on both a pro forma and historical basis and a loss before the cumulative effect of an accounting change of $763 million on a pro forma basis (income before the cumulative effect of an accounting change of $369 million on a historical basis) for the six months ended June 30, 2000.
As previously described, in addition to the consummation of the Merger, the comparability of TWE's operating results for the second quarter of 2000, on both a pro forma and historical basis, has been affected by the recognition of certain significant, nonrecurring items aggregating approximately $572 million of net pretax losses.
Revenues. TWE's revenues increased to $7.170 billion in 2001, compared to $6.624 billion in 2000. This increase was driven by an increase in subscription revenues of 11% to $3.609 billion, an increase in advertising and commerce revenues of 4% to $613 million and an increase in content and other revenues of 6% to $2.948 billion. This compares to $3.243 billion, $591 million and $2.790 billion, respectively, for the six months ended June 30, 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 at both the Cable and Networks segments and an increase in subscription rates at the Cable segment. The increase in advertising and commerce revenues was principally due to increased advertising at the Cable segment and advertising rate increases and ratings increases in key demographic groups 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 by $705 million to $582 million in 2001, compared to $1.287 billion on a pro forma basis in 2000 ($155 million on a historical basis). Excluding the effect of the nonrecurring items referred to earlier, TWE's net loss decreased to $582 million in 2001 from $715 million on a pro forma basis in 2000. TWE's net loss decreased due to higher EBITDA, gains on the sale of certain cable-related investments and lower amortization expense, offset in part by increases in depreciation expense and minority interest.
Depreciation and Amortization. Depreciation and amortization increased to $1.853 billion in 2001 from $1.803 billion on a pro forma basis in 2000 ($721 million on a historical basis). 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.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Interest Expense, Net. Interest expense decreased to $295 million in 2001, compared to $301 million on both a pro forma and a historical basis in 2000, principally as a result of lower market interest rates and the absence in 2001 of additional interest expense recognized in the second quarter of 2000 related to the Six Flags litigation, offset in part by higher outstanding debt levels.
Other Expense, Net. Other expense, net, decreased to $87 million in 2001, compared to $169 million on a pro forma basis in 2000 ($124 million on a historical basis), primarily due to lower losses from certain investments accounted for under the equity method of accounting, higher net gains on the sale or exchange of various unconsolidated cable television systems and investments and the absence in 2001 of a noncash pretax charge of $24 million recognized in 2000 related to the Six Flags litigation.
Minority Interest Expense. Minority interest expense increased to $173 million in 2001, compared to $83 million on both a pro forma and a historical basis in 2000. Minority interest expense increased principally due to pretax gains in 2001 on the exchange of various unconsolidated cable television systems at an equity investee of the TWE-Advance/Newhouse Partnership 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 Expense Provision. As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $38 million in 2001 and $61 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
Cable. Revenues increased to $2.849 billion in 2001, compared to $2.511 billion in 2000. EBITDA increased to $1.328 billion in 2001 from $1.168 billion on a pro forma basis in 2000. Revenues increased due to a 13% 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, an increase in digital cable subscribers and an increase in subscribers to high-speed online services. The increase in advertising and commerce revenues included the impact of third-party advertising packages sold across multiple business segments of AOL Time Warner and TWE that were entered into in the second quarter and the intercompany sale of advertising to other business segments of TWE. 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 $3.193 billion in 2001, compared to $3.022 billion in 2000. EBITDA decreased to $261 million in 2001 from $302 million on a pro forma basis in 2000. Revenues benefited from the increased worldwide 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 because of an increase in the number and timing of new theatrical releases in comparison to the prior year comparable period, offset in part by the increased revenues.
Networks. Revenues increased to $1.469 billion in 2001, compared to $1.335 billion in 2000. EBITDA increased to $314 million in 2001 from $221 million on a pro forma basis in 2000. Revenues grew primarily due to an increase in subscription revenues at HBO and an increase in advertising and commerce revenues at The WB Network. For HBO, subscription revenues benefited primarily from an increase in the number of subscribers. For The WB Network, the increase in advertising and commerce revenues was driven by advertising rate increases, ratings increases
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
in key demographic groups and the intercompany sale of advertising to other business segments of TWE. EBITDA was higher due to improved results at both HBO and The WB Network. For HBO, the increase in EBITDA was principally due to the increase in revenues and increased cost savings from HBO's overhead cost management program. For The WB Network, the lower EBITDA losses were principally due to the revenue gains.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 2001
Financial Condition
At June 30, 2001, TWE had $8.5 billion of debt, $293 million of cash and equivalents (net debt of $8.2 billion) and $65.1 billion of partners' capital, compared 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 six months of 2001, TWE's cash provided by operations amounted to $1.017 billion and reflected $1.864 billion of EBITDA, less $295 million of net interest payments, $96 million of net income taxes paid and $456 million related to an increase in other working capital requirements. Cash provided by operations of $1.675 billion in the first six months of 2000 reflected $1.654 billion of pro forma EBITDA, $246 million of proceeds received under TWE's asset securitization program and $77 million related to a decrease in other working capital requirements, less $251 million of net interest payments and $51 million of net income taxes paid.
Cash used by investing activities was $1.673 billion in the first half of 2001, compared to $1.051 billion 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 $1.003 billion in the first six months of 2001, compared to $894 million in 2000, primarily due to increased capital spending in the Cable segment related to digital cable boxes, high-speed modems and associated support equipment.
Cash provided by financing activities was $643 million in the first six months of 2001, compared to cash used by financing activities of $962 million in 2000. Cash provided by financing activities in 2001 primarily related to $1.105 billion of net borrowings, offset in part by capital distributions of $391 million. Cash used in financing activities in 2000 primarily related to $423 million of net debt repayments and $473 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 $954 million in 2001, compared to $836 million in 2000.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
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 June 30, 2001, the Cable segment had 2.511 million digital cable subscribers, a 19.8% penetration of basic cable subscribers. This compares to 889 thousand digital cable subscribers, or a 7.1% penetration of basic cable subscribers at June 30, 2000. Similarly, the number of high-speed online customers grew to 1.409 million, or 8.1% of eligible homes, from 573 thousand, or 5.3% of eligible homes at June 30, 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 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 and risks 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 network businesses, greater than expected programming or production costs; 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.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
o For TWE's film businesses, their ability to continue to attract and select desirable talent and scripts at manageable costs; 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.
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.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31, December 31,
2001 2000 2000
Historical Pro Forma(a) Historical(a)
---------- ----------- -----------
(millions)
ASSETS
Current assets
Cash and equivalents....................................................... $ 293 $ 306 $ 306
Receivables, including $1.040, $1.556 and $1.556 billion due from AOL
Time Warner, less allowances of $724, $677 and $677 million............ 3,615 3,643 3,643
Inventories................................................................ 805 762 762
Prepaid expenses........................................................... 271 200 200
------- ------- -------
Total current assets....................................................... 4,984 4,911 4,911
Noncurrent inventories and film costs...................................... 4,780 3,938 2,579
Investments................................................................ 2,571 2,218 543
Property, plant and equipment.............................................. 8,072 7,468 7,493
Cable television franchises................................................ 20,384 23,100 5,329
Brands and trademarks...................................................... 2,120 2,500 -
Goodwill and other intangible assets....................................... 41,708 39,882 3,603
Other assets............................................................... 919 959 1,000
------- ------- -------
Total assets............................................................... $85,538 $84,976 $25,458
======= ======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable........................................................... $ 2,410 $ 2,272 $ 2,272
Participations payable..................................................... 931 969 969
Programming costs payable.................................................. 507 455 455
Debt due within one year................................................... 2 3 3
Other current liabilities, including $1.391, $1.223 and $1.223 billion due
to AOL Time Warner..................................................... 2,454 2,799 2,799
------- ------- -------
Total current liabilities.................................................. 6,304 6,498 6,498
Long-term debt, including $2.814 billion due to AOL Time Warner at
June 30, 2001.......................................................... 8,467 7,108 7,108
Other long-term liabilities, including $1.157 billion, $681 and
$681 million due to AOL Time Warner.................................... 3,727 3,045 3,045
Minority interests......................................................... 1,976 1,881 1,881
Partners' capital
Contributed capital........................................................ 66,872 66,793 7,349
Partnership deficit........................................................ (1,808) (349) (423)
------- ------- -------
Total partners' capital.................................................... 65,064 66,444 6,926
------- ------- -------
Total liabilities and partners' capital.................................... $85,538 $84,976 $25,458
======= ======= =======
|
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- -----------------------------------
2001 2000 2000 2001 2000 2000
Historical Pro Forma(a) Historical(a) Historical Pro Forma(a) Historical(a)
---------- --------- ---------- ---------- --------- ----------
(millions)
Revenues:
Subscriptions................................. $ 1,838 $ 1,649 $ 1,649 $ 3,609 $ 3,243 $ 3,243
Advertising and commerce...................... 314 307 307 613 591 591
Content and other............................. 1,476 1,357 1,357 2,948 2,790 2,790
------ ------- ------- ------- ------- -------
Total revenues(b)................................ 3,628 3,313 3,313 7,170 6,624 6,624
Cost of revenues(b).............................. (2,258) (1,995) (2,008) (4,516) (4,079) (4,106)
Selling, general and administrative(b)........... (671) (681) (679) (1,296) (1,304) (1,299)
Amortization of goodwill and other
intangible assets............................. (666) (695) (141) (1,347) (1,390) (281)
------ ------- ------- ------- ------- -------
Operating income (loss).......................... 33 (58) 485 11 (149) 938
Interest expense, net............................ (142) (163) (163) (295) (301) (301)
Other expense, net(b)............................ (47) (132) (109) (87) (169) (124)
Minority interest................................ (70) (43) (43) (173) (83) (83)
------ ------- ------- ------- ------- -------
Income (loss) before income taxes and cumulative
effect of accounting change.................. (226) (396) 170 (544) (702) 430
Income taxes..................................... (6) (25) (25) (38) (61) (61)
------ ------- ------- ------- ------- -------
Income (loss) before cumulative effect of
accounting change............................. (232) (421) 145 (582) (763) 369
Cumulative effect of accounting change........... - - - - (524) (524)
------ ------- ------- ------- ------- -------
Net income (loss)................................ $ (232) $ (421) $ 145 $ (582) $(1,287) $ (155)
====== ======= ======= ======= ======= =======
|
(b) Includes the following income (expenses) resulting from transactions with the partners of TWE and other related companies:
Revenues................................... $ 234 $ 126 $ 126 $ 441 $ 219 $ 219 Cost of revenues........................... (132) (84) (84) (255) (147) (147) Selling, general and administrative........ (45) (41) (41) (81) (84) (84) Other expense, net......................... (6) 6 6 2 9 9 |
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
(Unaudited)
2001 2000 2000
Historical Pro Forma(a) Historical(a)
---------- --------- ----------
(millions)
OPERATIONS
Net loss........................................................................ $ (582) $(1,287) $ (155)
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change....................................... - 524 524
Depreciation and amortization................................................ 1,853 1,803 721
Amortization of film costs................................................... 830 732 732
Equity in losses of investee companies after distributions................... 142 166 111
Changes in operating assets and liabilities..................................... (1,226) (263) (258)
-------- -------- --------
Cash provided by operations..................................................... 1,017 1,675 1,675
-------- -------- --------
INVESTING ACTIVITIES
Investments and acquisitions.................................................... (702) (231) (231)
Capital expenditures............................................................ (1,003) (894) (894)
Investment proceeds............................................................. 32 74 74
-------- -------- --------
Cash used by investing activities............................................... (1,673) (1,051) (1,051)
-------- -------- --------
FINANCING ACTIVITIES
Borrowings...................................................................... 3,633 894 894
Debt repayments................................................................. (2,528) (1,317) (1,317)
Capital distributions........................................................... (391) (473) (473)
Other........................................................................... (71) (66) (66)
--------- -------- --------
Cash provided (used) by financing activities.................................... 643 (962) (962)
-------- -------- --------
DECREASE IN CASH AND EQUIVALENTS................................................ (13) (338) (338)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD..................................... 306 517 517
-------- -------- --------
CASH AND EQUIVALENTS AT END OF PERIOD........................................... $ 293 $ 179 $ 179
======== ======== ========
|
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
Six Months Ended June 30,
(Unaudited)
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 loss.................................................................................... (582) (155)
Other comprehensive loss.................................................................... (14) (46)
------- ------
Comprehensive loss (a)...................................................................... (596) (201)
Distributions............................................................................... (867) (509)
Other....................................................................................... 83 14
------- ------
BALANCE AT END OF PERIOD.................................................................... $65,064 $6,453
======= ======
|
See accompanying notes.
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 6). 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 $666 million in the second quarter of 2001 and $695 million on a pro forma basis in the second quarter of 2000 ($141 million on a historical basis). Noncash amortization of intangible assets amounted to $1.347 billion for the first six months of 2001 and $1.390 billion on a pro forma basis for the first six months of 2000 ($281 million on a historical basis).
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 are being 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.
As discussed further below, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which provides, among other things, for the nonamortization of goodwill and intangible assets with indefinite useful lives. Consequently, goodwill and some intangible assets recognized in connection with the Merger will no longer be amortized, beginning in the first quarter of 2002.
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 of 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 separate reportable segment;
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 expense, net; and
o Corporate services have been reclassified to selling, general and administrative costs as a reduction of operating income (loss).
Interim Financial Statements
The accompanying consolidated financial statements are unaudited but, in the opinion of management, contain all of 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.
TWE adopted the provisions of SOP 00-2 retroactively to the beginning of 2000. As a result, TWE's net loss 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.
Revenue Classification Changes
In April 2001, the FASB's Emerging Issues Task Force ("EITF") reached a final consensus EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" ("EITF 00-25"). EITF 00-25 will be effective for TWE in the first quarter of 2002. EITF 00-25 clarifies the income statement classification of costs incurred by a vendor in connection with the reseller's purchase or promotion of the vendor's products, resulting in certain cooperative advertising and product placement costs previously classified as selling expenses to be reflected as a reduction of revenues earned from that activity. While TWE is in the process of evaluating the overall impact of EITF 00-25 on its consolidated financial statements, it is not expected that EITF 00-25 will have a significant impact on TWE's consolidated financial statements.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
In September 2000, FASB 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.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 was effective for the transfer of financial assets occurring after March 31, 2001. The provisions of FAS 140 did not have a significant effect on TWE's consolidated financial statements.
Accounting for Business Combinations
In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141, "Business Combinations" ("FAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life created by business combinations accounted for using the purchase method of accounting. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. The new standards generally will be effective for TWE in the first quarter of 2002 and for purchase business combinations consummated after June 30, 2001. TWE is in the process of quantifying the anticipated impact of adopting the provisions of FAS 142, which is expected to be significant.
Upon adoption, TWE will stop amortizing goodwill, including goodwill included in the carrying value of certain investments accounted for under the equity method of accounting. Based on the current levels of goodwill, this would reduce amortization expense and, with respect to equity investees, it would reduce other expense, net, by approximately $1.7 billion and $100 million, respectively. The impact of stopping goodwill amortization and the amortization of goodwill included in the carrying value of equity investees would be to increase TWE's annual net income by approximately $1.8 billion. In addition, TWE is in the process of evaluating certain intangible assets to determine whether they are deemed to have an indefinite useful life. As a result of this process, TWE may stop amortizing an additional $20 billion to $25 billion of intangible assets. This could result in an additional reduction of amortization by approximately $800 million to $1 billion, which will have a corresponding increase in TWE's net income.
Reclassifications
Certain reclassifications have been made to the prior year's financial statements to conform to the 2001 presentation.
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 its operations ("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 represents 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. Termination payments of approximately $10 million
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
were made in the second quarter of 2001. As of June 30, 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 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. Payments related to exiting activities were approximately $15 million in the second quarter of 2001 and approximately $20 million in the first six months of 2001. As of June 30, 2001, the remaining liability of $135 million was primarily classified as a current liability in the accompanying consolidated balance sheet.
The restructuring liabilities recorded 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 (in millions):
Employee Other
Termination Exit Costs Total
----------- ----------- -----
Initial accruals $55 $155 $210
Cash paid (10) (20) (30)
-------- ---------- ------
Restructuring liability as of June 30, 2001 $45 $135 $180
======== ========== ======
|
3. SIGNIFICANT TRANSACTIONS
Six Flags
In December 1998, a jury returned an adverse verdict in the Six Flags Entertainment Corporation ("Six Flags") litigation in the amount of $454 million. TWE and its former 51% partner in Six Flags were financially responsible for this judgment. TWE appealed the verdict, but, in July 2000, an appellate court unexpectedly affirmed the jury's verdict. As a result, TWE revised its estimate of its financial exposure and recorded a one-time, pretax charge of $50 million in the second quarter of 2000 to cover its additional financial exposure in excess of established reserves, which consisted of the unrecognized portion of the deferred gain on the 1998 sale of Six Flags and accrued interest. The $50 million charge is classified in two components in the accompanying consolidated statement of operations on a pro forma basis for the three and six months ended June 30, 2000; $26 million of the charge, representing an accrual for additional interest, is included in interest expense, net, and the remaining $24 million is included in other expense, net.
Loss 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. In connection with the sale or exchange of unconsolidated cable television systems, approximately $8 million of net pretax losses were recognized in the second
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
quarter of 2000 and are included in other expense, net, in the accompanying consolidated statement of operations on both a pro forma and historical basis for the three and six months ended June 30, 2000.
4. INVENTORIES AND FILM COSTS
Inventories and film costs consist of:
June 30, 2001 December 31, 2000 December 31, 2000
Historical Pro Forma Historical
----------- --------- ----------
(millions)
Programming costs, less amortization................. $1,199 $1,029 $1,014
Film costs-Theatrical:
Released, less amortization....................... 592 711 711
Completed and not released........................ 233 113 113
In production..................................... 655 386 386
Development and pre-production.................... 29 25 25
Film costs-Television:
Released, less amortization....................... 239 133 133
Completed and not released........................ 36 194 194
In production..................................... 9 76 76
Development and pre-production.................... 4 5 5
Film costs-Library, less amortization................ 2,448 1,800 456
Merchandise.......................................... 141 228 228
------ ------ ------
Total inventories and film costs..................... 5,585 4,700 3,341
Less current portion of inventory.................... 805 762 762
------ ------ ------
Total noncurrent inventories and film costs.......... $4,780 $3,938 $2,579
====== ====== ======
|
5. 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 six months ended June 30, 2001, TWE accrued $50 million of tax-related distributions and $817 million of stock option distributions, based on closing prices of AOL Time Warner common stock of $53.00 at June 30, 2001 and $34.80 at December 31, 2000. During the six months ended June 30, 2000, TWE accrued $284 million of tax-related distributions and $225 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 six months ended June 30, 2001, TWE paid distributions to the AOL Time Warner General Partners in the amount of $391 million, consisting of $50 million of tax-related distributions and $341 million of stock option related distributions. During the six months ended June 30, 2000, TWE paid the AOL Time Warner General Partners distributions in the amount of $473 million, consisting of $284 million of tax-related distributions and $189 million of stock option related distributions.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. 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 June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
2001 2000 2000 2001 2000 2000
Historical Pro Forma(a) Historical Historical Pro Forma(a) Historical
---------- ------------ ---------- ---------- ------------ ----------
(millions)
Revenues
Cable............................... $1,462 $1,280 $1,280 $2,849 $2,511 $2,511
Filmed Entertainment-Warner Bros.... 1,590 1,454 1,454 3,193 3,022 3,022
Networks............................ 745 679 679 1,469 1,335 1,335
Intersegment elimination............ (169) (100) (100) (341) (244) (244)
------ ------ ------ ------ ------ ------
Total............................... $3,628 $3,313 $3,313 $7,170 $6,624 $6,624
====== ====== ====== ====== ====== ======
|
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
2001 2000 2000 2001 2000 2000
Historical Pro Forma(a) Historical Historical Pro Forma(a) Historical
---------- ------------ ---------- ---------- ------------ ----------
(millions)
EBITDA(b)
Cable..................................$667 $589 $590 $1,328 $1,168 $1,170
Filmed Entertainment-Warner Bros....... 161 158 159 261 302 304
Networks............................... 156 118 118 314 221 222
Corporate.............................. (20) (18) (18) (39) (37) (37)
---- ---- ---- ------ ------ ------
Total..................................$964 $847 $849 $1,864 $1,654 $1,659
==== ==== ==== ====== ====== ======
|
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
2001 2000 2000 2001 2000 2000
Historical Pro Forma(a) Historical Historical Pro Forma(a) Historical
---------- ------------ ---------- ---------- ------------ ----------
(millions)
Depreciation of Property, Plant
and Equipment
Cable................................. $235 $177 $191 $446 $349 $377
Filmed Entertainment-Warner Bros...... 21 23 22 42 45 44
Networks.............................. 8 9 9 16 16 16
Corporate............................. 1 1 1 2 3 3
----- ---- ---- ---- ---- ----
Total................................. $265 $210 $223 $506 $413 $440
==== ==== ==== ==== ==== ====
- -------------------
|
(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 June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
2001 2000 2000 2001 2000 2000
Historical Pro Forma(a) Historical Historical Pro Forma(a) Historical
---------- ------------ ---------- ---------- ------------ ----------
(millions)
Amortization of Intangible Assets(b)
Cable................................. $473 $490 $109 $ 961 $ 981 $218
Filmed Entertainment-Warner Bros...... 97 103 31 195 205 61
Networks.............................. 96 102 1 191 204 2
---- ---- ---- ------ ------ ----
Total................................. $666 $695 $141 $1,347 $1,390 $281
==== ==== ==== ====== ====== ====
|
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:
June 30, December 31,
2001 2000
Historical Pro Forma(a)
---------- -----------
(millions)
Assets
Cable............................................. $56,660 $56,097
Filmed Entertainment-Warner Bros.................. 16,946 16,825
Networks.......................................... 11,309 11,654
Corporate......................................... 623 400
------- -------
Total business segment assets..................... $85,538 $84,976
======= =======
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
7. 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 was filed by TWE on June 15, 2001.
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 the matter described above), and developments or assertions by or against TWE relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on TWE's business, financial condition and operating results.
8. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
Additional financial information with respect to cash flows is as follows:
Six Months Ended June 30,
--------------------------------
2001 2000 2000
Historical Pro Forma Historical
---------- --------- ----------
(millions)
Cash payments made for interest, net.............. $295 $251 $251
Cash payments made for income taxes, net.......... 96 51 51
Noncash capital distributions..................... 476 36 36
|
Other Expense, Net
Other expense, net, consists of:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
2001 2000 2000 2001 2000 2000
Historical Pro Forma Historical Historical Pro Forma Historical
---------- --------- ---------- ---------- --------- ----------
(millions)
Other investment-related activity, principally
losses on equity investees.................... $(41) $(108) $ (85) $(74) $(130) $ (85)
Losses on asset securitization programs.......... (5) (28) (28) (11) (31) (31)
Miscellaneous.................................... (1) 4 4 (2) (8) (8)
---- ----- ----- ---- ----- -----
Total other expense, net......................... $(47) $(132) $(109) $(87) $(169) $(124)
==== ===== ===== ==== ===== =====
|
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Other Current Liabilities
Other current liabilities consist of:
June 30, December 31, December 31,
2001 2000 2000
Historical Pro Forma Historical
---------- --------- ----------
Accrued expenses............... $1,823 $2,071 $2,071
Accrued compensation........... 238 352 352
Deferred revenues.............. 349 297 297
Accrued income taxes........... 44 79 79
------ ------ ------
Total.......................... $2,454 $2,799 $2,799
====== ====== ======
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Part II. Other Information
Item 1. Legal Proceedings.
All of the lawsuits brought by shareholders against America Online, Inc. ("America Online") and Time Warner Inc. ("Time Warner") and their respective directors relating to the merger of America Online and Time Warner, described on page I-34 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as amended (the "2000 Form 10-K"), were dismissed in July 2001.
Reference is made to Six Flags Over Georgia LLC et al. v. Time Warner Entertainment Company, L.P., described on page I-34 of the Company's 2000 Form 10-K. On June 15, 2001, the Company filed a petition for certiorari with the U.S. Supreme Court.
Reference is made to the state lawsuits which are related to the Ottinger & Silvey et al. v. EMI Music Distribution, Inc. et al litigation referred to on page I-35 of the Company's 2000 Form 10-K and page 57 of the Company's Form 10-Q for the quarter ended March 31, 2001. Motions to dismiss were partially granted in two states and denied in a third.
On April 17, 2001, plaintiffs in Playmedia Systems Inc. v. AOL Time Warner Inc. et al. filed a complaint in the U.S. District Court for the Central District of California asserting copyright infringement based on a claim that use of a software decoder in the AOL Media Player exceeds the scope of the prior license Playmedia had granted to a subsidiary of America Online. Plaintiffs have filed a motion for preliminary injunction, which is to be heard August 30, 2001. The Company believes that the lawsuit is without merit and intends to defend against it vigorously, but is unable to predict the outcome or reasonably estimate a range of possible loss given its current status.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) (b) (c) The Annual Meeting of Stockholders of the Company was held on May 17, 2001 (the "2001 Annual Meeting"). The following matters were voted upon at the 2001 Annual Meeting:
(i) The following were elected directors of the Company for terms expiring in 2002:
Broker
For Withheld Non-Votes
--- -------- ---------
Daniel F. Akerson 3,514,702,839 29,737,334 0
James L. Barksdale 3,514,520,083 29,920,090 0
Stephen F. Bollenbach 3,514,311,153 30,129,020 0
Stephen M. Case 3,514,468,823 29,971,350 0
Frank J. Caufield 3,514,412,147 30,028,026 0
Miles R. Gilburne 3,477,310,157 67,130,016 0
Carla A. Hills 3,513,838,898 30,601,275 0
Gerald M. Levin 3,513,946,092 30,494,081 0
Reuben Mark 3,514,669,758 29,770,415 0
Michael A. Miles 3,513,557,156 30,883,017 0
Kenneth J. Novack 3,514,506,938 29,933,235 0
Richard D. Parsons 3,514,359,452 30,080,721 0
Robert W. Pittman 3,514,290,516 30,149,657 0
Franklin D. Raines 3,514,172,631 30,267,542 0
R. E. Turner 3,512,463,257 31,976,916 0
Francis T. Vincent, Jr. 3,514,432,874 30,007,299 0
|
(ii) Approval of the appointment of Ernst & Young LLP as independent auditors of the Company for 2001:
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
3,514,907,182 12,766,209 15,054,924 0
|
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The exhibit listed on the accompanying Exhibit Index is filed 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 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.
AOL TIME WARNER INC.
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.
(Registrant)
By: /s/ J. Michael Kelly
------------------------------
Name: J. Michael Kelly
Title: Executive Vice President and
Chief Financial Officer
Dated: August 14, 2001
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EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
- ---------- ----------------------
10.1 AOL Time Warner Inc. Deferred Compensation Plan,
amended and restated as of August 1, 2001.
|
AOL TIME WARNER INC.
DEFERRED COMPENSATION PLAN
(Amended and Restated as of August 1, 2001)
ARTICLE I
ESTABLISHMENT OF THE PLAN
1.1 Establishment of Plan. Time Warner Inc. established this plan effective as of November 18, 1998, to be known as the Time Warner Inc. Deferred Compensation Plan. Effective January 11, 2001 AOL Time Warner Inc. (the "Company") became the plan sponsor and the plan was renamed the AOL Time Warner Inc. Deferred Compensation Plan (the "Plan"). The Plan has been amended and restated effective as of August 1, 2001.
1.2 Purpose of Plan. The Plan is intended to be an unfunded, non-qualified deferred compensation plan maintained to provide deferred compensation for a select group of management or highly compensated employees under Section 201(2) of the Employee Retirement Income Security Act of 1974, by providing Eligible Employees a means of irrevocably deferring to a future Year the receipt of certain compensation from Employing Companies in excess of the Compensation Limit. The Plan also applies to certain account balances attributable to compensation previously irrevocably deferred under (i) the Time Warner Deferred Compensation (pre-1999) Plan (the "Pre-1999 Plan"), (ii) the Time Warner Excess Profit Sharing Plan (the "Excess Profit Sharing Plan"), (iii) the Warner Bros. Supplemental Executive Retirement Plan (the "Warner Bros. SERP") and (iv) the employment agreements of certain senior officers and key personnel of the Company and its Affiliates, subject to the terms and conditions for making such transfers specified in the Pre-1999 Plan, the Excess Profit Sharing Plan, the Warner Bros. SERP and each of the employment agreements.
1.3 Applicability of Plan. The provisions of the Plan are applicable only to Employees of Employing Companies employed on or after the effective date of this restatement of the Plan.
ARTICLE II
DEFINITIONS
2.1 Definitions. Whenever used in the Plan, the following terms shall have the respective meanings set forth below unless otherwise expressly provided, and when the defined meaning is intended, the term is capitalized.
2.2 Administrative Committee: The Administrative Committee as provided for herein.
2.3 Adverse Tax Effect: Any reduction in the benefits available to, or any adverse impact on, the Company from the use of Corporate Owned Life Insurance ("COLI") as an investment vehicle to fund the obligations of the Company under the Plan.
2.4 Affiliate: An Employing Company and any entity affiliated with the Employing Company within the meaning of Code Section 414(b), with respect to controlled groups of corporations, Section 414(c) with respect to trades or businesses under common control with the Employing Company, and Section 414(m) with respect to affiliated service groups, and any other entity required to be aggregated with an Employing Company pursuant to regulations under Section 414(o) of the Code.
Except as described below, the term "Affiliate" shall generally mean an entity in which the Employing Company has an ownership interest directly or indirectly of at least eighty percent (80%).
(a) The Benefits Officer may designate any entity which is related to the Company by less than eighty percent (80%) as an Affiliate.
(b) If an Employing Company adopts the Plan only for the benefit of certain of its divisions, locations or operations, all other divisions, locations or operations of said Employing Company shall be treated as Affiliates.
(c) TWE, each division of TWE, any entity affiliated with TWE
within the meaning of Sections 414(b), 414(c) and 414(m) of the Code, and any
other entity required to be aggregated with TWE pursuant to regulations under
Section 414(o) of the Code shall be treated as Affiliates.
(d) TWE-A/N, each division of TWE-A/N, any entity affiliated with TWE-A/N within the meaning of Sections 414(b), 414(c) and 414(m) of the Code, and any other entity required to be aggregated with TWE-A/N pursuant to regulations under Section 414(o) of the Code shall be treated as Affiliates.
2.5 Beneficiary: The person or persons designated from time to time by a Participant or Inactive Participant, by notice to the Benefits Officer, to receive any benefits payable under the Plan after his or her death, which designation has not been revoked by notice to the Benefits Officer at the date of the Participant's or Inactive Participant's death. Such notice shall be in a form as required by the Benefits Officer or acceptable to such officer which is properly completed and delivered to the Benefits Officer or such officer's designee. Notice to the Benefits Officer shall be deemed to have been given when it is actually received by or on behalf of such officer. The beneficiary designation, if any, in effect for the Plan will override and supercede any Excess Profit Sharing Plan designation. If there is none on file for the Plan, the Excess Profit Sharing Plan designation will continue to apply to any transferred balance from the Excess Profit Sharing Plan until a Plan designation is made. Any such new designation will apply to all balances in the Plan.
2.6 Benefits Officer: The Benefits Officer as provided for herein.
2.7 Board: The Board of Directors of the Company or a committee thereof authorized to act in the name of the Board.
2.8 Code: The Internal Revenue Code of 1986, as amended.
2.9 Company: AOL Time Warner Inc.
2.10 Compensation Limit: The compensation limit of Section 401(a)(17) of the Code, as adjusted under Section 401(a)(17)(B) of the Code for increases in the cost of living.
2.11 Deferred Compensation Account: The separate account established under Article V of the Plan for each Participant and Inactive Participant representing amounts deferred by a Participant pursuant to Article III.
2.12 Disability: Permanent and total disability as determined by the Social Security Administration or any disability for which a Participant is receiving monthly benefits under the provisions of the AOL Time Warner Inc. Long Term Disability Plan or, in the case of an employee covered by a long term disability plan of an Affiliate, under the provisions of such plan, whichever shall occur first.
2.13 Eligible Employee: An individual who meets the eligibility requirements of Section 3.1.
2.14 Employee: An individual employed by an Employing Company.
2.15 Employing Company: The Company and each Affiliate which has been authorized by the Benefits Officer to participate in the Plan and has adopted the Plan.
2.16 ERISA: The Employee Retirement Income Security Act of 1974, as amended.
2.17 Inactive Participant: A Participant whose employment has terminated with the Company and any Affiliate and whose Deferred Compensation Account has not been fully distributed.
2.18 Investment Committee: The Investment Committee as provided for herein.
2.19 Investment Direction: A Participant's or Inactive Participant's direction to the recordkeeper of the Plan, in the form and manner prescribed by the Benefits Officer, in accordance with directions made by telephone, through the intranet of the applicable Employing Company or through the Internet, directing which Investment Funds will be credited with his or her deferrals and transfers of all or part of the deferred amounts and any earnings thereon from other Investment Funds, the Pre-1999 Plan, the Excess Profit Sharing Plan, the Warner Bros. SERP and certain employment agreements, as provided for herein.
2.20 Investment Funds: The hypothetical investment funds, as determined from time to time by the Board or the Investment Committee.
2.21 Participant: Each Employee who participates in the Plan in accordance with the terms and conditions of the Plan.
2.22 Plan: The AOL Time Warner Inc. Deferred Compensation Plan as set forth herein and as it may be amended from time to time.
2.23 Retirement: The term used to indicate that a Participant, as of the date his or her employment terminates with the Company and any Affiliate, is eligible for retirement under the then current qualified defined benefit plan of the Company or the Affiliate from which he or she is terminating employment. If such company does not have a qualified defined benefit plan, eligibility for retirement shall be determined by the applicable provision in the qualified defined contribution plan of such company for which the Participant is eligible, and, if more than one, the plan which would result in the earliest distribution under this Plan.
2.24 Tax Event: The first to occur of any of the following events (as determined by the Committee):
(a) any amendments to, clarification of, or change in the laws of the United States or taxing authority thereof that has an Adverse Tax Effect,
(b) any judicial decision, administrative pronouncement, published or private ruling, technical advice memorandum, regulatory procedure, notice or announcement ("Administrative Action") that has an Adverse Tax Effect,
(c) any amendment to, clarification of, or change in the position or the interpretation of any Administrative Action that has an Adverse Tax Effect, or
(d) the receipt by the Company or any of its Affiliates or subsidiaries of a Notice of Proposed Adjustment (or notice similar thereto) from the Internal Revenue Service proposing an adjustment which would result in an Adverse Tax Effect.
2.25 TWE: Time Warner Entertainment Company, L.P.
2.26 TWE-A/N: Time Warner Entertainment-Advance/Newhouse Partnership.
2.27 Valuation Date: With respect to the Investment Funds, each business day when the New York Stock Exchange is open.
2.28 Year: A calendar year.
ARTICLE III
PARTICIPANT DEFERRALS
3.1 Eligibility. The Employees who shall be eligible to make deferral elections under the Plan are those salaried officers and other key employees of an Employing Company who at the time of a deferral election pursuant to Section 3.3 below:
(i) are on a regular periodic U.S. payroll of the Employing Company; and
(ii) have a current base salary plus bonus in excess of the Compensation Limit or are otherwise designated as eligible by the Benefits Officer. For purposes of this subsection 3.1(ii), "bonus" means any annual bonus (paid or deferred) pursuant to a regular program (but excluding long-term cash incentive plan payments other than those specified in Section 3.5 and commission, spot and similar bonuses) for the Year preceding the current Year, except that, in the case of a deferral election to be made by a newly hired Employee (which election shall be made available at the sole discretion of the Employing Company), with respect to a bonus to be earned in (A) the current Year, "bonus" means the target or otherwise estimated bonus for that portion of the current Year after the date of his or her hire, and (B) the Year following hire, "bonus" means the target or otherwise estimated bonus for the current Year.
The Benefits Officer may, from time to time, modify the above eligibility requirements and make such additional or other requirements for eligibility as such officer may determine.
3.2 Compensation Eligible for Deferral. (a) An Eligible Employee may
elect to defer receipt of all or a specified portion of any bonus, but only to
the extent the receipt thereof would cause the Eligible Employee's compensation
to exceed the Compensation Limit. Each such deferral may be expressed as a
percentage, in 10% increments only, but in no event shall any election result in
a deferral of less than $5,000. The Eligible Employee may elect to have the
designated percentage apply only to that portion of the bonus in excess of a
certain dollar amount that he or she specifies when making the election. In lieu
of designating a percentage, the Eligible Employee may elect to have a specific
dollar amount of the bonus deferred. For purposes of this Section 3.2, "bonus"
means any annual bonus payable pursuant to a regular program and signing bonuses
(but excluding long-term cash incentive plan payments other than those specified
in Section 3.5 and commission, spot and similar bonuses) and which would
otherwise be payable in cash to an Eligible Employee for services as an
Employee. Notwithstanding anything to the contrary herein, for purposes of this
Section 3.2, "bonus" shall also mean the special one-time merger completion
bonus payable in connection with the successful completion of the merger of
America Online, Inc. and Time Warner Inc.
(b) An Eligible Employee whose compensation is payable under
an employment agreement with an Employing Company which provides for deferred
compensation may elect to defer such deferred compensation under the Plan,
subject to the terms of such agreement. Any such deferral so elected shall be
made in the same manner as provided for in subsection (a). Notwithstanding the
foregoing, any compensation previously deferred under an employment agreement
shall be subject to deferral under the Plan only as provided for in Section
3.6(b). An Eligible Employee's employment agreement with the Company or another
Employing Company may also provide for a mandatory deferral of certain
compensation under the Plan.
(c) An Employing Company may designate a special bonus to be paid to an Eligible Employee under an agreement with such employee as eligible for deferral, subject to the terms of such agreement. Any such deferral so elected shall be made in the same manner as provided for in subsection (a).
(d) Whenever any compensation eligible for deferral under the Plan is also eligible for deferral, in whole or part, under any other deferred compensation plan (such as an excess 401(k) plan), the amount of such compensation eligible for deferral under the Plan shall be net of any amount elected for deferral under the other plan.
3.3 Deferral Elections. An Eligible Employee with the consent of the Benefits Officer may annually make an irrevocable election to defer under the Plan certain compensation described in Section 3.2 and participate herein by timely delivering a properly executed election to the Benefits Officer or such officer's designee on a form prescribed by the Benefits Officer. The election form shall specify with respect to the compensation to be deferred under the Plan for the Year, pursuant to the provisions of Section 3.2 and Article V:
(i) the percentage of the bonus or compensation specified in Section 3.2(b) to be deferred, the certain dollar amount of such bonus or compensation in excess of which the deferral has been elected, if applicable or, the specific dollar amount to be deferred; and
(ii) the time for the commencement of payment of the deferred compensation, which must be either on account of retirement or at an in-service Year to be specified by the Eligible Employee. Compensation which is to be deferred to an in-service payment date must be deferred for no fewer than three Years following the Year in which it was earned.
3.4 Effective Date of Election. (a) An election to defer compensation under the Plan must be received by or on behalf of the Benefits Officer prior to July 1 of the Year preceding that in which it would be payable, at which time it shall become irrevocable.
(b) Notwithstanding the date specified in subsection (a) above, the Benefits Officer may prescribe an earlier or later date by which time an Eligible Employee must elect to defer such compensation.
(c) Under no circumstances may an Eligible Employee at any time defer compensation to which he or she has attained a legally enforceable right to receive currently.
3.5 Certain Incentive Plans. Notwithstanding anything to the contrary herein, the term "bonus" wherever used in this Article III shall include (i) any amounts payable to Eligible Employees of (a) Time Inc. and its subsidiaries and affiliates, who participate in a Phantom Equity Plan ("PEP"), provided, however, that any such elections shall be made irrevocably during the third Year of a four Year PEP cycle or (b) Entertainment Weekly Inc., who participate in the Entertainment Weekly Stock Performance Plan, (ii) any amounts payable to Eligible Employees participating in the Time Warner Cable Long Term Cash Plan. Any such elections pursuant to this Section shall be made prior to July 1 of the final Year of the respective plan, at which time they shall become irrevocable.
3.6 Transfers. (a) Transfers to the Plan have previously been made of the entire account balances of certain participants in the Pre-1999 Plan and the Excess Profit Sharing Plan, as provided by the terms and conditions of such plans and the Plan as in effect at the time of such transfers.
(b) Each Eligible Employee, whose compensation is payable under an employment agreement with an Employing Company which provides for deferred compensation, may elect to have transferred to and deferred under his or her Deferred Compensation Account in the Plan the balance, in whole or in part, of the compensation previously deferred under such agreement, subject to the terms thereof. Such an election can be made at any time, but only once in the Eligible Employee's lifetime.
(c) Transfers to the Plan shall be accepted from the Warner Bros. SERP on or after September 1, 2001 of the account balances of certain of the participants in the Warner Bros. SERP as provided by the terms and conditions of the Warner Bros. SERP.
ARTICLE IV
DEFERRED COMPENSATION ACCOUNT
4.1 Deferred Compensation Account. (a) A Deferred Compensation Account shall be established for each Participant who makes a deferral election pursuant to Article III. A Participant's or Inactive Participant's Deferred Compensation Account shall consist of the Compensation deferred by a Participant in any Year under the Plan, increased or decreased by any gains or losses thereon.
(b) The Company shall maintain the Deferred Compensation Accounts of all Participants and Inactive Participants.
(c) All payments made under the Plan shall be made directly by the Company from its general assets subject to the claims of any creditors and no deferred compensation under the Plan shall be segregated or earmarked or held in trust The Plan is an unfunded and unsecured
contractual obligation of the Company. Participants, Inactive Participants and Beneficiaries shall be unsecured creditors of the Company with respect to all obligations owed to them under the Plan. Participants, Inactive Participants and Beneficiaries shall not have any interest in any fund or specific asset of the Company by reason of any amount credited to a Deferred Compensation Account, nor shall any such person have any right to receive any distribution under the Plan except as explicitly stated herein. The Company shall not designate any funds or assets to specifically provide for the distribution of the value of a Deferred Compensation Account or issue any notes or security for the payment thereof. Any asset or reserve that the Company may purchase or establish shall not serve as security to Participants, Inactive Participants and Beneficiaries for the performance of the Company under the Plan.
4.2 Hypothetical Investment. (a) For crediting rate purposes, amounts credited to a Participant's or Inactive Participant's Deferred Compensation Account shall be deemed to be invested according to his or her Investment Direction in one or more of all of the similarly named funds (both core funds and mutual funds in the mutual funds option) offered under the AOL Time Warner Defined Contribution Plans Master Trust. For any period, the deemed return on each of these Investment Funds shall be the same as the return for such period on each similarly named fund offered under such master trust.
(b) Notwithstanding anything to the contrary herein, the Company, by action of the Investment Committee or the Board, may add to, decrease or change the Investment Funds offered under the Plan, at any time and for any reason. Participants, Inactive Participants and Beneficiaries shall not have the right to continue any particular deferral option.
(c) The Company shall be under no obligation to invest amounts corresponding to any deferral options chosen by Participants or Inactive Participants. Any such allocation to any Deferred Compensation Account shall be made solely for the purpose of determining the value of such account under the Plan.
4.3 Investment Direction. Deferrals shall be credited to the Investment Funds in accordance with a Participant's or Inactive Participant's Investment Direction. A Participant or Inactive Participant shall direct that his or her deferrals be applied, in multiples of one percent, to deemed investments in any or all of the Investment Funds.
4.4 Changes in Investment Direction. A Participant or Inactive Participant may make one Investment Direction in each calendar quarter, separately with respect to either or both new deferrals or previous deferrals and any earnings thereon.
4.5 Manner of Hypothetical Investment. (a) For purposes of the hypothetical investment under Section 4.2, deferred compensation shall be considered to be invested on the date the recordkeeper of the Plan records the deferral amount.
(b) As of each Valuation Date, the recordkeeper of the Plan shall determine the value of each Participant's, Inactive Participant's or Beneficiary's Deferred Compensation Account.
(c) For purposes of distribution pursuant to Article V, the balance of each Deferred Compensation Account shall be valued as of the Valuation Date immediately preceding the date that the Committee commences the processing of the distribution of the balance of such account, or the particular installment thereof.
4.6 Participant Assumes Risk of Loss. Each Participant, Inactive Participant and Beneficiary assumes the risk in connection with any decrease in value of his or her Deferred Compensation Account deemed invested in the Investment Funds.
4.7 Statement of Account. As soon as reasonably practicable after the end of each calendar quarter, a statement shall be sent to each Participant and Inactive Participant with respect to the value of his or her Deferred Compensation Account as of the end of such quarter.
4.8 Investment of Account Balances Transferred from the Warner Bros. SERP. The account balances to be transferred from the Warner Bros. SERP to the Plan as provided in Section 3.6 (c) shall be deemed invested at the time of transfer in the fund using the investment crediting rate based on the Capital Preservation Fund of the AOL Time Warner Defined Contribution Plans Master Trust. Participants in the Plan who have such account balances transferred to the Plan shall be permitted to make two changes in Investment Direction (for their entire Plan account balances) in the calendar quarter of the transfer instead of one.
ARTICLE V
PAYMENT OF DEFERRED COMPENSATION ACCOUNT
5.1 Payment on Account of Termination of Employment for Reasons other than Death or Disability. (a) In the event of termination of the Participant's employment with the Company and any Affiliate for reasons other than death or Disability, the Participant's Deferred Compensation Account shall be distributed to him or her in ten annual installment payments.
(b) Notwithstanding subsection (a) above, a Participant may, at any time, but no later than September 30 of the Year in which he or she terminates employment with the Company and any Affiliate, request that his or her Deferred Compensation Account be distributed to him or her in a lump sum, if the value of the Participant's Deferred Compensation Account is $50,000 or more (determined as of December 31 of the Year in which he or she terminates employment with the Company and any Affiliate), or in two, five or seven annual installment payments, and the Benefits Officer may, in such officer's sole and absolute discretion, make a lump sum payout or payouts in such installments.
(c) Notwithstanding any other provision of this Section 5.1, if the value of the Participant's Deferred Compensation Account is less than $50,000 (determined as of December 31 of the Year in which he or she terminates employment with the Company and any Affiliate), payment shall be made in a lump sum.
(d) The first installment, or lump sum, as the case may be, shall be distributed as soon as practicable on or after April 1 of the Year following the Year in which the Participant terminates employment. Subsequent annual installment payments shall be distributed as soon as practicable on or after each following April 1.
(e) All requests by a Participant under this Section 5.1 shall be made only by delivering a written notice to the Benefits Officer in a manner prescribed by such officer.
(f) This Section 5.1 shall apply to distributions which commence on and after November 1, 2000.
5.2 Special In-Service Payment. Notwithstanding the payment provisions in subsections (a) through (d) of Section 5.1 above, a Participant may request, by delivering a written notice to the Benefits Officer in a manner prescribed by such officer, one special in-service payment in a lump sum of all or any portion of the Participant's Deferred Compensation Account (but not less than $5,000), to be distributed as soon as practicable after the expiration of 36 months following the month in which he or she has made the request, and the Benefits Officer may, in such officer's sole and absolute discretion, make such payment.
(i) The value of any such special in-service payment shall not include amounts payable under existing in-service payment elections.
(ii) In the event of the termination of the Participant's employment with the Company and any Affiliate for any reason prior to the payment of any such special in-service payment, it shall be paid in the same manner and at the same time or times as any other payments of the Participant's Deferred Compensation Account due under this Article. In the event of death, payment shall be made as provided for in Section 5.5.
(iii) In requesting a special in-service payment, a Participant must specify that such payment is to be applicable to the amount or amounts which were deferred in a specific Year or Years. All or a percentage of the deferral for such Year or Years may be requested.
5.3 Payment on Account of Disability. (a) In the event a Participant meets the definition of Disability, the value of the Participant's Deferred Compensation Account shall be distributed to him or her in five annual installment payments.
(b) Notwithstanding subsection (a) above, if the value of the Participant's Deferred Compensation Account is less than $50,000 as of the Valuation Date immediately prior to the date the definition of Disability is met, payment shall be made in a lump sum.
(c) The first installment, or lump sum, as the case may be, shall be distributed as soon as practicable on or after April 1 of the Year following the date the Participant has met
the definition of Disability. Subsequent annual installment payments shall be distributed as soon as practicable on or after each following April 1.
(d) If a Participant or Inactive Participant no longer meets the definition of Disability and returns to work with the Company or an Affiliate, no further payments shall be made on account of the prior Disability, and distribution of his or her remaining Deferred Compensation Account shall be made as otherwise provided in this Article V.
5.4 In-Service Payments. (a) An in-service payment elected by a Participant pursuant to Section 3.3(ii) shall be distributed in a lump sum as soon as practicable on or after April 1 in the Year specified by the Participant.
(b) Notwithstanding subsection (a) above, a Participant may
request, by delivering written notice to the Benefits Officer on a form
prescribed by such officer prior to July 1 of the Year preceding that in which
the in-service payment is to be made, that the Benefits Officer, in such
officer's sole and absolute discretion, defer such payment until such later Year
as the Participant requests. Any such additional deferral (i) must be for full
Years, and for no fewer than 36 months from the beginning of the month in which
the in-service deferral would have been paid but for the additional deferral,
(ii) must be for the current value of the whole amount originally deferred,
(iii) can only be made five times with respect to any in-service payment, and
(iv) shall be distributed in a lump sum as soon as practicable on or after April
1 in the Year specified by the Participant. In lieu of specifying the Year in
which the payment is to be made, the Participant may specify that payment of the
deferral shall be made on account of Retirement, in which case it shall be
distributed in accordance with the provisions of Section 5.1, as soon as
practicable on or after April 1 of the Year following the date of termination
from the Company and any Affiliate.
Notwithstanding the prior sentences of this subsection (b), distribution of any in-service payment (whether or not there has been a prior redeferral) may be deferred pursuant to an employment contract or separation agreement which provides that payment of the deferral shall be made on account of retirement, in which case it shall be distributed in accordance with the provisions of section 5.1.
(c) In the event of the termination of a Participant's
employment for any reason prior to the time any in-service payment under this
Section 5.4 would have been made, distribution of such payment shall be made
according to the manner of payment specified in Section 5.1, 5.2, 5.3 or 5.5,
based on the Participant's actual reason for termination of employment;
provided, however, that the unpaid balance of any in-service payment shall be
paid in full at the time such in-service payment would have been made but for
such termination of employment.
(d) The Benefits Officer may, in such officer's sole and absolute discretion, defer any in-service payment previously elected by any officer of the Company or TWE who at the time of the designated in-service payment date is at or above the level of a senior vice president. In the event of any such deferral by the Benefits Officer, payment shall be made
under this Article V as if a deferral election had been made for payment on account of Retirement.
5.5 Payment to Beneficiary or Estate in the Event of Death. Notwithstanding the provisions for payment described in Sections 5.1 through 5.4 above, in the event of the death of a Participant or Inactive Participant before the distribution of his or her Deferred Compensation Account has commenced, or before such account has been fully distributed, the value of such account shall be determined as of the Valuation Date coincident with or immediately prior to the date that the Benefits Officer commences the processing of the distribution, after both a written notice of his or her death and a death certificate have been received by the Benefits Officer. Such account shall be distributed in a lump sum as soon as practicable to the Participant's or Inactive Participant's Beneficiary (or, if no person has been designated or if no person so designated survives the Participant or Inactive Participant, to such Participant's or Inactive Participant's estate or if such Beneficiary survives the Participant or Inactive Participant, but dies prior to payment, to such Beneficiary's estate). In case any Participant or Inactive Participant and his or her Beneficiary die in or as a result of a common accident or disaster and under such circumstances as to make it impossible to determine which of them was the last to die, the Participant or Inactive Participant shall be deemed to have survived his or her Beneficiary. Distributions hereunder shall be subject to such administrative and procedural requirements and forms as the Benefits Officer in such officer's discretion may require.
5.6 Severe Unforeseeable Financial Emergency Payments. Notwithstanding any other provisions of the Plan, a Participant or Inactive Participant may make an application to the Benefits Officer that he or she has a severe unforeseeable financial emergency of such a substantial nature and beyond the individual's control that a payment of compensation previously deferred under the Plan or rescission of a deferral election is warranted. After consideration of the application, and a determination that such an emergency exists, the Benefits Officer may, in such officer's sole and absolute discretion, (i) direct that all or a portion of the balance of such individual's Deferred Compensation Account be paid to him or her in such manner and at such time as the Benefits Officer shall specify, or (ii) may rescind, in whole or in part, a deferral election with respect to a bonus deferred but not yet payable, but only to the extent reasonably required to satisfy the emergency need.
5.7 Incapacity. The Benefits Officer may direct that any amounts distributable under the Plan to a person under a legal disability be made to (and be withheld until the appointment of) a representative qualified pursuant to law to receive such payment on such person's behalf.
5.8 Method of Paying Installments. Installment payments as provided for in this Article V shall be paid as follows: (i) in the case of installments paid over two Years: 1/2 of the value of the Deferred Compensation Account subject to installment payments shall be paid in the first installment and all of the remaining value shall be paid in the second and final installment, (ii) in the case of installments paid over five Years: 1/5 of the value of the Deferred Compensation Account subject to installment payments shall be paid in the first installment; 1/4 of the remaining value shall be paid in the second installment; 1/3 of the remaining value shall be paid in the third installment; 1/2 of the remaining value shall be paid in the fourth installment; and all of the remaining value in the account shall be paid in the fifth and final installment,
in the case of installments paid over seven Years: 1/7 of the value of the Deferred Compensation Account subject to installment payments shall be paid in the first installment; 1/6 of the remaining value shall be paid in the second installment; 1/5 of the remaining value shall be paid in the third installment; 1/4 of the remaining value shall be paid in the fourth installment; 1/3 of the remaining value shall be paid in the fifth installment; 1/2 of the remaining value shall be paid in the sixth installment; and all of the remaining value in the account shall be paid in the seventh and final installment, (iv) in the case of installments paid over ten Years: 1/10 of the value of the Deferred Compensation Account subject to installment payments shall be paid in the first installment; 1/9 of the remaining value shall be paid in the second installment; 1/8 of the remaining value shall be paid in the third installment; 1/7 of the remaining value shall be paid in the fourth installment; 1/6 of the remaining value shall be paid in the fifth installment; 1/5 of the remaining value shall be paid in the sixth installment; 1/4 of the remaining value shall be paid in the seventh installment; 1/3 of the remaining value shall be paid in the eighth installment; 1/2 of the remaining value shall be paid in the ninth installment and all of the remaining value in the account shall be paid in the tenth and final installment.
5.9 Payments Only in Cash. All payments under the Plan shall be made only in cash.
5.10 Occurrence of a Tax Event. If a Tax Event shall occur and the Investment Committee thereafter determines to change the Investment Funds offered as crediting rates under the Plan for amounts that have been deferred and elected to be deferred under the Plan prior to the effective date of such change, then each Participant and Inactive Participant shall have a one-time right to elect to (a) maintain his or her Deferred Compensation Account under the Plan in the Investment Funds then offered as crediting rates under the Plan or (b) receive a lump sum distribution of all (but not less than all) of his or her Deferred Compensation Account under the Plan and all amounts elected to be deferred under the Plan but not yet credited to the Plan.
5.11 Rehire of Inactive Participant. If an Inactive Participant returns to work with the Company or an Affiliate, no further payments shall be made on account of the prior termination of employment, and distribution of his or her remaining Deferred Compensation Account shall be made as otherwise provided in this Article V.
5.12 Transfers from the Pre-1999 Plan, the Excess Profit Sharing Plan and the Warner Bros. SERP. All balances transferred from the Pre-1999 Plan, the Excess Profit Sharing Plan, the Warner Bros. SERP and the employment agreement specified in Section 3.6(b) shall be subject to the provisions of this Article V as part of a Participant's or Inactive Participant's Deferred Compensation Account. A participant whose Warner Bros. SERP account balance has been transferred to the Plan may not elect an in-service payment date with respect to such account balance prior to April 1, 2004.
ARTICLE VI
ADMINISTRATION
6.1 The Administrative Committee; Appointment. The Plan shall be administered by a Administrative Committee, consisting of not less than three members to be appointed from time to time by the Board. The members of the Administrative Committee shall serve at the pleasure of, and may be removed by the Board at any time. Any member of the Administrative Committee may resign at any time by giving notice to the Board or to the President of the Company. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. No member of the Administrative Committee shall receive any compensation for his or her services as such. Participants and Inactive Participants may be members of the Administrative Committee but may not participate in any decision affecting their own account in any case where the Administrative Committee may take discretionary action under Article V.
6.2 Quorum and Actions of Administrative Committee. A majority of the members of the Administrative Committee at the time in office shall constitute a quorum for the transaction of business. All resolutions or other action taken by the Administrative Committee shall be by vote of a majority of its members present at any meeting or, without a meeting, by instrument in writing signed by all its members. Members of the Administrative Committee may participate in a meeting of such Administrative Committee by means of a conference telephone or similar communications equipment that enables all persons participating in the meeting to hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
6.3 Plan Administrator. The Administrative Committee shall be the administrator of the Plan and shall have all powers necessary to administer the Plan, including discretionary authority to determine eligibility for benefits and to decide claims under the terms of the Plan, except to the extent that any such powers are vested in any other fiduciary by the Plan or by the Administrative Committee. The Administrative Committee may from time to time establish rules for the administration of the Plan, and it shall have the exclusive right to interpret the Plan to decide any matters arising in connection with the administration and operation of the Plan. All its rules, interpretations and decisions shall be conclusive and binding on the Employing Companies and on Eligible Employees, Participants, Inactive Participants and Beneficiaries.
The Administrative Committee may delegate any of its powers or duties to others as it shall determine and may retain counsel, agents and such clerical and accounting services as it may require in carrying out the provisions of the Plan.
6.4 Reliance on Information. The Administrative Committee and the Investment Committee (as described below) may rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel, recordkeeper or other person who is employed or engaged for any purpose in connection with the administration of the Plan.
Neither the Administrative Committee or Investment Committee nor any member of the Board or the board of directors (or governing body) of an Affiliate and no employee of the Company or any Affiliate shall be liable for any act or action hereunder, whether of omission or commission, by any other member or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or for anything done or omitted to be done in connection with the Plan.
6.5 Committee Records. The Administrative Committee shall keep a record of all its proceedings and of all payments directed by it to be made to Participants, Inactive Participants or Beneficiaries or payments made by it for expenses or otherwise.
6.6 The Benefits Officer; Appointment. The Benefits Officer shall be appointed by the Chief Executive Officer of the Company and may be removed by the Chief Executive Officer. The Benefits Officer may not serve concurrently on the Administrative Committee or the Investment Committee. The Benefits Officer may resign at any time by giving notice to the Chief Executive Officer of the Company. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. A Participant may be appointed as the Benefits Officer. The Benefits Officer shall not receive compensation for his or her services as such.
6.7 Delegation of Duties. The Benefits Officer may delegate any of his powers or duties to others as he or she shall determine, and may authorize others to execute or deliver any instrument or to make any payment in his or her behalf. The Benefits Officer may employ such counsel, agents and clerical, medical, accounting and actuarial services as he or she may require in carrying out his or her functions.
6.8 Benefits Officer; Settlor and Ministerial Functions. The Benefits Officer shall have the duty to execute settlor and ministerial functions on behalf of the Company, including, without limitation, amending and modifying the terms of the Plan and performing ministerial functions with respect to the Plan, except to the extent specifically limited by resolution of the Board or by the terms herein. The Benefits Officer shall have solely ministerial and settlor functions, and shall have no fiduciary authority, obligations or status with respect to the Plan, such as, without limitation, authority or discretion to interpret or administer the Plan, set investment policy with respect to the Plan, or resolve factual disputes arising in connection with the interpretation, administration and operation of the Plan, and all such fiduciary authority, obligations and status shall be retained by the Administrative Committee and Investment Committee as set forth herein, and the Benefits Officer will present any issues related to such authority, obligations or status to the Administrative Committee for its resolution.
6.9 Investment Committee; Appointment. An Investment Committee, consisting of three or more persons, shall be appointed from time to time by the Board. The members of the Investment Committee shall serve at the pleasure of, and may be removed by the Board at any time. Any member of the Investment Committee may resign at any time by giving notice to the Board or to the President of the Company. Any such resignation shall take effect at the date of
receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Participants may be members of the Investment Committee. Unless otherwise directed by the Board, and except as may be required under ERISA, no bond or other security shall be required of any members of the Investment Committee as such. No member of the Investment Committee shall receive compensation for his services as such.
6.10 Quorum and Actions of Investment Committee. A majority of the members of the Investment Committee at the time in office shall constitute a quorum for the transaction of business. All resolutions or other action taken by the Investment Committee shall be by vote of a majority of its members present at any meeting or, without a meeting, by instrument in writing signed by all its members. Members of the Investment Committee may participate in a meeting of such Investment Committee by means of a conference telephone or similar communications equipment that enables all persons participating in the meeting to hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
6.11 Investment Committee Chairman; Delegation by Investment Committee. The members of the Investment Committee shall elect one of their number as chairman and may elect a secretary who may, but need not, be one of their number. The Investment Committee may delegate any of its powers or duties among its members or to others as it shall determine. It may authorize one or more of its members to execute or deliver any instrument or to make any payment in its behalf. It may employ such counsel, agents and clerical, accounting, actuarial and recordkeeping services as it may require in carrying out the provisions of the Plan.
6.12 Investment Policy. The Board shall have the authority to establish the overall investment policy for the Plan and may delegate such responsibility to the Investment Committee. The Investment Committee shall take all prudent action necessary or desirable for the purpose of carrying out the foregoing.
6.13 Indemnification. The Company shall, to the fullest extent permitted by law, indemnify each director, officer or employee of the Company or any Affiliate (including the heirs, executors, administrators and other personal representatives of such person) and each member of the Administrative Committee, Investment Committee and Benefits Officer against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection with any threatened, pending or actual suit, action or proceeding (whether civil, criminal, administrative or investigative in nature or otherwise) in which such person may be involved by reason of the fact that he or she is or was serving any employee benefit plans of the Company or any Affiliate in any capacity at the request of such company.
6.14 Expenses of Administration. Any expense incurred by the Company, the Administrative Committee, the Investment Committee or the Benefits Officer relative to the administration of the Plan shall be paid by the Employing Companies in such proportions as the Company may direct.
ARTICLE VII
CLAIMS PROCEDURE
7.1 Participant or Beneficiary Request for Claim. Any request for a benefit payable under the Plan shall be made in writing by a Participant or Beneficiary (or an authorized representative of any of them), as the case may be, and shall be delivered to any member of the Administrative Committee. Such written request shall be deemed filed upon receipt thereof by the Administrative Committee. Such request shall be made within one year after the claimant first knew or should have known that he had a claim for benefits under the Plan.
7.2 Insufficiency of Information. In the event a request for benefits contains insufficient information, the Administrative Committee shall, within a reasonable period after receipt of such request, send a written notification to the claimant setting forth a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material is necessary. The claimant's request shall be deemed filed with the Administrative Committee on the date the Administrative Committee receives in writing such additional information.
7.3 Request Notification. The Administrative Committee shall make a determination with respect to a request for benefits within ninety (90) days after such request is filed (or within such extended period prescribed below). The Administrative Committee shall notify the claimant whether his claim has been granted or whether it has been denied in whole or in part. Such notification shall be in writing and shall be delivered, by mail or otherwise, to the claimant within the time period described above. If the claim is denied in whole or in part, the written notification shall set forth, in a manner calculated to be understood by the claimant:
(i) The specific reason or reasons for the denial;
(ii) Specific reference to pertinent provisions of the Plan on which the denial is based; and
(iii) An explanation of the Plan's claim review procedure.
Failure by the Administrative Committee to give notification pursuant to this Section within the time prescribed shall be deemed a denial of the request for the purpose of proceeding to the review stage.
7.4 Extensions. If special circumstances require an extension of time for processing the claim, the Administrative Committee shall furnish the claimant with written notice of such extension. Such notice shall be furnished prior to the termination of the initial ninety (90)-day period and shall set forth the special circumstances requiring the extension and the date by which the Administrative Committee expects to render its decision. In no event shall such extension exceed a period of ninety (90) days from the end of such initial ninety (90)-day period.
7.5 Claim Review. A claimant whose request for benefits has been denied
in whole or in part, or his duly authorized representative, may, within sixty
(60) days after written notification of such denial, file with a reviewer
appointed for such purpose by the Administrative Committee (or, if none has been
appointed, with the Administrative Committee itself, with a copy to the
Administrative Committee, a written request for a review of his claim. Such
written request shall be deemed filed upon receipt of same by the reviewer.
7.6 Time Limitation on Review. A claimant who timely files a request for review of his claim for benefits, or his duly authorized representative, may review pertinent documents (upon reasonable notice to the reviewer) and may submit the issues and his comments to the reviewer in writing. The reviewer shall, within sixty (60) days after receipt of the written request for review (or within such extended period prescribed below), communicate its decision in writing to the claimant and/or his duly authorized representative setting forth, in a manner calculated to be understood by the claimant, the specific reasons for its decision and the pertinent provisions of the Plan on which the decision is based. If the decision is not communicated within the time prescribed, the claim shall be deemed denied on review.
7.7 Special Circumstances. If special circumstances require an
extension of time beyond the sixty (60)-day period described above for the
reviewer to render his decision, the reviewer shall furnish the claimant with
written notice of the extension required. Such notice shall be furnished prior
to the termination of the initial sixty (60)-day period and shall set forth the
special circumstances requiring the extension period. In no event shall such
extension exceed a period of sixty (60) days from the end of such initial sixty
(60)-day period.
ARTICLE VIII
AMENDMENT AND TERMINATION
8.1 Amendments. The Company (by action of the Board) or the Benefits Officer (for the Company and the other Employing Companies) may at any time amend the Plan.
8.2 Termination or Suspension. The continuance of the Plan and the ability of an Eligible Employee to make a deferral for any Year are not assumed as contractual obligations of the Company or any other Employing Company. The Company reserves the right (for itself and the other Employing Companies) by action of the Board or the Benefits Officer, to terminate or suspend the Plan, or to terminate or suspend the Plan with respect to itself or an Employing Company. Any Employing Company may terminate or suspend the Plan with respect to itself by executing and delivering to the Company or the Benefits Officer such documents as the Company or Benefits Officer shall deem necessary or desirable.
8.3 Participants' Rights to Payment. No termination of the Plan or amendment thereto shall deprive a Participant, Inactive Participant or Beneficiary of the right to payment of deferred compensation credited as of the date of termination or amendment, in accordance with the terms of the Plan as of the date of such termination or amendment; provided, however, that in the event of termination of the Plan, or termination of the Plan with respect to the Company or one or more other Employing Companies, the Benefits Officer may, in such officer's sole and absolute discretion, accelerate the payment of all such credited deferred compensation on a uniform basis for all Participants and Inactive Participants or, in the case of termination of the Plan with respect to one or more other Employing Companies, for all Participants and Inactive Participants of such other Employing Companies only.
ARTICLE IX
PARTICIPATING COMPANIES
9.1 Adoption by Other Entities. Upon the approval of the Company or the Benefits Officer, the Plan may be adopted by any Affiliate by executing and delivering to the Company or the Benefits Officer such documents as the Company or Benefits Officer shall deem necessary or desirable. The provisions of the Plan shall be fully applicable to such entity except as may otherwise be agreed to by such adopting company and the Company or Benefits Officer.
ARTICLE X
GENERAL PROVISIONS
10.1 Participants' Rights Unsecured. The right of any Participant or Inactive Participant to receive future payments under the provisions of the Plan shall be an unsecured claim against the general assets of the Employing Company employing the Participant at the time that his or her compensation is deferred. The Company, and any other Employing Company or former Employing Company shall not guarantee or be liable for payment of benefits to the employees of any other Employing Company or former Employing Company under the Plan.
10.2 Non-Assignability. The right of any person to receive any benefit payable under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, lien or charge, and any such benefit shall not, except to such extent as may be required by law, in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of the person who shall be entitled to such benefits, nor shall it be subject to attachment or legal process for or against such person.
10.3 Affiliate Ceasing to be Such. (a) In the event that a corporation or other entity ceases at any time to meet the definition of an Affiliate, such entity shall cease as of such time to be an Employing Company, if it had been such, and those of its Employees who would have been Eligible Employees under the Plan shall cease to be such.
(b) Payments to Participants employed by any entity which ceases to be an Affiliate shall be made pursuant to Article V unless prior to the end of the Year in which such entity ceases to be an Affiliate, it adopts a non-qualified deferred compensation plan and agrees to the transfer of the Deferred Compensation Accounts of all such Participants to its plan and to assume all obligations accrued under the Plan as of the date of such transfer with respect to such accounts and subsequent distributions thereof.
10.4 No Rights Against the Company. The establishment of the Plan, any amendment or other modification thereof, or any payments hereunder, shall not be construed as giving to any Employee, Eligible Employee, Participant or Inactive Participant any legal or equitable rights against the Company or any other Employing Company or former Employing Company, its shareholders, directors, officers or other employees, except as may be contemplated by or under the Plan including, without limitation, the right of any Participant or Inactive Participant to be paid as provided under the Plan. Participation in the Plan does not give rise to any actual or implied contract of employment. A Participant may be terminated at any time for any reason in accordance with the procedures of the Employing Company.
10.5 Withholding. Each Employing Company, former Employing Company, or paying agent shall withhold any federal, state and local income or employment tax (including F.I.C.A. obligations for both social security and medicare) which by any present or future law it is, or may be, required to withhold with respect to any deferral of compensation pursuant to the Plan, any Employing Company Allocation, any income deemed accrued or any distribution under the Plan, with respect to any of its former or present Employees. The Benefits Officer shall provide or direct the provision of information necessary or appropriate to enable each such company to so withhold.
10.6 No Guarantee of Tax Consequences. The Administrative Committee, the Benefits Officer, the Company and any Employing Company or former Employing Company do not make any commitment or guarantee that any amounts deferred for the benefit of a Participant or Inactive Participant will be excludible from the gross income of the Participant or Inactive Participant in the Year of deferral or distribution for federal, state or local income or employment tax purposes, or that any other federal, state or local tax treatment will apply to or be available to any Participant or Inactive Participant. It shall be the obligation of each Eligible Employee, Participant or Inactive Participant to determine whether any deferral under the Plan is excludible from his or her gross income for federal, state and local income or employment tax purposes, and to take appropriate action if he or she has reason to believe that any such deferral is not so excludible.
10.7 Severability. If a provision of the Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included in the Plan.
10.8 Governing Law. The provisions of the Plan shall be governed by and construed in accordance with the laws of the State of New York (other than its rules of conflicts of laws to the extent that the application of the laws of another jurisdiction would be required thereby), to the extent not preempted by the laws of the United States.