SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 11, 2001
AOL TIME WARNER INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-15062 13-4099534
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
75 ROCKEFELLER PLAZA, NEW YORK, NY 10019
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(Address of principal executive offices) (zip code)
(212) 484-8000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION AND DISPOSITION OF ASSETS
As reported on Form 8-K dated January 11, 2001 (filed January 12,
2001), effective January 11, 2001, pursuant to the Second Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement"), dated as of January 10,
2000, among AOL Time Warner Inc. ("AOL Time Warner"), America Online, Inc.
("America Online"), Time Warner Inc. ("Time Warner") and two acquisition
subsidiaries of AOL Time Warner, America Online and Time Warner combined their
businesses by merging with acquisition subsidiaries of AOL Time Warner. America
Online common stockholders received one share of AOL Time Warner common stock
for each share they owned and Time Warner common stockholders received 1.5
shares of AOL Time Warner common stock for each share they owned. Time Warner
series LMCN-V common stockholders received 1.5 shares of substantially identical
AOL Time Warner series LMCN-V common stock for each share they owned.
This Form 8-K/A amends the current report on Form 8-K dated January 11,
2001 to include financial statements of Time Warner as required by Item 7(a)
Financial Statements of Businesses Acquired. Included as a part of Time Warner's
financial statements is the financial information of the guarantors of Time
Warner's publicly held debt as of December 31, 2000 (Supplementary
Information--Condensed Consolidated Financial Statements). Also included as
exhibits are the financial statements of Time Warner Entertainment Company, L.P.
("TWE"), a significant subsidiary of Time Warner, and the financial statements
of the TWE General Partners in their capacity as guarantors of TWE's publicly
held debt.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED:
(i) Time Warner Inc.:
Consolidated financial statements of Time Warner Inc. as of
December 31, 2000 and 1999 and for each of the years ended
December 31, 2000, 1999 and 1998, including the report thereon
of Ernst & Young LLP, Independent Auditors.
(c) EXHIBITS
(i) Exhibit 23.1: Consent of Ernst & Young LLP, Independent Auditors.
(ii) Exhibit 99.1: Financial statements of Time Warner Entertainment
Company, L.P. as of December 31, 2000 and 1999 and for each of
the years ended December 31, 2000, 1999 and 1998, including the
report thereon of Ernst & Young LLP, Independent Auditors.
(iii) Exhibit 99.2: TWE General Partners as of December 31, 2000 and
1999 and for each of the years ended December 31, 2000, 1999 and
1998, including the report thereon of Ernst & Young LLP,
Indpendent Auditors.
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TIME WARNER INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
PAGE
----
Consolidated Financial Statements:
Balance Sheet............................................................. 3
Statement of Operations................................................... 4
Statement of Cash Flows................................................... 5
Statement of Shareholders' Equity......................................... 6
Notes to Consolidated Financial Statements ............................... 7
Report of Independent Auditors...............................................49
Selected Financial Information...............................................50
Quarterly Financial Information..............................................53
Supplementary Information....................................................54
Financial Statement Schedule II--Valuation and Qualifying Accounts...........62
2
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
2000 1999
---- ----
ASSETS
CURRENT ASSETS
Cash and equivalents.................................................................... $ 690 $ 1,284
Receivables, less allowances of $1.628 and $1.682 billion............................... 5,420 4,931
Inventories............................................................................. 1,583 1,472
Prepaid expenses........................................................................ 1,437 1,413
------ ------
Total current assets.................................................................... 9,130 9,100
Noncurrent inventories and film costs................................................... 5,075 5,276
Investments............................................................................. 1,548 2,096
Property, plant and equipment .......................................................... 10,148 8,728
Music catalogues, contracts and copyrights.............................................. 707 782
Cable television and sports franchises.................................................. 8,055 8,472
Goodwill................................................................................ 15,594 15,458
Other assets............................................................................ 1,944 1,545
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Total assets............................................................................ $52,201 $51,457
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................................................ $ 2,020 $ 1,923
Participations payable.................................................................. 1,190 1,403
Royalties and programming costs payable................................................. 1,488 1,564
Debt due within one year................................................................ 45 22
Other current liabilities............................................................... 5,500 4,839
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Total current liabilities............................................................... 10,243 9,751
Long-term debt ......................................................................... 19,907 18,083
Borrowings against future stock option proceeds......................................... - 1,243
Deferred income taxes................................................................... 3,079 4,234
Unearned portion of paid subscriptions.................................................. 832 762
Other liabilities....................................................................... 4,240 3,910
Minority interests...................................................................... 3,364 3,186
Mandatorily redeemable preferred securities of a subsidiary holding solely
debentures of a subsidiary of the Company............................................ 575 575
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value, 3.1 and 8.4 million shares outstanding, $.310 and
$.840 billion liquidation preference............................................... - 1
Series LMCN-V common stock, $.01 par value, 114.1 million shares outstanding............ 1 1
Common stock, $.01 par value, 1.218 and 1.173 billion shares outstanding................ 12 12
Paid-in capital......................................................................... 15,074 12,998
Accumulated deficit..................................................................... (5,126) (3,299)
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Total shareholders' equity.............................................................. 9,961 9,713
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Total liabilities and shareholders' equity.............................................. $52,201 $51,457
======= =======
See accompanying notes.
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TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1998
HISTORICAL(a) HISTORICAL(a) PRO FORMA(a) HISTORICAL(a)
---------- ---------- --------- ----------
Revenues(b)................................................... $ 28,514 $ 27,123 $ 26,070 $ 14,408
-------- --------- -------- --------
Cost of revenues(b)........................................... (15,796) (14,733) (14,675) (7,357)
Selling, general and administrative(b)........................ (7,608) (7,513) (7,070) (4,802)
Amortization of goodwill and other intangible assets.......... (1,353) (1,279) (1,311) (781)
Gain on sale or exchange of cable systems and investments(b).. 37 2,247 108 18
Gain on early termination of video distribution agreement..... - 215 - -
Gain on sale of interest in CanalSatellite.................... 65 97 - -
Write-down of retail store assets............................. - (106) - -
-------- --------- -------- --------
Business segment operating income............................. 3,859 6,051 3,122 1,486
Equity in pretax income of Entertainment Group(b)............. - - - 356
Interest expense ............................................. (1,696) (1,511) (1,451) (891)
Other income (expense), net(b)(c)............................. (1,054) (402) (589) (227)
Corporate expenses(b)......................................... (174) (163) (158) (86)
Minority interest............................................. (264) (475) (338) (52)
-------- --------- -------- --------
Income before income taxes, extraordinary loss on retirement of
debt and cumulative effect of accounting change.......... 671 3,500 586 586
Income taxes.................................................. (403) (1,540) (418) (418)
-------- --------- -------- --------
Income before extraordinary loss on retirement of debt and
cumulative effect of accounting change................... 268 1,960 168 168
Extraordinary loss on retirment of debt, net of $9 million
income tax benefit....................................... - (12) - -
-------- --------- -------- --------
Income before cumulative effect of accounting change.......... 268 1,948 168 168
Cumulative effect of accounting change, net of $295 million
income tax benefit....................................... (443) - - -
-------- --------- -------- --------
Net income (loss)............................................. (175) 1,948 168 168
Preferred dividend requirements(d)............................ (14) (52) (540) (540)
-------- --------- -------- --------
Net income (loss) applicable to common shares................. (189) $ 1,896 $ (372) $ (372)
======== ======= ======== =======
Basic income (loss) per common share before extraordinary
loss on retirement of debt and cumulative effect
of accounting change..................................... $ 0.19 $ 1.51 $ (0.31) $ (0.31)
Extraordinary loss on retirement of debt...................... - (0.01) - -
Cumulative effect of accounting change........................ (0.33) - - -
-------- --------- -------- --------
Basic net income (loss) per common share...................... $ (0.14) $ 1.50 $ (0.31) $ (0.31)
======== ========= ======== =======
Average basic common shares................................... 1,318.6 1,267.0 1,194.7 1,194.7
======== ========= ======== ========
Diluted income (loss) per common share before extraordinary
loss on retirement of debt and cumulative effect of
accounting change........................................ $ 0.19 $ 1.43 $ (0.31) $ (0.31)
Extraordinary loss on retirement of debt...................... - (0.01) - -
Cumulative effect of accounting change........................ (0.33) - - -
-------- --------- -------- --------
Diluted net income (loss) per common share.................... $ (0.14) $ 1.42 $ (0.31) $ (0.31)
======== ========= ======== ========
Average diluted common shares................................. 1,318.6 1,398.3 1,194.7 1,194.7
======== ========= ======== ========
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(a) The 2000 and 1999 financial statements reflect the consolidation of the
Entertainment Group, which substantially consists of TWE, retroactive to
the beginning of 1999. Time Warner's historical financial statements for
1998 have not been changed; however, in order to enhance comparability, pro
forma financial statements for 1998 reflecting the consolidation of the
Entertainment Group are presented supplementally.
(b) Includes the following income (expenses) resulting from transactions
with related companies:
Revenues............................................... $663 $ 506 $ 511 $ 487
Cost of revenues....................................... (212) (167) (119) (283)
Selling, general and administrative.................... (42) (29) (23) (40)
Gain (loss) on sale or exchange of cable systems
and investments.................................... - 427 (4) (4)
Equity in pretax income of Entertainment Group......... - - - 105
Other income (expense), net............................ (19) (28) (34) (44)
Corporate expenses..................................... - - - 72
(c) Includes an approximate $115 million pretax gain recognized in the second
quarter of 1999 in connection with the initial public offering of a 20%
interest in Time Warner Telecom Inc. See Note 3.
(d) Preferred dividend requirements for 1998 include a one-time effect of $234
million relating to the premium paid in connection with the redemption of
the Company's 10 1/4% Series M exchangeable preferred stock ("Series M
Preferred Stock"). See Note 13.
See accompanying notes.
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TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
2000 1999 1998 1998
HISTORICAL(a) HISTORICAL(a) PRO FORMA(a) HISTORICAL(a)
---------- ---------- --------- ----------
OPERATIONS
Net income (loss)............................................. $ (175) $ 1,948 $ 168 $ 168
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt................. - 12 - -
Cumulative effect of accounting change................... 443 - - -
Depreciation and amortization............................ 2,657 2,510 2,616 1,159
Amortization of film costs............................... 2,032 2,268 2,478 542
Noncash interest expense................................. 4 4 30 30
Gain on sale or exchange of cable systems and investments (37) (2,247) (108) (18)
Excess of distributions over equity in pretax income of
Entertainment Group.................................... - - - 342
Equity in losses of other investee companies after
distributions.......................................... 608 417 286 166
Changes in operating assets and liabilities:
Receivables.............................................. (833) (349) (940) (597)
Inventories.............................................. (2,291) (2,660) (2,962) (854)
Accounts payable and other liabilities................... 245 2,055 1,500 810
Other balance sheet changes.............................. 31 (5) 340 97
------- ------- ------- -------
Cash provided by operations................................... 2,684 3,953 3,408 1,845
------- ------- ------- -------
INVESTING ACTIVITIES
Consolidation of the Entertainment Group's cash and
equivalents.............................................. - 87 - -
Investments and acquisitions.................................. (1,216) (870) (548) (159)
Capital expenditures.......................................... (2,773) (2,231) (2,115) (512)
Investment proceeds........................................... 425 1,084 1,755 569
Proceeds received from distribution of TWE Senior Capital..... - - - 455
------- ------- ------- -------
Cash provided (used) by investing activities.................. (3,564) (1,930) (908) 353
------- ------- ------- -------
FINANCING ACTIVITIES
Borrowings.................................................... 4,556 4,332 5,257 3,743
Debt repayments............................................... (3,042) (3,749) (4,215) (2,317)
Borrowings against future stock option proceeds............... 2 348 1,015 1,015
Repayments of borrowings against future stock option proceeds. (1,245) - (653) (653)
Redemption of mandatorily redeemable preferred securities of
subsidiary............................................... - (217) - -
Repurchases of Time Warner common stock....................... (65) (1,896) (2,240) (2,240)
Redemption of Series M Preferred Stock........................ - - (2,093) (2,093)
Dividends paid................................................ (254) (289) (524) (524)
Proceeds received from stock option and dividend reinvestment
plans.................................................... 386 421 740 740
Other......................................................... (52) (131) (225) (72)
------- ------- ------- -------
Cash provided (used) by financing activities.................. 286 (1,181) (2,938) (2,401)
------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.............. (594) 842 (438) (203)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD............. 1,284 442 967 645
------- ------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD......................... $ 690 $ 1,284 $ 529 $ 442
======= ======= ======= =======
-------------------
(a) The 2000 and 1999 financial statements reflect the consolidation of the
Entertainment Group, which substantially consists of TWE, retroactive to
the beginning of 1999. Time Warner's historical financial statements for
1998 have not been changed; however, in order to enhance comparability, pro
forma financial statements for 1998 reflecting the consolidation of the
Entertainment Group are presented supplementally.
See accompanying notes.
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TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(MILLIONS)
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
--------- ------ ------- ----------- ------
BALANCE AT DECEMBER 31, 1997................................ $ 4 $ 11 $12,675 $(3,334) $9,356
Net income.................................................. 168 168
Foreign currency translation adjustments.................... 4 4
Realized and unrealized losses on derivative financial
instruments, net of $13 million tax benefit............. (20) (20)
Cumulative effect of change in accounting for derivative
financial instruments, net of $3 million tax benefit.... (18) (18)
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Comprehensive income..................................... 134 134
Common stock dividends...................................... (216) (216)
Preferred stock dividends................................... (540) (540)
Issuance of common stock in connection with the
conversion of zero-coupon convertible notes due 2013.... 1,150 1,150
Issuance of common stock in connection with the
conversion of convertible preferred stock............... (2) 1 151 (150) -
Repurchases of Time Warner common stock..................... (1) (2,239) (2,240)
Shares issued pursuant to stock option, dividend
reinvestment and benefit plans.......................... 1 1,397 (190) 1,208
----- ----- ------ ------- ------
BALANCE AT DECEMBER 31, 1998................................ 2 12 13,134 (4,296) 8,852
Net income.................................................. 1,948 1,948
Foreign currency translation adjustments.................... (63) (63)
Unrealized gains on securities, net of $147 million tax
provision............................................... 221 221
Realized and unrealized gains on derivative financial
instruments, net of $6 million tax provision............ 9 9
------- ------
Comprehensive income.................................... 2,115 2,115
Common stock dividends...................................... (228) (228)
Preferred stock dividends................................... (52) (52)
Issuance of common stock in connection with the
conversion of convertible preferred stock............... (1) 1 23 (23) -
Repurchases of Time Warner common stock..................... (1,896) (1,896)
Shares issued pursuant to stock option, dividend
reinvestment and benefit plans.......................... 1,737 (815) 922
----- ----- ------- ------- ------
BALANCE AT DECEMBER 31, 1999................................ 1 13 12,998 (3,299) 9,713
Net loss.................................................... (175) (175)
Foreign currency translation adjustments.................... (94) (94)
Unrealized losses on securities, net of $136 million tax
benefit................................................. (205) (205)
Realized and unrealized losses on derivative financial
instruments............................................. (1) (1)
------ ------
Comprehensive loss....................................... (475) (475)
Common stock dividends...................................... (238) (238)
Preferred stock dividends................................... (14) (14)
Issuance of common stock in connection with the
conversion of convertible preferred stock............... (1) 572 (571) -
Repurchases of Time Warner common stock..................... (65) (65)
Shares issued pursuant to stock option, dividend
reinvestment and benefit plans, including $651
million tax benefit..................................... 1,569 (529) 1,040
------ ----- ------- ------- ------
BALANCE AT DECEMBER 31, 2000................................ $ - $ 13 $15,074 $(5,126) $9,961
====== ===== ======= ======= ======
See accompanying notes.
6
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Time Warner Inc. ("Time Warner" or the "Company") is one of the world's
leading media and entertainment companies. Time Warner's principal business
objective is to create and distribute branded information and entertainment
copyrights throughout the world. Time Warner classifies its business interests
into six fundamental areas: Cable Networks, consisting principally of interests
in cable television programming; Publishing, consisting principally of interests
in magazine publishing, book publishing and direct marketing; Music, consisting
principally of interests in recorded music and music publishing; Filmed
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable, consisting principally
of interests in cable television systems; and Digital Media, consisting
principally of interests in Internet-related and digital media businesses.
Each of the business interests within Cable Networks, Publishing,
Music, Filmed Entertainment, Cable and Digital Media 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 cable television networks,
such as HBO, Cinemax, CNN, TNT and TBS Superstation, (2) magazine franchises,
such as Time, People and Sports Illustrated, (3) 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, (4) 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, (5) 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 the Company's collection of
children's cartoons and television programming, (6) Time Warner Cable, the
second largest operator of cable television systems in the U.S. and (7) Internet
websites, such as CNN.com.
Financial information for Time Warner's various business segments is
presented herein as an indication of financial performance (Note 18). Except for
start-up losses incurred in connection with The WB Network and Digital Media,
Time Warner's principal business segments generate significant operating income
and 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 in
various acquisitions accounted for by the purchase method of accounting. Noncash
amortization of intangible assets recorded by Time Warner's business segments
amounted to $1.353 billion in 2000, $1.279 billion in 1999, and $781 million in
1998 ($1.311 billion on a pro forma basis).
BASIS OF PRESENTATION
A majority of 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 and digital media are
held through Time Warner Entertainment Company, L.P. ("TWE"). 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. ("AT&T").
7
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1999, rights held by MediaOne to participate in the management
of TWE's businesses were forfeited. As a result, Time Warner began consolidating
the Entertainment Group, which substantially consists of TWE, retroactive to the
beginning of 1999. Time Warner's historical financial statements for 1998 have
not been changed, but are no longer comparable to 1999 and 2000 because the
Entertainment Group was reflected on an unconsolidated basis using the equity
method of accounting. Accordingly, in order to enhance comparability, pro forma
financial statements for 1998 reflecting the consolidation of the Entertainment
Group are presented supplementally.
1998 Stock Split
Common stock, paid-in-capital, stock options, per common share and
average common share amounts give effect to a two-for-one common stock split
that occurred on December 15, 1998.
Cumulative Effect of Change in Film Accounting Principle
In June 2000, Time Warner adopted Statement of Position 00-2,
"Accounting by Producers and Distributors of Films" ("SOP 00-2"). SOP 00-2
established new film accounting standards, including changes in revenue
recognition and accounting for advertising, development and overhead costs.
Specifically, SOP 00-2 requires advertising costs for theatrical and television
product to be expensed as incurred. This compares to Time Warner's previous
policy of first capitalizing and then expensing advertising costs for theatrical
product over the related revenue streams. In addition, SOP 00-2 requires
development costs for abandoned projects and certain indirect overhead costs to
be charged directly to expense, instead of those costs being capitalized to film
costs, which was required under the previous accounting model. SOP 00-2 also
requires all film costs to be classified in the balance sheet as noncurrent
assets. Provisions of SOP 00-2 in other areas, such as revenue recognition,
generally are consistent with Time Warner's existing accounting policies.
Time Warner has adopted the provisions of SOP 00-2 retroactively to the
beginning of 2000. As a result, Time Warner's net income 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 in the accompanying consolidated
statement of operations.
Revenue Classification Changes
In the fourth quarter of 2000, Time Warner adopted Securities and
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 clarifies certain existing accounting
principles for the recognition and classification of revenues in financial
statements. While Time Warner's existing revenue recognition policies are
consistent with the provisions of SAB 101, the new rules result in changes as to
how revenues and costs are classified in Time Warner's Cable Networks and Music
segments. As a result of applying the provisions of SAB 101, Time Warner's
revenues and costs were reduced by an equal amount of $198 million in 2000, $200
million in 1999 and $164 million in 1998 (on both a historical and pro forma
basis) in the accompanying consolidated statement of operations. Other aspects
of SAB 101 did not have a significant effect on Time Warner's consolidated
financial statements.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the 2000 presentation, including a reclassification of
the Music segment's operating results for 1999 and 1998 to reflect a
8
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
change in how management classifies Time Warner's share of the operating results
of the Columbia House Company Partnerships ("Columbia House"), a 50%-owned
equity investee. Effective January 1, 2000, management reclassified Time
Warner's share of the operating results of Columbia House from its Music segment
to other income (expense), net. This reclassification resulted primarily from
the planned restructuring of Columbia House's traditional direct-marketing
business and an increasing dependency on the sale of video product.
BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS
The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of Time Warner and
all companies in which Time Warner has a controlling voting interest
("subsidiaries"), as if Time Warner and its subsidiaries were a single company.
Significant intercompany accounts and transactions between the consolidated
companies have been eliminated.
Investments in companies in which Time Warner has significant
influence, but less than a controlling voting interest, are accounted for using
the equity method. Under the equity method, only Time Warner's investment in and
amounts due to and from the equity investee are included in the consolidated
balance sheet; only Time Warner's share of the investee's earnings is included
in the consolidated operating results; and only the dividends, cash
distributions, loans or other cash received from the investee, less any
additional cash investments, loan repayments or other cash paid to the investee,
are included in the consolidated cash flows.
Investments in companies in which Time Warner does not have a
controlling interest, or an ownership and voting interest so large as to exert
significant influence, are accounted for at market value if the investments are
publicly traded and there are no resale restrictions greater than one year. If
there are resale restrictions greater than one year, or if the investment is not
publicly traded, then the investment is accounted for at cost. Unrealized gains
and losses on investments accounted for at market value are reported net-of-tax
as a component of accumulated other comprehensive income (loss) until the
investment is sold, at which time the realized gain or loss is included in
income. Dividends and other distributions of earnings from both market-value and
cost-method investments are included in income when declared.
The effect of any changes in Time Warner's ownership interests
resulting from the issuance of equity capital by consolidated subsidiaries or
equity investees to unaffiliated parties is included in income.
FOREIGN CURRENCY TRANSLATION
The financial position and operating results of substantially all
foreign operations are consolidated using the local currency as the functional
currency. Local currency assets and liabilities are translated at the rates of
exchange on the balance sheet date, and local currency revenues and expenses are
translated at average rates of exchange during the period. Resulting translation
gains or losses, which have not been material, are included as a component of
accumulated other comprehensive income (loss).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
9
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated
revenues and cash flows from investments and the sale of future and existing
music and publishing-related products, as well as from the distribution of
theatrical and television product, in order to evaluate the ultimate
recoverability of accounts receivable, film inventory, artist and author
advances and investments, recorded as assets in the consolidated balance sheet.
Accounts receivable and sales of product in the music and publishing industries,
as well as sales of home video product in the filmed entertainment industry, are
subject to customers' rights to return unsold items. Management periodically
reviews such estimates and it is reasonably possible that management's
assessment of recoverability of accounts receivable, individual films and
television product, individual artist and author advances, and investments may
change based on actual results and other factors.
REVENUES AND COSTS
Publishing and Music
The unearned portion of paid magazine subscriptions is deferred until
magazines are delivered to subscribers. Upon each delivery, a proportionate
share of the gross subscription price is included in revenues. Magazine
advertising revenues are recognized when the advertisements are published.
In accordance with industry practice, certain products (such as
magazines, books, home videocassettes, compact discs, DVDs and cassettes) are
sold to customers with the right to return unsold items. Revenues from such
sales are recognized when the products are shipped based on gross sales less a
provision for future returns.
Inventories of magazines, books, cassette tapes, DVDs and compact
discs are stated at the lower of cost or estimated realizable value. Cost is
determined using first-in, first-out; last-in, first-out; and average cost
methods. Returned goods included in inventory are valued at estimated
realizable value, but not in excess of cost.
Cable and Cable Networks
A significant portion of cable system and cable network programming
revenues are derived from subscriber fees and advertising. Subscriber fees are
recorded as revenue in the period the service is provided and advertising
revenues are recognized in the period that the advertisements are exhibited. The
costs of rights to exhibit feature films and other programming on the cable
networks during one or more availability periods ("programming costs") generally
are recorded when the programming is initially available for exhibition, and are
allocated to the appropriate availability periods and amortized as the
programming is exhibited.
Digital Media
Digital media revenues primarily are derived from advertising and
e-commerce activities. Advertising revenues are recognized in the period that
the advertisements are exhibited. Revenues from e-commerce activities are
recognized when the products are sold.
Filmed Entertainment
Feature films are produced or acquired for initial exhibition in
theaters followed by distribution in the home video, pay cable, basic cable,
broadcast network and syndicated television markets. Generally, distribution to
the theatrical, home video and pay cable markets (the primary markets) is
completed within eighteen months of initial
10
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
release. Thereafter, feature films are distributed to the basic cable, broadcast
network and syndicated television markets (the secondary markets). Theatrical
revenues are recognized as the films are exhibited. Home video revenues, less a
provision for returns, are recognized when the home videos are sold. Revenues
from the distribution of theatrical product to cable, broadcast network and
syndicated television markets are recognized when the films are available to
telecast.
Television films and series are initially produced for the broadcast
networks, cable networks or first-run television syndication (the primary
markets) and may be subsequently licensed to foreign or domestic cable and
syndicated television markets (the secondary markets). Revenues from the
distribution of television product are recognized when the films or series are
available to telecast, except for barter agreements where the recognition of
revenue is deferred until the related advertisements are exhibited.
License agreements for the telecast of theatrical and television
product in the cable, broadcast network and syndicated television markets are
routinely entered into well in advance of their available date for telecast,
which is generally determined by the telecast privileges granted under previous
license agreements. Accordingly, there are significant contractual rights to
receive cash and barter under these licensing agreements. For cash contracts,
the related revenues will not be recognized until such product is available for
telecast under the contractual terms of the related license agreement. For
barter contracts, the related revenues will not be recognized until the product
is available for telecast and the advertising spots received under such
contracts are either used or sold to third parties. All of these contractual
rights for which revenue is not yet recognizable is referred to as "backlog."
Inventories of theatrical and television product are stated at the
lower of unamortized cost or net realizable value. Cost principally consists of
direct production costs and production overhead. A portion of the cost to
acquire Turner Broadcasting System, Inc. ("TBS") in 1996 was allocated to its
theatrical and television product, including an allocation to purchased program
rights (such as the animation library of Hanna-Barbera Inc. and the former film
and television libraries of Metro-Goldwyn-Mayer, Inc. and RKO Pictures, Inc.)
and product that had been exhibited at least once in all markets ("Library").
Library product is amortized on a straight-line basis over twenty years.
Individual films and series are amortized, and the related participations and
residuals are accrued, based on the proportion that current revenues from the
film or series bear to an estimate of total revenues anticipated from all
markets. These estimates are revised periodically and losses, if any, are
provided in full. Film inventories generally include the unamortized cost of
completed theatrical and television films, theatrical films and television
series in production pursuant to a contract of sale, film rights acquired for
the home video market, advances pursuant to agreements to distribute third-party
films and the Library.
ADVERTISING
In 2000, Time Warner began expensing advertising costs for theatrical
and television product as incurred in accordance with SOP 00-2. Prior to that
time, in accordance with Financial Accounting Standards Board ("FASB") Statement
No. 53, "Financial Reporting by Producers and Distributors of Motion Picture
Films," advertising costs for theatrical and television product were capitalized
and amortized over the related revenue streams in each market that such costs
were intended to benefit, which generally does not exceed three months.
Other advertising costs are expensed upon the first exhibition of the
advertisement, except for certain direct-response advertising, for which the
costs are capitalized and amortized over the expected period of future benefits.
Direct-response advertising principally consists of product promotional
mailings, broadcast advertising, catalogs and other promotional costs incurred
in the Company's direct-marketing businesses. Deferred advertising costs
generally are amortized over periods of up to eighteen months subsequent to the
promotional event using straight-line or
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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accelerated methods, with a significant portion of such costs amortized in
twelve months or less. Deferred advertising costs for Time Warner amounted to
$128 million at the end of 2000 and $250 million at the end of 1999. Advertising
expense, excluding advertising costs of theatrical and television product in
1999 and 1998, amounted to $2.693 billion in 2000, $1.511 billion in 1999 and
$1.154 billion in 1998 ($1.438 billion on a pro forma basis).
CASH AND EQUIVALENTS
Cash equivalents consist of commercial paper and other investments that
are readily convertible into cash and have original maturities of three months
or less.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
Replacement of FASB Statement No. 125" ("FAS 140"). FAS 140 revises the criteria
for accounting for securitizations and other transfers of financial assets and
collateral. In addition, FAS 140 requires certain additional disclosures. Except
for the new disclosure provisions, which are effective for the year ended
December 31, 2000, FAS 140 is effective for the transfer of financial assets
occurring after March 31, 2001. Management does not expect the provisions of FAS
140 to have a significant effect on Time Warner's consolidated financial
statements.
FINANCIAL INSTRUMENTS
Effective July 1, 1998, Time Warner adopted FASB Statement No. 133, as
amended by FASB Statement No. 138, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"). FAS 133 requires that all derivative financial
instruments that qualify for hedge accounting, such as interest rate swap
contracts and foreign exchange contracts, be recognized in the financial
statements and measured at fair value regardless of the purpose or intent for
holding them. Changes in the fair value of derivative financial instruments are
either recognized periodically in income or shareholders' equity (as a component
of comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The adoption of FAS 133 did not have
a material effect on Time Warner's primary financial statements, but did reduce
comprehensive income in 1998 by $18 million in the accompanying consolidated
statement of shareholders' equity.
The carrying value of Time Warner's financial instruments approximates
fair value, except for differences with respect to long-term, fixed-rate debt
(Note 9) and certain differences relating to cost method investments and other
financial instruments that are not significant. The fair value of financial
instruments is generally determined by reference to market values resulting from
trading on a national securities exchange or in an over-the-counter market. In
cases where quoted market prices are not available, fair value is based on
estimates using present value or other valuation techniques.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to cable
property, plant and equipment generally include material, labor, overhead and
interest. Depreciation is provided generally on the straight-line method over
useful lives ranging up to thirty years for buildings and improvements and up to
sixteen years for furniture, fixtures, cable television and other equipment.
Property, plant and equipment consists of:
12
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31,
-----------------
2000 1999
---- ----
(MILLIONS)
Land and buildings............................... $ 1,958 $ 1,878
Cable television equipment....................... 11,032 8,671
Furniture, fixtures and other equipment.......... 4,029 3,776
------- -------
17,019 14,325
Less accumulated depreciation............... (6,871) (5,597)
------- -------
Total............................................ $10,148 $ 8,728
======= =======
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, Time Warner has a significant and growing number of intangible
assets, including goodwill, cable television and sports franchises, film and
television libraries, music catalogues, contracts and copyrights, and other
copyrighted products and trademarks. In accordance with generally accepted
accounting principles, Time Warner does not recognize the fair value of
internally generated intangible assets. Costs incurred to create and produce
copyrighted product, such as feature films, television series and compact discs,
generally are either expensed as incurred, or capitalized as tangible assets as
in the case of cash advances and inventoriable product costs. However,
accounting recognition is not given to any increasing asset value that may be
associated with the collection of the underlying copyrighted material.
Additionally, costs incurred to create or extend brands, such as magazine titles
and new television networks, generally result in losses over an extended
development period and are recognized as a reduction of income as incurred,
while any corresponding brand value created is not recognized as an intangible
asset in the consolidated balance sheet. On the other hand, intangible assets
acquired in business combinations accounted for by the purchase method of
accounting are capitalized and amortized over their expected useful life as a
noncash charge against future results of operations. Accordingly, the intangible
assets reported in the consolidated balance sheet do not reflect the fair value
of Time Warner's internally generated intangible assets, but rather are limited
to intangible assets resulting from certain acquisitions in which the cost of
the acquired companies exceeded the fair value of their tangible assets at the
time of acquisition.
Time Warner amortizes goodwill and sports franchises over periods up to
forty years using the straight-line method. Cable television franchises, film
and television libraries, music catalogues, contracts and copyrights, and other
intangible assets are amortized over periods up to twenty years using the
straight-line method. Amortization of intangible assets amounted to $1.353
billion in 2000, $1.279 billion in 1999 and $781 million in 1998 ($1.311 billion
on a pro forma basis). Accumulated amortization of intangible assets at December
31, 2000 and 1999 amounted to $9.7 billion and $8.3 billion, respectively.
Time Warner periodically reviews the carrying value of acquired
intangible assets for each acquired entity to determine whether an impairment
may exist. Time Warner considers relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of intangible
assets can be recovered. If it is determined that the carrying value of
intangible assets will not be recovered from the undiscounted future cash flows
of the acquired business, the carrying value of such intangible assets would be
considered impaired and reduced by a charge to operations in the amount of the
impairment. An impairment charge is measured as any deficiency in the amount of
estimated undiscounted future cash flows of the acquired business available to
recover the carrying value related to the intangible assets.
13
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
INCOME TAXES
Income taxes are provided using the liability method prescribed by FASB
Statement No. 109, "Accounting for Income Taxes." Under the liability method,
deferred income taxes reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial statement and income tax purposes, as determined under enacted tax
laws and rates. The financial effect of changes in tax laws or rates is
accounted for in the period of enactment. The subsequent realization of net
operating loss and investment tax credit carryforwards acquired in acquisitions
is accounted for as a reduction of goodwill.
The principal operations of the Entertainment Group are conducted by
partnerships. Time Warner's income tax expense for all periods includes all
incomes taxes related to its allocable share of partnership income and its
equity in the income tax expense of corporate subsidiaries of the Entertainment
Group.
STOCK OPTIONS
In accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations, compensation cost for stock options and restricted stock
granted to employees is recognized in income based on the excess, if any, of the
quoted market price of the stock at the grant date of the award or other
measurement date over the amount an employee must pay to acquire the stock.
Generally, the exercise price for stock options granted to employees equals or
exceeds the fair market value of Time Warner common stock at the date of grant,
thereby resulting in no recognition of compensation expense by Time Warner. Time
Warner recognizes compensation cost for restricted stock awards ratably over the
vesting period based on the fair market value of the shares on the date of
grant.
INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share is computed by dividing the net
income (loss) applicable to common shares after preferred dividend requirements
by the weighted average of common shares outstanding during the period.
Weighted-average common shares include shares of Time Warner's common stock and
Series LMCN-V common stock. Diluted income (loss) per common share adjusts basic
income (loss) per common share for the effects of convertible securities, stock
options and other potentially dilutive financial instruments, only in the
periods in which such effect is dilutive.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income and other gains and
losses affecting shareholders' equity that, under generally accepted accounting
principles, are excluded from net income. For Time Warner, such items consist
primarily of unrealized gains and losses on marketable equity investments, gains
and losses on certain derivative financial instruments and foreign currency
translation gains and losses.
14
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summary sets forth the components of other comprehensive
income (loss) accumulated in shareholders' equity:
ACCUMULATED
FOREIGN DERIVATIVE OTHER
CURRENCY UNREALIZED FINANCIAL COMPREHENSIVE
TRANSLATION GAINS (LOSSES) INSTRUMENT INCOME
LOSSES ON SECURITIES GAINS (LOSSES) (LOSS)
------ ------------- -------------- ------
(MILLIONS)
Balance at December 31, 1999.......... $(146) $ 226 $ (29) $ 51
2000 activity......................... (94) (205) (1) (300)
----- ----- ----- -----
Balance at December 31, 2000.......... $(240) $ 21 $ (30) $(249)
===== ===== ===== =====
2. SIGNIFICANT TRANSACTIONS
AMERICA ONLINE-TIME WARNER MERGER
On January 11, 2001, America Online, Inc. ("America Online") and Time
Warner consummated the previously announced agreement to merge (the "Merger") to
form AOL Time Warner. The Merger was structured as a stock-for-stock exchange.
Prior to the Merger, America Online and Time Warner formed a new holding company
called AOL Time Warner and AOL Time Warner formed two wholly owned subsidiaries.
Upon the closing of the transaction, one such subsidiary merged with and into
America Online and one such subsidiary merged with and into Time Warner. As a
result, America Online and Time Warner each became a wholly owned subsidiary of
AOL Time Warner.
As a result of the Merger, the former shareholders of America Online
have an approximate 55% interest in AOL Time Warner and the former shareholders
of Time Warner have an approximate 45% interest in AOL Time Warner, expressed on
a fully diluted basis. The Merger will be accounted for by AOL Time Warner as an
acquisition of Time Warner under the purchase method of accounting for business
combinations during the first quarter of 2001. Under the purchase method of
accounting, the estimated cost of approximately $147 billion to acquire Time
Warner, including transaction costs, will be allocated to its underlying net
assets in proportion to their respective fair values. Any excess of the purchase
price over the estimated fair values of the net assets acquired will be recorded
as goodwill.
During 2000, in connection with the Merger, Time Warner incurred
one-time, merger-related costs, including legal, investment banking and stock
registration fees. These costs are required to be expensed by Time Warner in
accordance with generally accepted accounting principles. These costs have been
classified in other income (expense), net, in the accompanying consolidated
statement of operations.
WARNER-EMI MUSIC MERGER
In January 2000, Time Warner and EMI Group plc ("EMI") announced they
had entered into an agreement to combine their global music operations into two
50-50 joint ventures, to be referred to collectively as Warner EMI Music. On
October 5, 2000, Time Warner and EMI terminated the merger agreement and
withdrew their application seeking approval of the transaction from the European
Union Commission.
In connection with the proposed merger, Time Warner incurred one-time,
merger-related costs, which were permitted to be capitalized in accordance with
generally accepted accounting principles. In the third quarter of 2000, because
the merger agreement was terminated, Time Warner expensed all of its previously
capitalized merger-related
15
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
costs. These costs have been classified in other income (expense), net, in the
accompanying consolidated statement of operations.
BOOK-OF-THE-MONTH CLUB JOINT VENTURE
In the first quarter of 2000, Time Warner formed a 50-50 joint venture
("BookSpan") with Bertelsmann AG ("Bertelsmann"), combining the domestic
operations of Time Warner's Book-of-the-Month Club with the domestic book club
operations of Doubleday Direct, Inc. ("Doubleday"), a leading consumer book club
group owned by Bertelsmann. In connection with this transaction, Time Warner has
deconsolidated its domestic book club operations in 2000 and is accounting for
its interest in the joint venture under the equity method of accounting. Time
Warner's initial interest in the joint venture was recorded based on the
historical cost basis of the contributed net assets. Time Warner did not
recognize a gain or loss on the transaction. Time Warner's share of the
operating results of the joint venture in 2000 has been included in other income
(expense), net, in the accompanying consolidated statement of operations.
COLUMBIA HOUSE INVESTMENT WRITE-DOWN
In July 1999, Time Warner announced an agreement with Sony Corporation
of America ("Sony") to merge their jointly owned music and video club operations
of Columbia House with CDNOW, Inc. ("CDNOW"), a music and video e-commerce
company. While awaiting the receipt of regulatory approvals, the March 13, 2000
termination date in the merger agreement was reached, and the parties terminated
the agreement. Accordingly, the merger did not occur.
In March 2000, Time Warner recorded a $220 million noncash pretax
charge 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, in the accompanying consolidated statement of operations.
3. CABLE TRANSACTIONS
Time Warner, TWE and the TWE-Advance/Newhouse Partnership ("TWE-A/N")
completed a series of significant transactions in 2000, 1999 and 1998. These
transactions, which related to the cable television business and related
ancillary businesses, enhanced Time Warner Cable's geographic clustering of
cable television properties or reduced existing debt and/or Time Warner Cable's
share of future funding requirements for such businesses. These transactions are
discussed more fully below.
ROAD RUNNER RESTRUCTURING
In June 1998, Time Warner, TWE, TWE-A/N, MediaOne, Microsoft Corp.
("Microsoft") and Compaq Computer Corp. ("Compaq") formed a joint venture
partnership to operate and expand Time Warner Cable's and MediaOne's existing
high-speed online businesses (the "Road Runner Joint Venture"). No gain or loss
was recognized on the transaction. As such, each of Time Warner's, TWE's and
TWE-A/N's initial interest in the Road Runner Joint Venture was recorded based
on the historical cost basis of the contributed net assets. The common equity
interests of the Road Runner Joint Venture were collectively owned 68.6% by Time
Warner, TWE and TWE-A/N and 31.4% by MediaOne. In addition, Microsoft and Compaq
each own a preferred equity interest in the Road Runner Joint Venture that is
convertible into a 10% common equity interest (the "Preferred Equity
Interests"). Each of Time Warner's, TWE's and TWE-A/N's interest in the Road
Runner Joint Venture is being accounted for under the equity method of
accounting because of certain approval rights held by MediaOne.
16
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 2000, Time Warner announced that it had agreed with its
partners to restructure the ownership of the Road Runner Joint Venture. Under
the restructuring, the Preferred Equity Interests will be redeemed and
substantially all of the assets of the Road Runner Joint Venture will be
distributed to Time Warner and its affiliates, collectively, and MediaOne. Time
Warner will incur approximately $570 million in cash expenditures related to the
restructuring. Subsequent to the restructuring, Time Warner's interest in the
assets distributed will continue to be accounted for under the equity method of
accounting because of certain approval rights held by the Advance/Newhouse
Partnership ("Advance/Newhouse"), a limited partner in TWE-A/N. As a result of
the restructuring, Time Warner recognized a one-time charge of $41 million in
the fourth quarter of 2000, principally relating to employee severance and
payments to terminate contracts. This charge is included in other income
(expense), net, in the accompanying consolidated statement of operations.
GAIN ON SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS AND INVESTMENTS
During the past three years, largely in an ongoing effort to enhance
its geographic clustering of cable television properties, Time Warner continued
to sell or exchange various cable television systems and investments. The 1999
transactions included a number of transactions generally involving large
exchanges of cable television systems. In these transactions, Time Warner Cable
exchanged cable television systems serving approximately (i) 575,000 subscribers
for other cable television systems of comparable size owned by TCI
Communications, Inc. ("TCI"), a subsidiary of AT&T (the "TCI Cable Trades") and
(ii) 314,000 subscribers for other cable television systems of comparable size
owned by MediaOne. In addition, in 1999, Time Warner Cable obtained sole control
of certain partnerships previously held with Fanch Communications, retaining
cable television systems serving approximately 158,000 subscribers and
approximately $280 million of net cash proceeds, in exchange for its interests
in other cable television systems formerly owned by such partnerships. The
systems acquired by Time Warner Cable were accounted for under the purchase
method of accounting for business combinations. As such, the net assets received
were recorded at fair value based on the negotiated terms of the transactions.
In connection with these and other transactions, the operating results of Time
Warner include net pretax gains of $37 million in 2000, $2.247 billion in 1999
and $18 million in 1998 ($108 million on a pro forma basis).
Because a substantial portion of these pretax gains was recognized by
TWE, and TWE was reported on an unconsolidated basis during 1998, these gains
were either classified in Time Warner's operating income or Time Warner's equity
in the pretax income of the Entertainment Group in the accompanying consolidated
statement of operations. In particular, Time Warner's operating income includes
pretax gains of $37 million in 2000, $2.247 billion in 1999 and $18 million in
1998 ($108 million on a pro forma basis). In 1998, Time Warner's equity in the
pretax income of the Entertainment Group included pretax gains of $90 million.
TIME WARNER TELECOM
Time Warner Telecom Inc. ("Time Warner Telecom"), a provider of local
and regional optical broadband networks and services to business customers,
was formed in July 1998 when Time Warner, TWE and TWE-A/N completed a
reorganization of their business telephony operations (the "Time Warner Telecom
Reorganization"). As part of that reorganization, (i) the business telephony
operations conducted by Time Warner, TWE and TWE-A/N were each contributed to
Time Warner Telecom and (ii) TWE's and TWE-A/N's interests in Time Warner
Telecom were distributed to their partners, Time Warner, MediaOne and
Advance/Newhouse. No gain or loss was recognized on the transaction. Time
Warner's initial interest in Time Warner Telecom was recorded based on the
historical cost basis of the contributed net assets.
17
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 1999, Time Warner Telecom completed an initial public offering
of 20% of its common stock (the "Time Warner Telecom IPO"). Time Warner Telecom
issued approximately 21 million shares of common stock at a price of $14 per
share and raised net proceeds of approximately $270 million. Approximately $180
million of these proceeds were used to pay obligations owed to Time Warner and
TWE. In turn, Time Warner and TWE used those proceeds principally to reduce bank
debt. In connection with the Time Warner Telecom IPO and certain related
transactions, Time Warner's ownership interest in Time Warner Telecom was
diluted from 62% to 48%. As a result, Time Warner recognized a pretax gain of
approximately $115 million before providing for deferred taxes. This gain has
been included in other income (expense), net, in the accompanying consolidated
statement of operations.
As of December 31, 2000, Time Warner Telecom is owned 48% by Time
Warner, 15% by MediaOne, 15% by Advance/Newhouse and 22% by other third parties.
Time Warner's interest in Time Warner Telecom is being accounted for under the
equity method of accounting.
In January 2001, Time Warner Telecom completed a public offering of
an additional 7.475 million shares of its common stock at a price of $74.44,
raising proceeds of approximately $556 million (the "Time Warner Telecom
Offering"). In connection with the Time Warner Telecom Offering, Time Warner's
ownership in Time Warner Telecom was diluted from 48% to 44%.
PRIMESTAR
In April 1998, TWE and Advance/Newhouse transferred the direct
broadcast satellite operations conducted by TWE and TWE-A/N (the "DBS
Operations") and the 31% partnership interest in Primestar Partners, L.P. held
by TWE-A/N ("Primestar Partners" and collectively, the "Primestar Assets") to
Primestar, Inc. ("Primestar"), a separate holding company. As a result of that
transfer and similar transfers by the other previously existing partners of
Primestar Partners, Primestar Partners became an indirect wholly owned
subsidiary of Primestar. In exchange for contributing its interests in the
Primestar Assets, TWE received approximately 48 million shares of Primestar
common stock (representing an approximate 24% equity interest) and realized
approximately $240 million of debt reduction. As a result of this transaction,
effective as of April 1, 1998, TWE deconsolidated the DBS Operations and the 24%
equity interest in Primestar received in the transaction is being accounted for
under the equity method of accounting. This transaction is referred to as the
"Primestar Roll-up Transaction."
In the fourth quarter of 1998, TWE recorded a charge of approximately
$210 million principally to reduce the carrying value of its interest in
Primestar. This charge reflected a significant decline in the fair value of
Primestar during that quarter. The decline in Primestar's value was confirmed by
the sale of its operations and assets to DirecTV, a competitor of Primestar
owned by Hughes Electronics Corp., which occurred during the first half of 1999.
As a result of the sale to DirecTV in 1999, Primestar substantially
wound down its operations during 1999 and Time Warner recognized its share of
Primestar's 1999 losses under the equity method of accounting. Such losses are
included in other income (expense), net in the accompanying consolidated
statement of operations.
On a historical basis, the 1998 charge has been included in Time
Warner's equity in the pretax income of the Entertainment Group and, on a pro
forma basis for 1998, in Time Warner's other income (expense), net in the
accompanying consolidated statement of operations.
18
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
TCI CABLE TRANSACTIONS
During 1999 and 1998, Time Warner, TWE, TWE-A/N and TCI completed a
number of significant cable-related transactions. These transactions consisted
of (i) the formation in December 1998 of a cable television joint venture in
Texas (the "Texas Cable Joint Venture") that is managed by Time Warner Cable,
(ii) the expansion in August 1998 of an existing joint venture in Kansas City,
which is managed by Time Warner Cable, through the contribution by TCI of a
contiguous cable television system serving approximately 95,000 subscribers,
subject to approximately $200 million of debt and (iii) the TCI Cable Trades in
1999, as previously discussed. The Kansas City joint venture is being accounted
for under the equity method of accounting.
The Texas Cable Joint Venture is a 50-50 cable television joint venture
between TWE-A/N and TCI. TWE-A/N contributed cable television systems serving
approximately 545,000 subscribers, subject to approximately $650 million of
debt. TCI contributed cable television systems serving approximately 565,000
subscribers, subject to approximately $650 million of debt. TWE-A/N did not
recognize a gain or loss on the transaction and the initial investment in the
Texas Cable Joint Venture was recorded based on the historical cost basis of the
contributed net assets. The Texas Cable Joint Venture is being accounted for
under the equity method of accounting.
As a result of the formation of the Texas Cable Joint Venture, the
combined debt of Time Warner and TWE was reduced by approximately $650 million.
Also, as a result of the Texas and Kansas City transactions, Time Warner and TWE
benefited from the geographic clustering of cable television systems and the
number of subscribers under the management of Time Warner Cable was increased by
approximately 660,000 subscribers.
TWE-A/N TRANSFERS
As of December 31, 2000, TWE-A/N owned cable television systems (or
interests therein) serving approximately 6.7 million subscribers, of which 5.6
million subscribers were served by consolidated, wholly owned cable television
systems and 1.1 million subscribers were served by unconsolidated, partially
owned cable television systems. TWE-A/N had approximately $1.4 billion of debt
at December 31, 2000.
TWE-A/N is owned approximately 64.8% by TWE, the managing partner,
33.3% by Advance/Newhouse and 1.9% indirectly by Time Warner. On a historical
basis for 2000 and 1999 and on a pro forma basis for 1998, the financial
position and operating results of TWE-A/N have been consolidated by Time Warner
and the partnership interest owned by Advance/Newhouse is reflected in Time
Warner's consolidated financial statements as minority interest. On a historical
basis for 1998, the financial position and operating results of TWE-A/N have
been consolidated by TWE and reflected by Time Warner under the equity method of
accounting. In accordance with the partnership agreement, Advance/Newhouse can
require TWE to purchase its equity interest for fair market value at specified
intervals following the death of both of its principal shareholders. In
addition, TWE or Advance/Newhouse can initiate a restructuring of the
partnership, in which Advance/Newhouse would withdraw from the partnership and
receive one-third of the partnership's net assets.
In early 1998, Time Warner (through a wholly owned subsidiary)
contributed cable television systems (or interests therein) serving
approximately 650,000 subscribers to TWE-A/N, subject to approximately $1
billion of debt, in exchange for common and preferred partnership interests in
TWE-A/N, and completed certain transactions relating to Paragon Communications
("Paragon" and collectively, the "TWE-A/N Transfers"). The cable television
systems transferred to TWE-A/N were formerly owned by TWI Cable Inc. ("TWI
Cable"), a wholly owned subsidiary of Time Warner, and Paragon. Prior to this
transaction, the economic ownership of Paragon was held 50% by subsidiaries of
Time Warner, 25% beneficially by TWE and 25% beneficially by TWE-A/N. The debt
assumed
19
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
by TWE-A/N has been guaranteed by TWI Cable and certain of its subsidiaries,
including Paragon. The TWE-A/N Transfers were accounted for effective as of
January 1, 1998. Time Warner and TWE-A/N accounted for this transaction at fair
value. However, because the fair value of the consideration received
approximated Time Warner's carrying value of the net assets transferred, Time
Warner did not recognize a gain or loss on the transaction.
Paragon was a partnership formerly owning cable television systems
serving approximately 1 million subscribers. As part of the TWE-A/N Transfers,
TWE and TWE-A/N exchanged substantially all of their aggregate 50% beneficial
interests in Paragon for an equivalent share of Paragon's cable television
systems (or interests therein) serving approximately 500,000 subscribers,
resulting in wholly owned subsidiaries of Time Warner owning 100% of the
restructured Paragon entity, with less than 1% beneficially held for TWE.
Accordingly, effective as of January 1, 1998, Time Warner has consolidated
Paragon, which it formerly accounted for under the equity method of accounting.
Because this transaction represented an exchange of TWE's and TWE-A/N's
beneficial interests in Paragon for an equivalent amount of its cable television
systems, it did not have a significant economic impact on Time Warner, TWE or
TWE-A/N.
4. FILMED ENTERTAINMENT TRANSACTIONS
SIX FLAGS
In 1998, TWE sold its remaining 49% interest in Six Flags Entertainment
Corporation ("Six Flags") to Premier Parks Inc. ("Premier," now known as Six
Flags, Inc.), a regional theme park operator, for approximately $475 million.
TWE initially deferred a $400 million gain on the transaction principally as a
result of uncertainties surrounding its realization. These uncertainties related
to litigation and TWE's guarantees of Premier's long-term obligations to make
minimum payments to the limited partners of the Six Flags Over Texas and Six
Flags Over Georgia theme parks (the "Co-Venture Guarantees").
Time Warner management periodically had evaluated its reasonably
possible risk of loss relating to the Six Flags litigation and Co-Venture
Guarantees. Based on the improving financial performance of Premier and the Six
Flags Over Texas and Six Flags Over Georgia theme parks, management believed
that its aggregate financial exposure had declined steadily. Accordingly, TWE
periodically recognized a portion of the deferred gain as its realization became
more fully assured. TWE recognized pretax gains of $10 million in 2000, $40
million in 1999 and $30 million in 1998. These amounts have been included in
business segment operating income in the accompanying consolidated statement of
operations.
In December 1998, a jury returned an adverse verdict in the Six Flags
litigation in the amount of $454 million. 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. These reserves
consisted of the unrecognized portion of the deferred gain and accrued interest.
The $50 million charge is classified in two components in Time Warner's
accompanying consolidated statement of operations: $26 million of the charge,
representing an accrual for additional interest, is included in interest expense
and the remaining $24 million is included in business segment operating income.
GAINS ON THE SALE OF INTEREST IN CANALSATELLITE
In December 1999, Warner Bros. sold its 10% interest in CanalSatellite,
a satellite television distribution service in France and Monaco, to Canal+, a
large French media and entertainment company. In connection with the
20
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
sale, Warner Bros. recognized a pretax gain of $97 million. In addition, during
2000, Warner Bros. recognized a net pretax, investment-related gain of
approximately $65 million, principally relating to additional proceeds received
in 2000 in connection with the 1999 sale of an interest in CanalSatellite. These
gains have been included in business segment operating income in the
accompanying consolidated statement of operations.
1999 GAIN ON TERMINATION OF VIDEO DISTRIBUTION AGREEMENT
In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ("MGM")
terminated a long-term distribution agreement under which Warner Bros. had
exclusive worldwide distribution rights for MGM/United Artists home video
product. In connection with the early termination and settlement of this
distribution agreement, Warner Bros. recognized a net pretax gain of
approximately $215 million, which has been included in business segment
operating income in the accompanying consolidated statement of operations.
1999 WARNER BROS. RETAIL STORES WRITE-DOWN
In the fourth quarter of 1999, Warner Bros. recorded a noncash pretax
charge of $106 million to reduce the carrying value of certain fixed assets and
leasehold improvements used in its retail stores. The charge represents the
excess of the carrying value of the assets used in Warner Bros.'s retail stores
over the discounted future operating cash flows, adjusted to reflect a shorter
recovery period due to planned store closures. The charge has been included in
business segment operating income in the accompanying consolidated statement of
operations. In 2001, in connection with the Merger, Warner Bros. announced its
plan to divest its retail store operations.
5. OTHER INVESTMENT-RELATED GAINS
GAIN ON THE SALE OF INVESTMENT IN MARTHA STEWART
During 2000, Time Warner sold a portion of its interest in Martha
Stewart Living Omnimedia Inc. ("Martha Stewart"). As a result, Time Warner
recognized a pretax gain of approximately $32 million. In addition, during 1999,
Time Warner recognized a pretax gain of a comparable amount, also related to its
interest in Martha Stewart. These gains are included in business segment
operating income in the accompanying consolidated statement of operations.
GAIN ON THE SALE OF INVESTMENT IN HEALTHEON/WEBMD
During 2000, Time Warner periodically sold portions of its interest in
Healtheon/WebMD Corp. As a result, Time Warner recognized pretax gains of
approximately $31 million for the year. These gains are included in business
segment operating income in the accompanying consolidated statement of
operations.
GAIN ON THE SALE OF OTHER INVESTMENT-RELATED ASSETS
During 2000 and 1999, Time Warner recognized other investment-related
pretax gains, principally related to the sale of various assets. Pretax gains
amounted to approximately $51 million in 2000 and approximately $35 million in
1999. These gains are included in business segment operating income in the
accompanying consolidated statement of operations.
21
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. INVESTMENT IN THE ENTERTAINMENT GROUP
PARTNERSHIP STRUCTURE
Time Warner's investment in the Entertainment Group consists
substantially of its investment in TWE, as well as certain related companies.
TWE is a Delaware limited partnership that was capitalized in 1992 to own and
operate substantially all of the Filmed Entertainment-Warner Bros., Cable
Networks-HBO and Cable businesses previously owned by subsidiaries of Time
Warner. 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 Time Warner subsidiaries
are the general partners of TWE ("Time Warner General Partners").
PARTNERSHIP CAPITAL AND ALLOCATION OF INCOME
Each partner's interest in TWE generally consists of the undistributed
priority capital and residual equity amounts that were initially assigned to
that partner or its predecessor based on the estimated fair value of the net
assets each contributed to TWE ("Undistributed Contributed Capital"), plus, with
respect to the priority capital interests only, any undistributed priority
capital return. The priority capital return consists of net partnership income
allocated to date in accordance with the provisions of the TWE partnership
agreement and the right to be allocated additional partnership income which,
together, provides for the various priority capital rates of return as specified
in the following table. The sum of Undistributed Contributed Capital and the
undistributed priority capital return is referred to herein as "Cumulative
Priority Capital". Cumulative Priority Capital is not necessarily indicative of
the fair value of the underlying priority capital interests principally due to
above-market rates of return on certain priority capital interests as compared
to securities of comparable credit risk and maturity, such as the 13.25% rate of
return on the Series B Capital interest owned 100% by the Time Warner General
Partners. Furthermore, the ultimate realization of Cumulative Priority Capital
could be affected by the fair value of TWE, which is subject to fluctuation.
A summary of the priority of Undistributed Contributed Capital, Time
Warner's ownership of Undistributed Contributed Capital and Cumulative Priority
Capital at December 31, 2000 and priority capital rates of return thereon is as
set forth below:
PRIORITY
UNDISTRIBUTED CUMULATIVE CAPITAL
CONTRIBUTED PRIORITY RATES OF % OWNED
PRIORITY OF UNDISTRIBUTED CONTRIBUTED CAPITAL CAPITAL(a) CAPITAL RETURN(b) BY TIME WARNER
--------------------------------------------- -------- --------- ------- --------------
(BILLIONS)
Series A Capital................................... $5.6 $16.5 13.00% 74.49%
Series B Capital................................... 2.9(d) 8.8 13.25% 100.00%
Residual Capital................................... 3.3(d) 3.3(c) - (c) 74.49%
---------------
(a) Excludes partnership income or loss allocated thereto.
(b) To the extent income allocations are concurrently distributed, the priority
capital rates of return on the Series A Capital and Series B Capital are
11% and 11.25%, respectively.
(c) Residual Capital is not entitled to stated priority rates of return and, as
such, its Cumulative Priority Capital is equal to its Undistributed
Contributed Capital. However, in the case of certain events such as the
liquidation or dissolution of TWE, Residual Capital is entitled to any
excess of the then fair value of the net assets of TWE over the aggregate
amount of Cumulative Priority Capital and special tax allocations.
(d) The Undistributed Contributed Capital relating to the Series B Capital has
priority over the priority returns on the Series A Capital. The
Undistributed Contributed Capital relating to the Residual Capital has
priority over the priority returns on the Series B Capital and the Series A
Capital.
22
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Because Undistributed Contributed Capital generally is based on the
fair value of the net assets that each partner initially contributed to the
partnership, the aggregate of such amounts is significantly higher than TWE's
partners' capital as reflected in its consolidated financial statements, which
is based on the historical cost of the contributed net assets. For purposes of
allocating partnership income or loss to the partners, partnership income or
loss is based on the fair value of the net assets contributed to the partnership
and results in significantly less partnership income, or results in partnership
losses, in contrast to the net income reported by TWE for financial statement
purposes, which also is based on the historical cost of contributed net assets.
Under the TWE partnership agreement, partnership income, to the extent
earned, is first allocated to the partners' capital accounts so that the
economic burden of the income tax consequences of partnership operations is
borne as though the partnership were taxed as a corporation ("special tax
allocations"). After any special tax allocations, partnership income is
allocated to the Series A Capital and Series B Capital, in order of priority, at
rates of 13.00% and 13.25% per annum, respectively, and finally to the Residual
Capital. Partnership losses generally are allocated first to eliminate prior
allocations of partnership income to, and then to reduce the Undistributed
Contributed Capital of, the Residual Capital, Series B Capital and Series A
Capital, in that order, and then to reduce any special tax allocations. To the
extent partnership income is insufficient to satisfy all special allocations in
a particular accounting period, the right to receive additional partnership
income necessary to provide for the various priority capital rates of return is
carried forward until satisfied out of future partnership income, including any
partnership income that may result from any liquidation, sale or dissolution of
TWE. TWE reported net income of $229 million in 2000, $2.759 billion in 1999 and
$326 million in 1998, no portion of which was allocated to the limited partners.
The Series B Capital owned by the Time Warner General Partners may be
increased if certain operating performance targets are achieved over a ten-year
period ending on December 31, 2001. At this time, it is not expected that such
targets will be achieved. In addition, MediaOne has an option to obtain up to an
additional 6.33% of Series A Capital and Residual Capital interests. The
determination of the amount of additional interests that MediaOne is eligible to
acquire is based on the compounded annual growth rate of TWE's adjusted cable
EBITDA, as defined in the option agreement, over the life of the option. The
option is exercisable at any time through May 2005. The option exercise price is
dependent upon the year of exercise and ranges from an exercise price of
approximately $1.4 billion in 2001 to $1.8 billion in 2005. Either MediaOne or
TWE may elect that the exercise price be paid with partnership interests rather
than cash. MediaOne also has the right, during 60 day exercise periods occurring
once every 18 months (with the current window expiring on March 1, 2001), to
request that TWE incorporate and register its stock in an initial public
offering. If MediaOne exercises such right, TWE can decline to incorporate
and register its stock, in which case MediaOne may cause TWE to purchase
MediaOne's interest at the price at which an appraiser believes such stock
could be sold in an initial public offering.
SUMMARIZED FINANCIAL INFORMATION OF THE ENTERTAINMENT GROUP
As previously described in Note 1, Time Warner's historical financial
statements for 2000 and 1999 and pro forma financial statements for 1998 reflect
the consolidation of the Entertainment Group, effective as of the beginning of
each year. However, in order to facilitate an analysis of Time Warner's results
of operations and financial condition for all historical periods in which the
Entertainment Group was not consolidated, set forth below is summarized
financial information of the Entertainment Group. The summarized financial
information reflects the TWE-A/N Transfers effective as of January 1, 1998, the
Primestar Roll-up Transaction effective as of April 1, 1998, the formation of
the Road Runner Joint Venture effective as of June 30, 1998, the Time Warner
Telecom Reorganization effective as of July 1, 1998 and the formation of the
Texas Cable Joint Venture effective as of December 31, 1998.
23
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
---- ---- ----
OPERATING STATEMENT INFORMATION (MILLIONS)
Revenues................................................................... $13,982 $13,164 $12,256
Business segment operating income(a)....................................... 2,126 4,227 1,724
Interest expense(b)........................................................ (656) (561) (566)
Other income (expense), net(c)............................................. (278) (257) (379)
Minority interest.......................................................... (208) (427) (284)
Income before income taxes and cumulative effect of an accounting change... 910 2,909 423
Income before cumulative effect of an accounting change.................... 753 2,759 331
Net income................................................................. 229 2,759 331
------------------
(a) Includes net pretax gains of approximately $65 million recognized in 2000
and $97 million recognized in 1999, principally related to the sale of an
interest in CanalSatellite, a pretax charge of $24 million recognized in
2000 in connection with the Six Flags litigation, pretax gains of $10
million recognized in 2000, $40 million recognized in 1999 and $30 million
recognized in 1998 related to the partial recognition of a deferred gain in
connection with the 1998 sale of Six Flags, a pretax gain of approximately
$215 million recognized in 1999 in connection with the early termination
and settlement of a long-term, home video distribution agreement, a noncash
pretax charge of approximately $106 million recognized in 1999 relating to
Warner Bros.'s retail stores and net pretax losses of approximately $1
million recognized in 2000 and net pretax gains of approximately $2.119
billion recognized in 1999 and $90 million recognized in 1998 related to
the sale or exchange of certain cable television systems and investments.
(b) 2000 includes a pretax charge of $26 million, representing an accrual for
additional interest in connection with the Six Flags litigation.
(c) 1998 includes a pretax charge of approximately $210 million principally
to reduce the carrying value of an interest in Primestar.
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
---- ---- ----
CASH FLOW INFORMATION (MILLIONS)
Cash provided by operations.................................................. $ 2,576 $ 2,713 $ 2,288
Capital expenditures......................................................... (1,926) (1,475) (1,603)
Investments and acquisitions................................................. (421) (478) (388)
Investment proceeds.......................................................... 209 948 1,246
Collection of loan to Time Warner............................................ - 400 -
Borrowings................................................................... 2,850 2,658 1,514
Debt repayments.............................................................. (2,399) (2,764) (1,898)
Redemption of preferred stock of subsidiary.................................. - (217) -
Capital distributions........................................................ (1,003) (1,200) (1,153)
Other financing activities, net.............................................. (97) (155) (241)
Increase (decrease) in cash and equivalents.................................. (211) 430 (235)
DECEMBER 31,
-----------------
2000 1999
---- ----
BALANCE SHEET INFORMATION (MILLIONS)
Cash and equivalents...................................................................... $ 306 $ 517
Total current assets...................................................................... 4,911 4,730
Total assets.............................................................................. 25,458 24,843
Total current liabilities................................................................. 6,498 5,723
Long-term debt............................................................................ 7,108 6,655
Minority interests........................................................................ 1,881 1,815
Partners' capital......................................................................... 6,926 7,149
CAPITAL DISTRIBUTIONS
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.
24
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Through July 1999, the Time Warner General Partners held senior
priority capital interests ("Senior Capital") in TWE. At that time, the Time
Warner General Partners received a $627 million distribution from TWE in full
redemption of the remaining portion of their Senior Capital interests plus
related priority capital return. This distribution increased the cumulative cash
distributions received from TWE relating to the Time Warner General Partners'
Senior Capital interests to $2.1 billion. A portion of the proceeds received
from the July 1999 distribution was used to repay all $400 million of
outstanding borrowings under Time Warner's credit agreement with TWE.
At December 31, 2000 and 1999, the Time Warner General Partners had
recorded $681 million and $1.292 billion, respectively, of stock option related
distributions due from TWE, based on closing prices of Time Warner common stock
of $52.24 and $72.31, respectively. Time Warner is paid when the options are
exercised. The Time Warner General Partners also receive tax-related
distributions from TWE on a current basis. During 2000, the Time Warner General
Partners received distributions from TWE in the amount of $1.003 billion,
consisting of $765 million of tax-related distributions and $238 million of
stock option related distributions. During 1999, the Time Warner General
Partners received distributions from TWE in the amount of $1.200 billion,
consisting of $627 million of Senior Capital distributions (representing the
return of $454 million of contributed capital and the distribution of $173
million of priority capital return), $347 million of tax-related distributions
and $226 million of stock option related distributions. During 1998, the Time
Warner General Partners received distributions from TWE in the amount of $1.153
billion, consisting of $579 million of Senior Capital distributions
(representing the return of $455 million of contributed capital and the
distribution of $124 million of priority capital return), $314 million of
tax-related distributions and $260 million of stock option related
distributions. In addition to the tax, stock option and Time Warner General
Partners' Senior Capital distributions, TWE may make other capital distributions
to its partners that are also subject to certain limitations contained in the
TWE partnership and credit agreements.
In addition, in connection with the Time Warner Telecom Reorganization
in 1998, TWE made a $191 million noncash distribution to its partners, of which
certain wholly owned subsidiaries of Time Warner received an interest in Time
Warner Telecom recorded at $143 million based on TWE's historical cost of the
net assets (Note 3).
7. OTHER INVESTMENTS
Time Warner's other investments consist of:
DECEMBER 31,
---------------
2000 1999
---- ----
(MILLIONS)
Equity-method investments.................................. $ 749 $1,012
Cost-method investments.................................... 98 73
Fair-value investments(a).................................. 701 1,011
------ ------
Total...................................................... $1,548 $2,096
====== ======
-------------------
(a) Principally includes investments in Internet-related and digital media
businesses and investments relating to Time Warner's deferred compensation
plans.
The following discussion presents information on Time Warner's equity
investees and separately highlights some of the more significant and strategic
investments held by Time Warner.
EQUITY-METHOD INVESTMENTS
At December 31, 2000, companies accounted for using the equity method
include: Time Warner Telecom (48% owned), the Road Runner Joint Venture (55%
owned on a fully diluted basis), certain cable television system joint ventures
(generally 50% owned), Courtroom Television Network (50% owned), the Columbia
House Company partnerships (50% owned), other music joint ventures (generally
50% owned), BookSpan (50% owned), Comedy
25
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Partners, L.P. (50% owned) and Primestar (24% owned in 1999 and 1998). A summary
of combined financial information as reported by the equity investees of Time
Warner is set forth below:
YEARS ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998 1998
HISTORICAL HISTORICAL PRO FORMA HISTORICAL
---------- ---------- --------- ----------
(MILLIONS)
Revenues............................................................... $3,440 $3,064 $3,604 $1,275
Operating income (loss)................................................ (183) 64 (266) (1)
Net loss............................................................... (640) (346) (461) (109)
Current assets......................................................... 1,026 1,570 1,848 1,183
Total assets........................................................... 5,109 5,214 7,293 2,065
Current liabilities.................................................... 2,197 1,294 1,215 587
Long-term debt......................................................... 3,511 3,367 4,724 1,807
Total liabilities...................................................... 5,969 4,807 6,163 2,464
Total shareholders' equity (deficit) or partners' capital.............. (860) 407 1,130 (399)
TIME WARNER TELECOM
As discussed more fully under Note 3, at December 31, 2000, Time Warner
had a 48% interest in Time Warner Telecom. Time Warner Telecom is a leading
fiber facilities-based provider of integrated communications services and
solutions. As of December 31, 2000, based on Time Warner's ownership of 50.4
million shares of Class B common stock and the $63.44 market price of Time
Warner Telecom's publicly traded Class A common stock, the market value of Time
Warner's interest in Time Warner Telecom was $3.2 billion.
ROAD RUNNER JOINT VENTURE
As discussed more fully under Note 3, at December 31, 2000, Time
Warner, TWE and TWE-A/N had a collective 55% interest in the Road Runner Joint
Venture on a fully diluted basis. The Road Runner Joint Venture operates a
high-speed online service that connects customers to the Internet at speeds
significantly faster than telephone dial-up services.
CABLE TELEVISION SYSTEM JOINT VENTURES
Time Warner Cable has an approximate 50% weighted-average interest in a
number of unconsolidated cable television systems that served an aggregate 1.6
million subscribers as of December 31, 2000. For 2000, these cable television
systems reported combined operating income of $143 million. In addition, at the
end of 2000, these cable television systems had debt of approximately $2
billion.
OTHER INVESTMENTS
Time Warner has a number of other fair value method investments,
including interests in Internet-related and digital media businesses. These fair
value method investments generally consist of common equity and common equity
equivalents. As of December 31, 2000, the significant investments included 2.3
million common share equivalents in OpenTV Corp., a designer and marketer of
digital interactive television software and components; 2.6 million common share
equivalents in Hoover's Inc., an Internet provider of news, financial and other
information on various companies and industries; 1.2 million common share
equivalents in Martha Stewart, an international multimedia company specializing
in original "how to" content and related products for homemakers and other
consumers; and 3.7 million common share equivalents in VIVA, a German company
that specializes in music entertainment programming.
26
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Time Warner's ownership and voting interests in these companies are
generally less than 20%, which is not large enough to exert significant
influence. As such, these publicly traded investments are accounted for at
market value. The cost basis of each fair value method investment, used to
determine unrealized and realized gains and losses, is determined on a specific
identification basis. As of December 31, 2000, the aggregate market value of
these publicly traded investments approximated $120 million, resulting in
unrealized pretax gains of approximately $37 million included as a component of
other comprehensive income (loss).
INVESTMENT-RELATED CHARGE
During 2000, Time Warner recorded a $44 million noncash pretax charge
to reduce the carrying value of its investment portfolio, primarily due to
significant market declines experienced in the fourth quarter. This charge is
included in business segment operating income in the accompanying consolidated
statement of operations.
8. INVENTORIES AND FILM COSTS
Inventories and film costs consist of:
DECEMBER 31,
---------------
2000 1999
---- ----
(MILLIONS)
Programming costs, less amortization.............................. $2,082 $1,985
Magazines, books, recorded music and other merchandise............ 614 652
Film costs-Theatrical:
Released, less amortization................................... 916 1,050
Completed and not released.................................... 242 80
In production................................................. 776 704
Development and pre-production................................ 91 155
Film costs-Television:
Released, less amortization................................... 220 546
Completed and not released.................................... 196 9
In production................................................. 76 8
Development and pre-production................................ 5 5
Film costs-Library, less amortization............................. 1,440 1,554
------ ------
Total inventories and film costs.................................. 6,658 6,748
Less current portion of inventory................................. 1,583 1,472
------ ------
Total noncurrent inventories and film costs....................... $5,075 $5,276
====== ======
Approximately $1.2 billion of released and completed and not released
film costs are expected to be amortized during the next twelve months. Excluding
the library, approximately 94% of unamortized film costs for released films is
expected to be amortized within three years.
27
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. LONG-TERM DEBT
Long-term debt consists of:
WEIGHTED AVERAGE DECEMBER 31,
INTEREST RATE AT -----------------
DECEMBER 31, 2000 MATURITIES 2000 1999
----------------- ---------- ---- ----
(MILLIONS)
Bank credit agreement borrowings................... 7.05% 2002 $ 6,771 $ 4,846
Commercial paper and money market loans............ 7.26% 2001 761 360
Fixed-rate senior notes and debentures............. 8.04% 2002-2036 11,775 12,277
Variable-rate senior notes......................... 6.57% 2031 600 600
------- -------
Total.............................................. $19,907 $18,083
======= =======
BANK CREDIT AGREEMENT
Time Warner has a revolving credit facility (the "Bank Credit
Agreement") that permits borrowings in an aggregate amount of up to $7.5
billion, with no scheduled reduction in credit availability prior to maturity in
November 2002. The borrowers under the Bank Credit Agreement are Time Warner and
a number of its consolidated subsidiaries, consisting of Time Warner Companies,
Inc. ("TW Companies"), Turner Broadcasting System, Inc. ("TBS"), TWI Cable, TWE
and TWE-A/N. Borrowings under the Bank Credit Agreement are limited to (i) $6
billion in the aggregate for Time Warner, TW Companies, TBS and TWI Cable, (ii)
$7.5 billion in the case of TWE and (iii) $2 billion in the case of TWE-A/N,
subject in each case to an aggregate borrowing limit of $7.5 billion and certain
other limitations and adjustments. Such borrowings bear interest at specific
rates for each of the borrowers (generally equal to LIBOR plus a margin of 30
basis points) and each borrower is required to pay a commitment fee of generally
.10% per annum on the unused portion of its commitment, which margin and fee
vary based on the credit rating or financial leverage of the applicable
borrower. Borrowings may be used for general business purposes and unused credit
is available to support commercial paper borrowings. The Bank Credit Agreement
contains certain covenants generally relating to, among other things, additional
indebtedness; liens on assets; cash flow coverage and leverage ratios; and
dividends, distributions and other restricted cash payments or transfers of
assets from the borrowers to their respective shareholders, partners or
affiliates.
VARIABLE-RATE SENIOR NOTES
In 1999, TW Companies redeemed all of its $600 million principal amount
of Floating Rate Reset Notes due July 29, 2009. The aggregate redemption cost of
approximately $620 million was funded with borrowings under the Bank Credit
Agreement.
The only variable-rate senior notes outstanding at the end of 2000 were
$600 million principal amount of Floating Rate Reset Notes due December 30, 2031
that are redeemable at the election of the holders on December 30, 2001 (the
"Five-Year Floating Rate Notes"). The Five-Year Floating Rate Notes bear
interest at a floating rate equal to LIBOR less 25 basis points until December
30, 2001, at which time, if not redeemed, the interest rate will be reset at a
fixed rate equal to 6.59% plus a margin based upon the credit risk of TW
Companies at such time.
ZERO-COUPON CONVERTIBLE NOTES
During 1998, approximately $1.15 billion accreted amount of zero-coupon
convertible notes due 2013 (the "Zero-Coupon Convertible Notes") were converted
into an aggregate 37.4 million shares of Time Warner common
28
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock. To partially offset the dilution resulting from this conversion, Time
Warner incurred a corresponding $1.15 billion of debt and used the proceeds
therefrom to repurchase common stock.
INTEREST EXPENSE AND MATURITIES
Interest expense amounted to $1.696 billion in 2000, $1.511 billion in
1999 and $891 million in 1998 ($1.451 billion on a pro forma basis). The
weighted average interest rate on Time Warner's total debt, including TWE's
debt, was 7.6% at both December 31, 2000 and 1999.
Time Warner periodically refinances its debt in an effort to lower its
overall cost of borrowings and to stagger debt maturities. In connection with
such refinancings, Time Warner recognized an extraordinary loss on the
retirement of debt of $12 million in 1999.
Annual repayments of long-term debt for the five years subsequent to
December 31, 2000 consist of $8.1 billion due in 2002, $48 million due in 2003,
$523 million due in 2004 and $500 million due in 2005. Such repayments exclude
the aggregate redemption price of $600 million in 2001 relating to the Five-Year
Floating Rate Notes, the year in which the holders thereof may first exercise
their redemption options. Time Warner has the intent and ability under the Bank
Credit Agreement to continue to refinance its borrowings on a long-term basis.
FAIR VALUE OF DEBT
Based on the level of interest rates prevailing at December 31, 2000,
the fair value of Time Warner's fixed rate debt exceeded its carrying value by
approximately $750 million. At December 31, 1999, the fair value of Time
Warner's fixed rate debt approximated its carrying value. Unrealized gains or
losses on debt do not result in the realization or expenditure of cash and
generally are not recognized for financial reporting purposes unless the debt is
retired prior to its maturity.
EFFECT OF AMERICA ONLINE-TIME WARNER MERGER ON LONG-TERM DEBT
During 2001, in connection with the Merger, America Online and AOL Time
Warner were added as guarantors to (i) borrowings drawn against the Bank Credit
Agreement by Time Warner, TW Companies, TWI Cable and TBS, and (ii) the public
debt of Time Warner, TW Companies and TBS.
10. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
In connection with Time Warner's common stock repurchase program (Note
14), Time Warner established a $1.3 billion revolving credit facility that
provided for borrowings against future stock option proceeds (the "Stock Option
Proceeds Credit Facility"). Borrowings under the Stock Option Proceeds Credit
Facility are principally used to fund stock repurchases. At December 31, 2000
Time Warner had no outstanding borrowings against future stock option proceeds.
At December 31, 1999, Time Warner had outstanding borrowings against future
stock option proceeds of $1.243 billion.
The receipt of stock option proceeds in excess of $1.3 billion through
March 2000, and thereafter in full on a cumulative basis, must be used to
permanently reduce the borrowing availability under the facility. At December
31, 2000, borrowing availability under the Stock Option Proceeds Credit Facility
was $1.1 billion, of which up to $125 million is reserved solely for the payment
of interest and fees thereunder. Borrowings under the Stock Option Proceeds
Credit Facility generally bear interest at LIBOR plus a margin equal to 75 basis
points and are principally expected to be repaid from the cash proceeds received
from the exercise of designated employee stock options. At
29
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, based on a closing market price of Time Warner common stock
of $52.24, the aggregate value of potential proceeds to Time Warner from the
exercise of outstanding vested, "in the money" stock options covered under the
facility was approximately $1.7 billion, representing a 1.5 to 1 coverage ratio
over the related $1.1 billion borrowing availability. To the extent that such
stock option proceeds are not sufficient to satisfy Time Warner's obligations
under the Stock Option Proceeds Credit Facility, Time Warner is generally
required to repay such borrowings using proceeds from the sale of shares of its
common stock held in escrow under the Stock Option Proceeds Credit Facility or,
at Time Warner's election, using available cash on hand. Time Warner had placed
76 million shares in escrow at December 31, 2000, which shares are not
considered to be issued and outstanding capital stock of the Company. Time
Warner may be required, from time to time, to have up to 210 million shares held
in escrow.
Because borrowings under the Stock Option Proceeds Credit Facility are
expected to be principally repaid by Time Warner from the cash proceeds related
to the exercise of employee stock options, Time Warner's principal credit rating
agencies have concluded that such borrowings and related financing costs are
credit neutral and are excludable from debt and interest expense for purposes of
evaluating the Company's leverage and coverage ratios.
11. INCOME TAXES
Domestic and foreign pretax income are as follows:
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
---- ---- ----
(MILLIONS)
Domestic.............................................................. $388 $3,184 $486
Foreign............................................................... 283 316 100
---- ------- ----
Total................................................................. $671 $3,500 $586
==== ====== ====
Current and deferred income taxes (tax benefits) provided are as
follows:
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
---- ---- ----
(MILLIONS)
Federal:
Current(a)....................................................... $628 $ 470 $436
Deferred(c)...................................................... (477) 556 (259)
Foreign:
Current(b)....................................................... 255 240 260
Deferred......................................................... (40) 9 (49)
State and Local:
Current(a)....................................................... 196 179 166
Deferred(c)...................................................... (159) 86 (136)
---- ------- ----
Total................................................................. $403 $1,540 $418
==== ====== ====
-----------------
(a) Includes utilization of tax carryforwards of $198 million in 1999 and
$126 million in 1998. Excludes federal and state and local tax benefits
of $647 million in 2000, $486 million in 1999 and $478 million in 1998
resulting from the exercise of stock options and vesting of restricted
stock awards, which were credited directly to paid-in-capital. Excludes
current tax benefits of $64 million in 2000 and $9 million in 1999 relating
to the cumulative effect of accounting change and extraordinary loss on
the retirement of debt, respectively.
(b) Includes foreign withholding taxes of $142 million in 2000, $120 million in
1999 and $113 million in 1998.
(c) Excludes deferred tax benefits of $231 million in 2000 relating to the
cumulative effect of accounting change.
The differences between income taxes expected at the U.S. federal
statutory income tax rate of 35% and income taxes provided are as set forth
below. The relationship between income before income taxes and income tax
30
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
expense is most affected by the amortization of goodwill and certain other
financial statement expenses that are not deductible for income tax purposes.
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
---- ---- ----
(MILLIONS)
Taxes on income at U.S. federal statutory rate........................ $235 $1,225 $205
State and local taxes, net of federal tax benefits.................... 24 172 20
Nondeductible goodwill amortization................................... 176 173 170
Other nondeductible expenses.......................................... 14 9 13
Foreign income taxed at different rates, net of U.S.
foreign tax credits................................................. (44) (37) --
Other................................................................. (2) (2) 10
---- ------ ----
Total................................................................. $403 $1,540 $418
==== ====== ====
Significant components of Time Warner's net deferred tax liabilities
are as follows:
DECEMBER 31,
----------------
2000 1999
---- ----
(MILLIONS)
Assets acquired in business combinations........................................... $2,428 $2,635
Depreciation and amortization...................................................... 1,574 2,240
Unrealized appreciation of certain marketable securities........................... 18 155
Other.............................................................................. 368 422
------- ------
Deferred tax liabilities........................................................... 4,388 5,452
------ ------
Tax carryforwards.................................................................. 72 231
Accrued liabilities................................................................ 614 572
Receivable allowances and return reserves.......................................... 205 223
Other.............................................................................. 418 192
------- ------
Deferred tax assets................................................................ 1,309 1,218
------ ------
Net deferred tax liabilities....................................................... $3,079 $4,234
====== ======
U.S. income and foreign withholding taxes have not been recorded on
permanently reinvested earnings of foreign subsidiaries aggregating
approximately $1.2 billion at December 31, 2000. Determination of the amount of
unrecognized deferred U.S. income tax liability with respect to such earnings is
not practicable. If such earnings are repatriated, additional U.S. income and
foreign withholding taxes are substantially expected to be offset by the
accompanying foreign tax credits.
U.S. federal tax carryforwards at December 31, 2000 consisted of $72
million of alternative minimum tax credits, which do not expire. The utilization
of these carryforwards is subject to limitations under U.S. federal income
tax laws.
12. MANDATORILY REDEEMABLE PREFERRED SECURITIES
REDEMPTION OF REIT PREFERRED STOCK
In 1997, a newly formed, substantially owned subsidiary of TWE (the
"REIT") issued 250,000 shares of preferred stock ("REIT Preferred Stock"). The
REIT was intended to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended.
31
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1999, the REIT redeemed all of its shares of REIT Preferred
Stock at an aggregate cost of $217 million, which approximated net book value.
The redemption was funded with borrowings under TWE's bank credit agreement.
PREFERRED TRUST SECURITIES
In 1995, Time Warner, 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 is the obligor
on the Preferred Trust Securities are $592 million principal amount of 8 7/8%
subordinated debentures of TW Companies due December 31, 2025. Cumulative cash
distributions are payable on the Preferred Trust Securities at an annual rate of
8 7/8%. The Preferred Trust Securities are mandatorily redeemable for cash on
December 31, 2025, and TW Companies has the right to redeem the Preferred Trust
Securities, in whole or in part, on or after December 31, 2000.
On January 16, 2001, it was announced that TW Companies will be
redeeming all 23 million shares of the Preferred Trust Securities on February
13, 2001. The redemption price will be $25 per security, plus accrued and unpaid
distributions thereon equal to $0.265 per security. The total redemption price
of $581 million will be funded on a long-term basis with borrowings under the
Bank Credit Agreement.
13. REDEMPTION OF SERIES M PREFERRED STOCK
In December 1998, Time Warner redeemed all of its outstanding shares of
10 1/4% Series M Preferred Stock. The aggregate redemption cost of approximately
$2.1 billion was funded with proceeds from the issuance of lower-cost debt. As a
result of this redemption, preferred dividend requirements in Time Warner's 1998
consolidated statement of operations include a one-time effect of $234 million
relating to the redemption premium paid in connection therewith.
14. SHAREHOLDERS' EQUITY
At December 31, 2000, shareholders' equity of Time Warner included 3.1
million shares of convertible preferred stock, 114.1 million shares of Series
LMCN-V common stock and 1.218 billion shares of common stock (net of .2 million
shares of common stock in treasury). As of December 31, 2000, Time Warner was
authorized to issue up to 250 million shares of preferred stock, up to 5.0
billion shares of common stock and up to 600 million shares of additional
classes of common stock, including Series LMCN-V common stock. Shares of Series
LMCN-V common stock have substantially identical rights as shares of Time
Warner's common stock, except shares of Series LMCN-V common stock have limited
voting rights and are non-redeemable.
CONVERTIBLE PREFERRED STOCK
During 2000, Time Warner issued approximately 22 million shares of
common stock in connection with the conversion of 5.3 million shares of
convertible preferred stock. During 1999, Time Warner issued approximately 59.1
million shares of common stock in connection with the conversion of 14.2 million
shares of convertible preferred stock. During 1998, Time Warner issued
approximately 53.5 million shares of common stock in connection with the
conversion of 12.8 million shares of convertible preferred stock. During January
2001 the remaining 3.1 million shares of convertible preferred stock were
converted into approximately 13 million shares of common stock.
32
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
COMMON STOCK REPURCHASE PROGRAM
In January 1999, Time Warner's Board of Directors authorized a new
common stock repurchase program that allows the Company to repurchase, from time
to time, up to $5 billion of common stock. This program was expected to be
completed over a three-year period. However, in connection with Time Warner's
agreement to merge with America Online, Time Warner suspended its stock
repurchase program in 2000.
1998 STOCK SPLIT
In December 1998, a two-for-one common stock split was effectuated by
the payment of a 100% stock dividend in the amount of 558.2 million shares of
common stock (the "1998 Stock Split"). The 1998 Stock Split did not affect the
number of shares of Series LMCN-V common stock outstanding in 1998. In May 1999,
Time Warner amended the terms of its Series LMCN-V common stock, which
effectively resulted in a two-for-one stock split and the issuance of
approximately 57 million shares of Series LMCN-V common stock (the "LMCN-V Stock
Split"). As a result, each share of Series LMCN-V common stock is equivalent
effectively to one share of common stock instead of two. Because the equivalent
number of shares of common stock did not change, the LMCN-V Stock Split did not
have any effect on Time Warner's consolidated financial statements.
DILUTIVE SECURITIES AND HOLDERS OF RECORD
At December 31, 2000, Time Warner had outstanding stock options that
were exercisable into approximately 127.0 million shares of common stock (as
adjusted for the January 2001 conversion of preferred stock). Similarly, Time
Warner had convertible securities and outstanding stock options that were
convertible or exercisable into approximately 158.6 million shares of common
stock at December 31, 1999 and 242.2 million shares at December 31, 1998. In
addition, Time Warner has placed a number of shares of common stock in escrow
under its Stock Option Proceeds Credit Facility (Note 10).
At January 11, 2001, the date on which the America Online-Time Warner
merger was consummated, there were approximately 23,000 holders of record of
Time Warner common stock. This total does not include the large number of
investors who hold such shares through banks, brokers or other fiduciaries. As
described further in Note 2, on January 11, 2001, each issued and outstanding
share of each class of Time Warner common stock was converted into 1.5 shares of
an identical series of AOL Time Warner common stock.
SHAREHOLDER RIGHTS PLAN
Pursuant to Time Warner's shareholder rights plan, as amended, each
share of Time Warner common stock has attached to it one right, which becomes
exercisable in certain events involving the acquisition of 15% or more of the
then outstanding common stock of Time Warner on a fully diluted basis. Upon the
occurrence of such an event, each right entitles its holder to purchase for $75
the economic equivalent of common stock of Time Warner, or in certain
circumstances, of the acquiror, worth twice as much. In connection with the
plan, 8 million shares of preferred stock were reserved. The rights expire on
January 20, 2004.
In connection with Time Warner's agreement to merge with America Online
entered into in January 2000, Time Warner amended the rights plan to provide
that the consummation of the merger and the other transactions contemplated by
the merger agreement with America Online would not trigger the exercise of
rights under the rights plan. See Note 2 for a summary of the terms of the
Merger.
33
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
INCOME (LOSS) PER COMMON SHARE BEFORE EXTRAORDINARY LOSS ON RETIREMENT OF DEBT
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Set forth below is a reconciliation of basic and diluted income (loss)
per common share before extraordinary loss on retirement of debt and cumulative
effect of accounting change for each period.
YEARS ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998 1998
HISTORICAL(a) HISTORICAL PRO FORMA(a) HISTORICAL(a)
---------- ----------- ---------- ----------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Income (loss) applicable to common shares before extraordinary loss on
retirement of debt and cumulative effect of accounting
change - basic...................................................... $ 254 $ 1,908 $ (372) $ (372)
Interest savings, net of tax(b) ......................................... - 43 - -
Preferred dividends ..................................................... - 52 - -
------ -------- ------ ------
Income (loss) applicable to common shares before extraordinary loss on
retirement of debt and cumulative effect of accounting
change - diluted ................................................... $ 254 $ 2,003 $ (372) $ (372)
======= ======== ====== =======
Average number of common shares outstanding - basic ..................... 1,318.6 1,267.0 1,194.7 1,194.7
Dilutive effect of stock options ........................................ - 72.6 - -
Dilutive effect of convertible preferred shares ......................... - 58.7 - -
-------- --------- --------- ---------
Average number of common shares outstanding - diluted ................... 1,318.6 1,398.3 1,194.7 1,194.7
======== ========= ========= =========
Income (loss) per common share before extraordinary loss on retirement of
debt and cumulative effect of accounting change:
Basic .............................................................. $0.19 $1.51 $(0.31) $(0.31)
===== ===== ====== ======
Diluted ............................................................ $0.19 $1.43 $(0.31) $(0.31)
===== ===== ====== ======
--------------------
(a) 2000 and 1998 basic and diluted income (loss) per common share before
extraordinary loss on retirement of debt and cumulative effect of
accounting change are the same because the effect of Time Warner's stock
options and convertible preferred stock was antidilutive.
(b) Reflects the required use of a portion of the proceeds from the future
exercise of employee stock options to repay all outstanding borrowings
under Time Warner's stock option proceeds credit facility.
15. STOCK-BASED COMPENSATION PLANS
EFFECT OF AMERICA ONLINE-TIME WARNER MERGER ON STOCK-BASED COMPENSATION PLANS
In connection with Time Warner's agreement to merge with America Online
entered into in January 2000, all Time Warner stock options and restricted stock
outstanding at that time became fully vested, pursuant to the terms of Time
Warner's stock option and restricted stock plans. In addition, on January 11,
2001, the date the Merger was consummated, each outstanding equity security of
Time Warner was converted into 1.5 units of an equivalent equity security of
AOL Time Warner. See Note 2 for a summary of the terms of the Merger.
STOCK OPTION PLANS
Time Warner has various stock option plans under which Time Warner may
grant options to purchase Time Warner common stock to employees of Time Warner
and TWE. Such options have been granted to employees of Time Warner and TWE with
exercise prices equal to, or in excess of, fair market value at the date of
grant. Accordingly, in accordance with APB 25 and related interpretations,
compensation cost generally is not recognized for its stock option plans.
Generally, the options become exercisable over a three-year vesting period and
expire ten years from the date of grant. Had compensation cost for Time Warner's
stock option plans been determined based on the fair value method set forth in
FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"),
Time Warner's net income and basic and diluted net income (loss) per common
share would have been changed to the pro forma amounts indicated below:
34
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
---- ---- ----
(MILLIONS, EXCEPT
PER SHARE AMOUNTS)
Net income (loss):
As reported................................................. $ (175) $1,948 $ 168
====== ====== ======
Pro forma................................................... $ (447) $1,852 $ 106
====== ====== ======
Net income (loss) per basic common share:
As reported................................................. $(0.14) $ 1.50 $(0.31)
====== ====== ======
Pro forma................................................... $(0.35) $ 1.42 $(0.36)
====== ====== ======
Net income (loss) per diluted common share:
As reported................................................. $(0.14) $ 1.42 $(0.31)
====== ====== ======
Pro forma................................................... $(0.35) $ 1.36 $(0.36)
====== ====== ======
For purposes of applying FAS 123, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions (which, for 2000, reflect the
impact of the announced Merger) used for grants in 2000, 1999 and 1998: dividend
yields of 0%, 0.3% and 0.5%, respectively; expected volatility of 46.3%, 23.4%
and 21.6%, respectively; risk-free interest rates of 6.4%, 5.3% and 5.5%,
respectively; and expected lives of 5 years in all periods. The weighted
average fair value of an option granted during the year was $43.15 ($25.89,
net of taxes), $21.18 ($12.50, net of taxes) and $11.13 ($6.57, net of taxes)
for the years ended December 31, 2000, 1999 and 1998, respectively. In each
period, Time Warner granted options to certain executives at exercise prices
exceeding the market price of Time Warner common stock on the date of grant.
These above-market options had a weighted average exercise price and fair
value of $119.11 and $46.53 ($27.92, net of taxes), respectively, in 2000;
$95.10 and $19.49 ($11.50, net of taxes), respectively, in 1999; and $49.54
and $9.45 ($5.58, net of taxes), respectively, in 1998.
A summary of stock option activity under all plans is as follows:
WEIGHTED-
THOUSANDS AVERAGE
OF EXERCISE
SHARES PRICE
------ -----
Balance at January 1, 1998.................................................. 178,704 $16.99
Granted..................................................................... 18,100 37.71
Exercised................................................................... (48,323) 15.01
Cancelled................................................................... (417) 28.01
-------
Balance at December 31, 1998................................................ 148,064 $20.14
Granted..................................................................... 12,954 68.50
Exercised................................................................... (24,257) 16.49
Cancelled................................................................... (893) 46.17
-------
Balance at December 31, 1999................................................ 135,868 $25.23
Granted..................................................................... 15,687 86.66
Exercised................................................................... (24,031) 17.04
Cancelled................................................................... (501) 70.67
-------
Balance at December 31, 2000................................................ 127,023 $34.18
=======
DECEMBER 31,
----------------------------
2000 1999 1998
---- ---- ----
(THOUSANDS)
Exercisable........................................................... 112,129 106,728 112,471
Available for future grants........................................... 6,443 21,635 11,207
35
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/00 LIFE PRICE AT 12/31/00 PRICE
---------- ----------- -------- --------- ----------- --------
(THOUSANDS) (THOUSANDS)
Under $15.......... 14,106 2.2 years $12.20 14,106 $12.20
$15.01 to $ 20.00.. 37,312 3.3 years $18.27 37,312 $18.27
$20.01 to $ 30.00.. 30,714 4.4 years $22.11 30,714 $22.11
$30.01 to $ 45.00.. 14,718 6.9 years $35.03 14,718 $35.03
$45.01 to $ 65.00.. 5,304 7.7 years $55.23 4,804 $54.44
$65.01 to $ 80.00.. 10,203 8.1 years $69.08 9,434 $68.61
$80.01 to $130.04.. 14,666 9.0 years $88.36 1,041 $89.38
------- ------
Total.............. 127,023 5.1 years $34.18 112,129 $27.20
======= =======
For options exercised by employees of TWE, Time Warner is reimbursed by
TWE for the amount by which the market value of Time Warner common stock on the
exercise date exceeds the exercise price, or the greater of the exercise price
or $13.88 for options granted prior to the TWE capitalization on June 30, 1992.
There were 46.3 million options held by employees of TWE at December 31, 2000,
41.6 million of which were exercisable.
RESTRICTED STOCK PLANS
Time Warner also has various restricted stock plans for employees and
non-employee directors of the Board. Under these plans, shares of common stock
are granted which do not vest until the end of a restriction period, generally
between three to five years. At December 31, 2000, Time Warner had approximately
723,000 shares of restricted stock outstanding. During 2000, Time Warner issued
approximately 800,000 shares of restricted stock at a weighted-average fair
value of $84.81. At December 31, 1999, Time Warner had approximately 190,000
shares of restricted stock outstanding. During 1999, Time Warner issued 99,400
shares of restricted stock at a weighted-average fair value of $64.24. Grants of
restricted stock in prior years were not significant. In addition, compensation
cost recognized in connection with restricted stock grants was not material in
any period.
16. BENEFIT PLANS
Time Warner and its subsidiaries have defined benefit pension plans
covering most domestic employees. Pension benefits are based on formulas that
reflect the employees' years of service and compensation levels during their
employment period. Time Warner's common stock represents approximately 10% and
13% of plan assets at December 31, 2000 and 1999, respectively. A summary of
activity for Time Warner's defined benefit pension plans is as follows:
36
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998 1998
HISTORICAL HISTORICAL PRO FORMA HISTORICAL
----------- ----------- --------- ----------
(MILLIONS)
COMPONENTS OF PENSION EXPENSE
Service cost........................................ $ 83 $ 107 $ 95 $ 53
Interest cost....................................... 122 118 110 74
Expected return on plan assets...................... (150) (132) (108) (73)
Net amortization and deferral....................... (34) (3) 2 2
----- ------ ----- -----
Total............................................... $ 21 $ 90 $ 99 $ 56
===== ====== ====== ======
DECEMBER 31,
------------------------
2000 1999
HISTORICAL HISTORICAL
----------- -----------
(MILLIONS)
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year........................... $1,477 $1,749
Service cost................................................................ 83 107
Interest cost............................................................... 122 118
Actuarial (gain) loss(a).................................................... (35) (427)
Benefits paid............................................................... (70) (70)
------- -------
Projected benefit obligation at end of year................................. 1,577 1,477
------ ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............................. 1,703 1,480
Actual return on plan assets................................................ (81) 266
Employer contribution....................................................... 13 21
Benefits paid............................................................... (62) (64)
----- ------
Fair value of plan assets at end of year.................................... 1,573 1,703
------ ------
Overfunded (underfunded) projected benefit obligation....................... (4) 226
Additional minimum liability(b)............................................. (50) (40)
Unrecognized actuarial gain(a).............................................. (348) (589)
Unrecognized prior service cost............................................. 12 26
------- -----
Accrued pension expense..................................................... $ (390) $ (377)
====== ======
---------------
(a) Reflects certain changes in actuarial assumptions made during 2000 and
1999, including a reduction to the assumed rate of compensation increase in
2000 and a shortening of the expected service period and an increase in the
assumed discount rate in 1999.
(b) The additional minimum liability is offset fully by a corresponding
intangible asset recognized in the consolidated balance sheet.
DECEMBER 31,
------------------------------
2000 1999 1998
---- ---- ----
WEIGHTED-AVERAGE PENSION ASSUMPTIONS
Discount rate................................................... 7.75% 7.75% 6.75%
Expected return on plan assets.................................. 9% 9% 9%
Rate of compensation increase................................... 5% 6% 6%
Included above are projected benefit obligations and accumulated
benefit obligations for unfunded defined benefit pension plans of $189 million
and $176 million as of December 31, 2000, respectively; and $174 million and
$145 million as of December 31, 1999, respectively.
Employees of Time Warner's operations in foreign countries participate
to varying degrees in local pension plans, which in the aggregate are not
significant.
37
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Time Warner also has certain defined contribution plans, including
savings and profit sharing plans, as to which the expense amounted to $141
million in 2000, $100 million in 1999 and $84 million in 1998 ($119 million on a
pro forma basis). Contributions to the savings plans are based upon a percentage
of the employees' elected contributions. Contributions to the profit sharing
plans generally are determined by management and approved by the boards of
directors of the participating companies.
17. DERIVATIVE FINANCIAL INSTRUMENTS
Time Warner uses derivative financial instruments principally to manage
the risk that changes in interest rates will affect either the fair value of its
debt obligations or the amount of its future interest payments and, with regard
to foreign currency exchange rates, to manage the risk that changes in exchange
rates will affect the amount of unremitted or future royalties and license fees
to be received from the sale of U.S. copyrighted products abroad. The following
is a summary of Time Warner's risk management strategies and the effect of these
strategies on Time Warner's consolidated financial statements.
INTEREST RATE RISK MANAGEMENT
Interest Rate Swap Contracts
Interest rate swap contracts are used to adjust the proportion of total
debt that is subject to variable and fixed interest rates. Under an interest
rate swap contract, Time Warner either agrees to pay an amount equal to a
specified variable-rate of interest times a notional principal amount, and to
receive in return an amount equal to a specified fixed-rate of interest times
the same notional principal amount or, vice versa, to receive a variable-rate
amount and to pay a fixed-rate amount. The notional amounts of the contract are
not exchanged. No other cash payments are made unless the contract is terminated
prior to maturity, in which case the amount paid or received in settlement is
established by agreement at the time of termination, and usually represents the
net present value, at current rates of interest, of the remaining obligations to
exchange payments under the terms of the contract. Interest rate swap contracts
are entered into with a number of major financial institutions in order to
minimize counterparty credit risk.
Time Warner accounts for its interest rate swap contracts differently
based on whether it has agreed to pay an amount based on a variable-rate or
fixed-rate of interest. For interest rate swap contracts under which Time Warner
agrees to pay variable-rates of interest, these contracts are considered to be a
hedge against changes in the fair value of Time Warner's fixed-rate debt
obligations. Accordingly, the interest rate swap contracts are reflected at fair
value in Time Warner's consolidated balance sheet and the related portion of
fixed-rate debt being hedged is reflected at an amount equal to the sum of its
carrying value plus an adjustment representing the change in fair value of the
debt obligations attributable to the interest rate risk being hedged. In
addition, changes during any accounting period in the fair value of these
interest rate swap contracts, as well as offsetting changes in the adjusted
carrying value of the related portion of fixed-rate debt being hedged, are
recognized as adjustments to interest expense in Time Warner's consolidated
statement of operations. The net effect of this accounting on Time Warner's
operating
38
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
results is that interest expense on the portion of fixed-rate debt being hedged
is generally recorded based on variable interest rates.
For interest rate swap contracts under which Time Warner agrees to pay
fixed-rates of interest, these contracts are considered to be a hedge against
changes in the amount of future cash flows associated with Time Warner's
interest payments of Time Warner's variable-rate debt obligations. Accordingly,
the interest rate swap contracts are reflected at fair value in Time Warner's
consolidated balance sheet and the related gains or losses on these contracts
are deferred in shareholders' equity (as a component of comprehensive income).
These deferred gains and losses are then amortized as an adjustment to interest
expense over the same period in which the related interest payments being hedged
are recognized in income. However, to the extent that any of these contracts are
not considered to be perfectly effective in offsetting the change in the value
of the interest payments being hedged, any changes in fair value relating to the
ineffective portion of these contracts are immediately recognized in income. The
net effect of this accounting on Time Warner's operating results is that
interest expense on the portion of variable-rate debt being hedged is generally
recorded based on fixed interest rates.
During 2000, all of Time Warner's outstanding interest rate swap
contracts matured and Time Warner did not enter into any new contracts. At
December 31, 1999, Time Warner had interest rate swap contracts on $400 million
notional amount of indebtedness. The net gain or loss on the ineffective portion
of these interest rate swap contracts was not material in any period.
Interest Rate Lock Agreements
In the past, Time Warner infrequently used interest rate lock
agreements to hedge the risk that the cost of a future issuance of fixed-rate
debt may be adversely affected by changes in interest rates. Under an interest
rate lock agreement, Time Warner agrees to pay or receive an amount equal to the
difference between the net present value of the cash flows for a notional
principal amount of indebtedness based on the existing yield of a U.S. treasury
bond at the date when the agreement is established and at the date when the
agreement is settled, typically when Time Warner issues new debt. The notional
amounts of the agreement are not exchanged. Interest rate lock agreements are
entered into with a number of major financial institutions in order to minimize
counterparty credit risk.
Interest rate lock agreements are reflected at fair value in Time
Warner's consolidated balance sheet and the related gains or losses on these
agreements are deferred in shareholders' equity (as a component of comprehensive
income). These deferred gains and losses are then amortized as an adjustment to
interest expense over the same period in which the related interest costs on the
new debt issuances are recognized in income.
Time Warner had deferred net losses on interest rate lock agreements of
$30 million at December 31, 2000 and December 31, 1999. It is anticipated that
the amount that will be recognized in income over the next twelve months will
not be material.
FOREIGN CURRENCY RISK MANAGEMENT
Foreign exchange contracts are used primarily by Time Warner to hedge
the risk that unremitted or future royalties and license fees owed to Time
Warner domestic companies for the sale or anticipated sale of U.S. copyrighted
products abroad may be adversely affected by changes in foreign currency
exchange rates. As part of its overall strategy to manage the level of exposure
to the risk of foreign currency exchange rate fluctuations, Time Warner hedges a
portion of its foreign currency exposures anticipated over the ensuing twelve
month period. At December 31, 2000, Time Warner had effectively hedged
approximately half of the estimated foreign currency
39
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exposures that principally relate to anticipated cash flows to be remitted to
the U.S. over the ensuing twelve-month period. To hedge this exposure, Time
Warner used foreign exchange contracts that generally have maturities of three
months or less, which generally will be rolled over to provide continuing
coverage throughout the year. Time Warner often closes foreign exchange sale
contracts by purchasing an offsetting purchase contract. Foreign exchange
contracts are placed with a number of major financial institutions in order to
minimize credit risk.
Time Warner records these foreign exchange contracts at fair value in
its consolidated balance sheet and the related gains or losses on these
contracts are deferred in shareholders' equity (as a component of comprehensive
income). These deferred gains and losses are recognized in income in the period
in which the related royalties and license fees being hedged are received and
recognized in income. However, to the extent that any of these contracts are not
considered to be perfectly effective in offsetting the change in the value of
the royalties and license fees being hedged, any changes in fair value relating
to the ineffective portion of these contracts are immediately recognized in
income. Gains and losses on foreign exchange contracts generally are included as
a component of other income (expense), net, in Time Warner's consolidated
statement of operations.
At December 31, 2000, Time Warner had contracts for the sale of $648
million and the purchase of $582 million of foreign currencies at fixed rates.
Contracts in a net sale position primarily consisted of Japanese yen (334% of
net contract value), Canadian dollars (45%) and English pounds (23%), offset in
part by contracts in a net purchase position, primarily consisting of New
Zealand dollars (125%) and Australian dollars (175%).
Time Warner had contracts for the sale of $843 million and the purchase
of $468 million of foreign currencies at December 31, 1999. Time Warner had
deferred approximately $1 million of net losses on foreign exchange contracts at
December 31, 2000, which is substantially expected to be recognized in income
over the next twelve months. Time Warner recognized $16 million in losses in
2000, $8 million in losses in 1999 and $8 million in losses in 1998 ($10 million
on a pro forma basis), on foreign exchange contracts. These amounts were or are
expected to be largely offset by corresponding decreases and increases,
respectively, in the dollar value of foreign currency royalties and license fee
payments that have been or are anticipated to be received in cash from the sale
of U.S. copyrighted products abroad.
18. SEGMENT INFORMATION
Time Warner classifies its business interests into six fundamental
areas: Cable Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; Music, consisting principally
of interests in recorded music and music publishing; Filmed Entertainment,
consisting principally of interests in filmed entertainment, television
production and television broadcasting; Cable, consisting principally of
interests in cable television systems; and Digital Media, consisting principally
of interests in Internet-related and digital media businesses. Time Warner's
Digital Media segment commenced operations in the fourth quarter of 1999.
Information as to the operations of Time Warner in different business
segments is set forth below based on the nature of the products and services
offered. Time Warner evaluates performance based on several factors, including
its primary financial measure of business segment operating income before
noncash amortization of intangible assets ("EBITA"). As described more fully in
Note 1, Time Warner has adopted the provisions of SAB 101 in the fourth quarter
of 2000. As a result, Time Warner's revenues and costs have been reduced by an
equal amount of $198 million in 2000, $200 million in 1999 and $164 million in
1998. The accounting policies of the business segments are the same as those
described in the summary of significant accounting policies under Note 1.
Intersegment sales are accounted for at fair value as if the sales were to third
parties.
40
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As described more fully in Note 1, effective January 1, 2000,
management reclassified Time Warner's share of the operating results of Columbia
House from its Music segment to other income (expense), net. As such, segment
results for 1999 and 1998 have been reclassified to conform to the 2000
presentation. Also, as described more fully in Note 2, the comparability of the
Publishing segment's operating results was affected by a joint venture
transaction in 2000 involving Book-of-the-Month Club. In connection with the
joint venture transaction, the operating results of Book-of-the-Month Club were
deconsolidated and are no longer included in the Publishing segment's operating
results for 2000. Time Warner's share of the operating results of the joint
venture for 2000 has been included in other income (expense), net, in the
accompanying consolidated statement of operations. During the year ended
December 31, 1999, the Publishing segment's operating results included revenues
of $321 million, EBITA losses of $15 million and operating losses of $18 million
relating to Book-of-the-Month Club. During the year ended December 31, 1998, the
Publishing segment's operating results included $340 million of revenues, $28
million of EBITA and $25 million of operating income relating to
Book-of-the-Month Club.
The operating results of Time Warner's Cable segment reflect (i) the
TWE-A/N Transfers effective as of January 1, 1998, (ii) the Primestar Roll-up
Transaction, effective as of April 1, 1998, (iii) the formation of the Road
Runner Joint Venture, effective as of June 30, 1998, (iv) the Time Warner
Telecom Reorganization, effective as of July 1, 1998 and (v) the formation of
the Texas Cable Joint Venture, effective as of December 31, 1998.
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
---- ---- ----
(MILLIONS)
REVENUES
Cable Networks................................................................. $ 6,288 $ 5,802 $5,116
Publishing..................................................................... 4,645 4,663 4,496
Music.......................................................................... 4,148 3,933 4,112
Filmed Entertainment........................................................... 8,116 8,075 7,978
Broadcasting-The WB Network.................................................... 453 384 260
Cable.......................................................................... 6,054 5,374 5,342
Digital Media.................................................................. 71 1 -
Intersegment elimination....................................................... (1,261) (1,109) (1,234)
------- ------- -------
Total business segment revenues................................................ $28,514 $27,123 $26,070
Entertainment Group revenues reported on an unconsolidated basis(a)............ - - (11,662)
------- ---------- -------
Total consolidated revenues.................................................... $28,514 $27,123 $14,408
======= ======= =======
-------------------
(a) Represents amounts previously reported for the Entertainment Group,
adjusted by intercompany eliminations and other consolidating adjustments
necessary for Time Warner to reflect the Entertainment Group on a
consolidated basis.
41
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
---- ---- ----
(MILLIONS)
EBITA(a)
Cable Networks................................................................. $1,602 $1,397 $1,160
Publishing..................................................................... 802 679 607
Music.......................................................................... 443 449 464
Filmed Entertainment(b)........................................................ 802 997 695
Broadcasting-The WB Network.................................................... (62) (92) (93)
Cable(c)....................................................................... 1,943 3,927 1,694
Digital Media(d)............................................................... (272) (17) -
Intersegment elimination....................................................... (46) (10) (94)
------ ------ ------
Total business segment EBITA................................................... $5,212 $7,330 $4,433
Entertainment Group EBITA reported on an unconsolidated basis(e)............... - - (2,166)
------ ------ ------
Total consolidated EBITA....................................................... $5,212 $7,330 $2,267
====== ====== ======
---------------
(a) EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of
intangible assets, Time Warner's business segment operating income was
$3.859 billion in 2000, $6.051 billion in 1999 and $1.486 billion in 1998
($3.122 billion on a pro forma basis).
(b) Includes net pretax gains of approximately $65 million recognized in 2000
and $97 million recognized in 1999, principally relating to the sale of an
interest in CanalSatellite, a pretax charge of $24 million recognized in
2000 in connection with the Six Flags litigation, pretax gains of $10
million recognized in 2000, $40 million recognized in 1999 and $30 million
recognized in 1998 related to the partial recognition of a deferred gain in
connection with the 1998 sale of Six Flags, a pretax gain of approximately
$215 million recognized in 1999 in connection with the early termination
and settlement of a long-term, home video distribution agreement and a
noncash pretax charge of $106 million recognized in 1999 relating to Warner
Bros.'s retail stores.
(c) Includes net pretax gains relating to the sale or exchange of certain cable
television systems and investments of approximately $37 million in 2000,
$2.247 billion in 1999 and $108 million in 1998.
(d) Includes a noncash pretax charge of $44 million in 2000 to reduce the
carrying value of the digital media investment portfolio, primarily due to
significant market decline experienced in the fourth quarter.
(e) Represents amounts previously reported for the Entertainment Group,
adjusted by intercompany eliminations and other consolidating adjustments
necessary for Time Warner to reflect the Entertainment Group on a
consolidated basis.
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
---- ---- ----
(MILLIONS)
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Cable Networks................................................................. $ 146 $ 132 $ 116
Publishing..................................................................... 65 81 80
Music.......................................................................... 83 74 72
Filmed Entertainment........................................................... 89 156 172
Broadcasting-The WB Network.................................................... 2 1 1
Cable.......................................................................... 915 786 864
Digital Media.................................................................. 4 1 -
------ ------ ------
Total business segment depreciation............................................ $1,304 $1,231 $1,305
Entertainment Group depreciation reported on an unconsolidated basis(a)........ - - (927)
------ ------ ------
Total consolidated depreciation................................................ $1,304 $1,231 $ 378
====== ====== =======
-------------------
(a) Represents amounts previously reported for the Entertainment Group,
adjusted by intercompany eliminations and other consolidating adjustments
necessary for Time Warner to reflect the Entertainment Group on a
consolidated basis.
42
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
---- ---- ----
(MILLIONS)
AMORTIZATION OF INTANGIBLE ASSETS(a)
Cable Networks................................................................. $ 221 $ 205 $ 200
Publishing..................................................................... 63 52 38
Music.......................................................................... 241 254 261
Filmed Entertainment........................................................... 201 201 216
Broadcasting-The WB Network.................................................... 5 4 3
Cable.......................................................................... 620 563 593
Digital Media.................................................................. 2 - -
------ ------ ------
Total business segment amortization............................................ $1,353 $1,279 $1,311
Entertainment Group amortization reported on an unconsolidated basis(b)........ - - (530)
------ ------ ------
Total consolidated amortization................................................ $1,353 $1,279 $ 781
====== ====== ======
---------------
(a) Includes amortization relating to all business combinations accounted for
by the purchase method, including the $14 billion acquisition of Warner
Communications Inc. in 1989, the $6.2 billion acquisition of TBS in 1996
and the $2.3 billion of cable acquisitions in 1996 and 1995.
(b) Represents amounts previously reported for the Entertainment Group,
adjusted by intercompany eliminations and other consolidating adjustments
necessary for Time Warner to reflect the Entertainment Group on a
consolidated basis.
Information as to the assets and capital expenditures is as follows:
DECEMBER 31,
------------------------------
2000 1999 1998
---- ---- ----
(MILLIONS)
ASSETS
Cable Networks................................................................. $10,279 $10,158 $ 9,499
Publishing..................................................................... 3,511 2,870 2,726
Music.......................................................................... 7,308 7,204 7,038
Filmed Entertainment........................................................... 10,269 10,393 10,841
Broadcasting-The WB Network.................................................... 294 284 244
Cable.......................................................................... 18,948 18,380 16,094
Digital Media.................................................................. 108 28 -
Corporate(a)................................................................... 1,484 2,140 1,509
------- ------- -------
Total business segment assets.................................................. $52,201 $51,457 $47,951
Entertainment Group assets reported on an unconsolidated basis(b).............. - - (16,311)
------- ------- -------
Total consolidated assets...................................................... $52,201 $51,457 $31,640
======= ======= =======
------------------
(a) Consists principally of cash, cash equivalents and other investments.
(b) Represents amounts previously reported for the Entertainment Group,
adjusted by intercompany eliminations and other consolidating adjustments
necessary for Time Warner to reflect the Entertainment Group on a
consolidated basis.
43
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
---- ---- ----
(MILLIONS)
CAPITAL EXPENDITURES
Cable Networks................................................................. $ 180 $ 229 $ 143
Publishing..................................................................... 124 106 58
Music.......................................................................... 164 134 92
Filmed Entertainment........................................................... 95 136 125
Broadcasting-The WB Network.................................................... 5 2 1
Cable.......................................................................... 2,158 1,600 1,676
Digital Media.................................................................. 13 2 -
Corporate...................................................................... 34 22 20
------ ------ ------
Total business segment capital expenditures.................................... $2,773 $2,231 $2,115
Entertainment Group capital expenditures reported on an unconsolidated
basis(a) .................................................................... - - (1,603)
------ ------ ------
Total consolidated capital expenditures........................................ $2,773 $2,231 $ 512
====== ====== ======
-------------------
(a) Represents amounts previously reported for the Entertainment Group,
adjusted by intercompany eliminations and other consolidating adjustments
necessary for Time Warner to reflect the Entertainment Group on a
consolidated basis.
Information as to operations in different geographical areas is as
follows:
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
---- ---- ----
(MILLIONS)
REVENUES(a)
United States................................................................. $22,703 $21,408 $20,590
United Kingdom................................................................ 1,060 992 997
Germany....................................................................... 682 733 703
Japan......................................................................... 713 628 566
Canada........................................................................ 429 421 430
France........................................................................ 376 429 395
Other international........................................................... 2,551 2,512 2,389
------- ------- -------
Total revenues by geographic area............................................. $28,514 $27,123 $26,070
Entertainment Group revenues reported on an unconsolidated basis(b)............ - - (11,662)
------- ------- -------
Total.......................................................................... $28,514 $27,123 $14,408
======= ======= =======
------------------
(a) Revenues are attributed to countries based on location of customer.
(b) Represents amounts previously reported for the Entertainment Group,
adjusted by intercompany eliminations and other consolidating adjustments
necessary for Time Warner to reflect the Entertainment Group on a
consolidated basis.
Because a substantial portion of international revenues is derived from
the sale of U.S. copyrighted products abroad, assets located outside the United
States are not material.
19. COMMITMENTS AND CONTINGENCIES
Time Warner's total rent expense amounted to $561 million in 2000, $521
million in 1999 and $286 million in 1998 ($504 million on a pro forma basis).
The minimum rental commitments under noncancellable long-term operating leases
are: 2001-$451 million; 2002-$433 million; 2003-$405 million; 2004-$382 million;
2005-$375 million; and after 2005-$2.666 billion.
44
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Time Warner's minimum commitments and guarantees under certain
programming, licensing, artists, athletes, franchise and other agreements
aggregated approximately $13.6 billion at December 31, 2000, which are payable
principally over a ten-year period.
Time Warner is subject to class action lawsuits as well as actions that
have been brought by various state attorneys general alleging collusive and
other illegal pricing practices by the major record companies in their capacity
as distributors of compact discs. Although management believes these cases are
without merit, adverse jury verdicts could result in a material loss to Time
Warner. Due to the lack of specificity to plaintiffs' claims, a range of loss is
not determinable at this time.
Time Warner is subject to a civil action brought by a former cable
television competitor in New York City alleging violations of the antitrust
laws. The case is presently scheduled for trial to begin on February 14, 2001.
Although management believes these allegations are without merit, an adverse
jury verdict could result in a material loss to Time Warner. Due to the vague
nature of both plaintiffs' claims and their assertions of damages, a range of
loss is not determinable at this time.
TWE also is subject to certain litigation relating to Six Flags. In
December 1998, a jury returned an adverse verdict in the Six Flags matter in the
amount of $454 million. As described in Note 4, 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 2000 to cover its additional financial
exposure in excess of established reserves.
Time Warner is also subject to numerous other legal proceedings. In
management's opinion and considering established reserves, the resolution of
these matters will not have a material effect, individually and in the
aggregate, on Time Warner's financial statements.
20. RELATED PARTY TRANSACTIONS
In the normal course of conducting their businesses, Time Warner and
its subsidiaries and affiliates have had various transactions with TWE and other
Entertainment Group companies, generally on terms resulting from a negotiation
between the affected units that in management's view results in reasonable
allocations. For 1998, these transactions were included in Time Warner's
operating results and reported as related party transactions. However, on a
historical basis for 2000 and 1999 and on a pro forma basis in 1998, these
transactions have been eliminated in Time Warner's consolidated financial
statements. Nevertheless, in order to facilitate an understanding of the effects
of these transactions on Time Warner's financial statements for 1998, a summary
of significant transactions between Time Warner and TWE is provided below.
TWE's employees participate in various Time Warner medical, stock
option and other benefit plans for which Time Warner charges TWE its allocable
share of plan expenses, including administrative costs.
Time Warner's Cable Networks-TBS division has license agreements with
TWE, pursuant to which the cable networks have acquired broadcast rights to
certain film and television product. In addition, Time Warner's Music division
provides home videocassette distribution services to certain TWE operations, and
certain TWE units place advertising in magazines published by Time Warner's
Publishing division.
Time Warner's Filmed Entertainment-TBS division has various service
agreements with TWE's Filmed Entertainment-Warner Bros. division, pursuant to
which TWE's Filmed Entertainment-Warner Bros. division
45
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
provides certain management and distribution services for Time Warner's
theatrical, television and animated product, as well as certain services for
administrative and technical support.
Time Warner's cable businesses have management services agreements with
TWE, pursuant to which TWE manages, or provides services to, the cable
television systems owned by Time Warner. Such cable television systems also pay
TWE for the right to carry cable television programming provided by TWE's cable
networks. Similarly, Time Warner receives fees from TWE's cable television
systems for the right to carry cable television programming provided by Time
Warner's cable networks.
Time Warner's and TWE's cable businesses have sold or exchanged various
cable television systems to MediaOne in an effort to strengthen their geographic
clustering of cable television properties. See Note 3 for further information.
Time Warner had a credit agreement with TWE that allowed it to borrow
up to $400 million from TWE. Time Warner paid interest to TWE on outstanding
borrowings at a rate equal to LIBOR plus 1% per annum. In 1999, Time Warner
repaid all outstanding borrowings under this credit agreement.
Time Warner provides TWE with certain corporate support services,
including accounting, tax, legal and administration, for which it received a fee
in the amount of $74 million in 2000 and $73 million in 1999 and $72 million in
1998.
TWE was required to pay a $130 million advisory fee to MediaOne over a
five-year period that ended September 15, 1998 for MediaOne's expertise in
telecommunications, telephony and information technology, and its participation
in the management and technological upgrade of TWE's cable systems.
In addition to transactions with TWE and other Entertainment Group
companies, Time Warner has had transactions with the Columbia House Company
partnerships, Comedy Partners, L.P., Time Warner Telecom, the Road Runner Joint
Venture, Courtroom Television Network, BookSpan and other equity investees of
Time Warner and the Entertainment Group, generally with respect to sales of
products and services in the ordinary course of business.
21. ADDITIONAL FINANCIAL INFORMATION
CASH FLOWS
As of December 31, 2000, Time Warner had certain asset securitization
facilities, which provide for the accelerated receipt of up to approximately $1
billion of cash on available receivables. In connection with each of these
securitization facilities, Time Warner sells, on a revolving and nonrecourse
basis, certain of its accounts receivables ("Pooled Receivables") to a wholly
owned, special purpose entity which, in turn, sells a percentage ownership
interest in the Pooled Receivables to a third-party, commercial paper conduit
sponsored by a financial institution. In addition, Time Warner services the
Pooled Receivables on behalf of the special purpose entity. Income received by
Time Warner in exchange for this service is equal to the prevailing market rate
for such services and has not been material in any period. These securitization
transactions have been accounted for as a sale in accordance with FASB Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Accordingly, accounts receivable sold under
this securitization program have been reflected as a reduction in receivables in
the accompanying consolidated balance sheet. Net proceeds received under this
securitization program were $134 million in 2000, $228 million in 1999 and $17
million in 1998.
46
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Time Warner retains an ownership interest in the Pooled Receivables in
the form of an interest-bearing note receivable. The note receivable, which has
been adjusted to reflect the portion that is not expected to be collectible,
bears an interest rate that varies with the prevailing market interest rates.
For this reason and because the accounts receivables underlying the retained
ownership interest that are sold to the special purpose entity are generally
short term in nature, the fair value of the note receivable approximated
its carrying value at both December 31, 2000 and 1999.
Time Warner, through TWE, also has an asset securitization facility,
which effectively provides for the accelerated receipt of up to $500 million of
cash through the year 2001 on available licensing contracts. Assets securitized
under this facility consist of cash contracts for the licensing of theatrical
and television product for broadcast network and syndicated television
exhibition, under which revenues have not been recognized because such product
is not available for telecast until a later date ("Backlog Contracts"). In
connection with this securitization facility, Time Warner sells, on a revolving
and nonrecourse basis, certain of its Backlog Contracts ("Pooled Backlog
Contracts") to a wholly owned, special purpose entity which, in turn, sells a
percentage ownership interest in the Pooled Backlog Contracts to a third-party,
commercial paper conduit sponsored by a financial institution.
Because the Backlog Contracts securitized under this facility consist
of cash contracts for the licensing of theatrical and television product that
have already been produced, the recognition of revenue for such completed
product is only dependent upon the commencement of the availability period for
telecast under the terms of the licensing agreements. Accordingly, the proceeds
received under the program are classified as deferred revenues in long-term
liabilities in the accompanying consolidated balance sheet. In 2000,
approximately $35 million of net proceeds were received under this
securitization program. This compares to approximately $15 million of net
proceeds repaid under this securitization program in 1999.
Additional financial information with respect to cash flows is as
follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998 1998
HISTORICAL HISTORICAL PRO FORMA HISTORICAL
---------- ---------- --------- ----------
(MILLIONS)
Cash payments made for interest............................. $1,477 $1,406 $1,343 $ 812
Cash payments made for income taxes......................... 534 424 356 261
Tax-related distributions received from TWE................. - - - 314
Income tax refunds received................................. 41 47 56 52
Noncash investing activities in 2000 and 1999 included the exchange of
certain cable television systems (Note 3). Noncash investing activities in 1998
included the exchange of certain cable television systems, the Time Warner
Telecom Reorganization, the formation of the Road Runner Joint Venture and the
TWE-A/N Transfers (Note 3). Noncash financing activities in 2000, 1999 and 1998
included the conversion of convertible preferred stock into shares of common
stock (Note 14). Noncash financing activities in 1998 included the conversion of
$1.15 billion of Zero-Coupon Convertible Notes into 37.4 million shares of
common stock (Note 9).
47
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of:
YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998 1998
HISTORICAL HISTORICAL PRO FORMA HISTORICAL
---------- ---------- --------- ----------
(MILLIONS)
Road Runner restructuring charge....................................... $ (41) $ - $ - $ -
Write-down of investment in Columbia House............................. (220) - - -
Merger-related costs................................................... (145) - - -
Gain on Time Warner Telecom IPO........................................ - 115 - -
Write-down of investment in Primestar.................................. - - (210) -
Other investment-related activity, principally net losses of
corporate-related equity investees................................ (427) (274) (198) (81)
Losses on asset securitization programs................................ (176) (114) (104) (77)
Other corporate finance-related activity............................... (19) (31) 3 1
Miscellaneous.......................................................... (26) (98) (80) (70)
------- ----- ----- -----
Total other income (expense), net...................................... $(1,054) $(402) $(589) $(227)
======= ===== ===== =====
OTHER CURRENT LIABILITIES
Other current liabilities consist of:
DECEMBER 31,
------------------
2000 1999
---- ----
(MILLIONS)
Accrued expenses................................................................. $3,787 $3,111
Accrued compensation............................................................. 974 1,026
Accrued income taxes............................................................. 142 105
Deferred revenues................................................................ 597 597
------ -------
Total............................................................................ $5,500 $4,839
====== ======
48
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
TIME WARNER INC.
We have audited the accompanying consolidated balance sheet of Time
Warner Inc. ("Time Warner") as of December 31, 2000 and 1999, and the related
consolidated statements of operations, cash flows and shareholders' equity for
each of the three years in the period ended December 31, 2000. Our audits also
included the accompanying financial statement schedule and supplementary
information. These financial statements, schedule and supplementary information
are the responsibility of Time Warner's management. Our responsibility is to
express an opinion on these financial statements, schedule and supplementary
information based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Time
Warner at December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule and supplementary information, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in
2000 Time Warner changed its film accounting method.
ERNST & YOUNG LLP
New York, New York
January 31, 2001
49
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the
period ended December 31, 2000 set forth below has been derived from and should
be read in conjunction with the financial statements and other financial
information presented elsewhere herein. Capitalized terms are as defined and
described in such consolidated financial statements, or elsewhere herein.
Certain reclassifications have been made to conform to the 2000 presentation.
The selected financial information for 2000 and 1999 reflects the
consolidation of the Entertainment Group, which substantially consists of TWE,
retroactive to the beginning of 1999. The selected historical financial
information for all prior periods has not been changed. However, in order to
enhance comparability, pro forma financial statements for 1998 reflecting the
consolidation of the Entertainment Group are presented supplementally.
The selected historical financial information for 1998 reflects (i) the
TWE-A/N Transfers and (ii) the redemption of Time Warner's Series M Preferred
Stock at an aggregate cost of approximately $2.1 billion using proceeds from the
issuance of lower-cost debt.
The selected historical financial information for 1996 reflects (i) the
use of approximately $1.55 billion of net proceeds from the issuance of Series M
Preferred Stock to reduce outstanding indebtedness and (ii) the acquisitions of
TBS and Cablevision Industries Corporation and related companies, resulting in
(a) the issuance of an aggregate 6.3 million shares of Time Warner preferred
stock having a total liquidation preference of $633 million and 365.4 million
shares of Time Warner common stock and (b) the assumption or incurrence of
approximately $4.8 billion of indebtedness.
Per common share amounts and average common shares have been restated
to give effect to the two-for-one common stock split that occurred on December
15, 1998.
50
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION--(CONTINUED)
SELECTED OPERATING STATEMENT INFORMATION YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
2000 1999 1998 1998 1997 1996
PRO
HISTORICAL(a) HISTORICAL(a) FORMA(a) HISTORICAL(a) HISTORICAL(a) HISTORICAL(a)
---------- ---------- ----- ---------- ---------- ----------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues(a)(b)................................... $28,514 $27,123 $26,070 $14,408 $13,148 $9,924
Business segment operating income(b)(c)(d)(e)(f). 3,859 6,051 3,122 1,486 1,241 897
Equity in pretax income of Entertainment
Group(g)...................................... - - - 356 686 290
Interest expense(h).............................. (1,696) (1,511) (1,451) (891) (1,049) (968)
Other income (expense), net(e)(i)................ (1,054) (402) (589) (227) 106 (65)
Income (loss) before extraordinary loss on
retirement of debt and cumulative effect of
accounting change............................. 268 1,960 168 168 301 (156)
Net income (loss)(j)............................. (175) 1,948 168 168 246 (191)
Net income (loss) applicable to common shares
(after preferred dividends)(j)(k)............. (189) 1,896 (372) (372) (73) (448)
Per share of common stock(k):
Basic net income (loss)....................... $(0.14) $ 1.50 $(0.31) $(0.31) $(0.06) $(0.52)
Diluted net income (loss)..................... $(0.14) $ 1.42 $(0.31) $(0.31) $(0.06) $(0.52)
Dividends..................................... $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18
Average common shares:
Basic......................................... 1,318.6 1,267.0 1,194.7 1,194.7 1,135.4 862.4
Diluted....................................... 1,318.6 1,398.3 1,194.7 1,194.7 1,135.4 862.4
---------------
(a) Revenues reflect the provisions of SAB 101, which was adopted in the fourth
quarter of 2000, and other reclassifications to conform to the 2000
presentation. The impact of SAB 101 was to reduce revenues and costs by
equal amounts of $198 million in 2000, $200 million in 1999, $164 million
in 1998 (on both a historical and pro forma basis), $142 million in 1997
and $133 million in 1996.
(b) Book-of-the-Month Club was deconsolidated in 2000 after its operations were
contributed to a joint venture with Doubleday. During the years ended
December 31, 1999, 1998 (historical and pro forma), 1997 and 1996, the
Publishing segment's operating results included revenues of $321 million,
$340 million, $314 million and $284 million, respectively, EBITA income
(losses) of $(15) million, $28 million, $43 million and $37 million,
respectively, and operating income (losses) of $(18) million, $25 million,
$40 million and $37 million, respectively, relating to Book-of-the-Month
Club.
(c) Business segment operating income includes net pretax gains of
approximately $65 million recognized in 2000 and $97 million recognized in
1999, principally relating to the sale of an interest in CanalSatellite, a
satellite television platform servicing France and Monaco, a pretax charge
of $24 million recognized in 2000 in connection with the Six Flags
litigation, pretax gains of $10 million recognized in 2000, $40 million
recognized in 1999 and $30 million recognized in 1998 related to the
partial recognition of a deferred gain in connection with the 1998 sale of
Six Flags, a pretax gain of approximately $215 million recognized in 1999
in connection with the early termination and settlement of a long-term,
home video distribution agreement and a noncash pretax charge of $106
million relating to Warner Bros.'s retail stores.
(d) Business segment operating income includes net pretax gains related to the
sale or exchange of certain cable television systems and investments of
approximately $37 million in 2000, $2.247 billion in 1999, $18 million in
1998 ($108 million on a pro forma basis) and $12 million in 1997.
(e) Effective January 1, 2000, management reclassified Time Warner's share of
the segment operating results of Columbia House from its Music segment to
other, net. Accordingly, segment operating results for 1999, 1998, 1997 and
1996 have been reclassified to conform to the 2000 presentation.
(f) Business segment operating income includes a pretax charge of approximately
$44 million recognized in 2000 to reduce the carrying value of certain
digital media investments due to significant declines in market value in
the fourth quarter.
(g) Time Warner's equity in the pretax income of the Entertainment Group
includes approximately $120 million of net losses in 1998 and $450 million
of gains in 1997 relating to the sale or exchange of various cable
television systems and other investment-related activity.
(h) Interest expense includes a pretax charge of $26 million recognized in
2000, representing an accrual for additional interest in connection with
the Six Flags litigation.
(i) Other income (expense), net, includes a noncash pretax charge of
approximately $220 million recognized in 2000 to reduce the carrying value
of Time Warner's interest in Columbia House, a 50%-owned equity investee, a
pretax charge of approximately $41 million recognized in 2000 in connection
with the Road Runner Joint Venture Restructuring, merger-related charges of
approximately $145 million relating to Time Warner's merger with America
Online and Time Warner's recently terminated merger agreement with EMI, an
approximate $115 million pretax gain recognized in 1999 in connection with
the initial public offering of a 20% interest in Time Warner Telecom, Inc.,
a net pretax charge of $210 million recognized in 1998 relating to the
write-down of TWE's carrying value of Primestar and a $200 million pretax
gain recognized in 1997 relating to the disposal of Time Warner's interest
in Hasbro and the related redemption of certain mandatorily redeemable
preferred securities of a subsidiary.
(j) Net income (loss) includes the cumulative effect of accounting change of
$443 million in 2000 and an extraordinary loss on the retirement of debt of
$12 million in 1999, $55 million in 1997 and $35 million in 1996.
(k) 1998 preferred dividend requirements include a one-time effect of $234
million relating to the premium paid in connection with the redemption of
Time Warner's Series M Preferred Stock.
51
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION--(CONTINUED)
SELECTED BALANCE SHEET INFORMATION DECEMBER 31,
------------------------------------------------------------------
2000 1999 1998 1998 1997 1996
HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL HISTORICAL
---------- ---------- --------- ---------- ---------- ----------
(MILLIONS)
Cash and equivalents............................. $ 690 $ 1,284 $ 529 $ 442 $ 645 $ 514
Total assets..................................... 52,201 51,457 48,124 31,813 34,366 35,188
Debt due within one year......................... 45 22 25 19 8 11
Long-term debt................................... 19,907 18,083 17,503 10,925 11,833 12,713
Borrowings against future stock option proceeds.. - 1,243 895 895 533 488
Mandatorily redeemable preferred securities
of subsidiaries............................... 575 575 792 575 575 949
Series M exchangeable preferred stock............ - - - - 1,857 1,672
Shareholders' equity:
Preferred stock liquidation preference........... 310 840 2,260 2,260 3,539 3,559
Equity applicable to common stock................ 9,651 8,873 6,592 6,592 5,817 5,943
Total shareholders' equity....................... 9,961 9,713 8,852 8,852 9,356 9,502
Total capitalization............................. 30,488 29,636 28,067 21,266 24,162 25,335
52
TIME WARNER INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
NET BASIC NET DILUTED
INCOME INCOME NET INCOME
BUSINESS (LOSS) (LOSS) PER (LOSS) PER DIVIDENDS BASIC DILUTED
SEGMENT NET APPLICABLE COMMON COMMON PER AVERAGE AVERAGE COMMON STOCK
OPERATING INCOME TO COMMON SHARE SHARE COMMON COMMON COMMON ---------------
QUARTER REVENUES(a) INCOME (LOSS) SHARES (e) (e) SHARE(e) SHARES SHARES HIGH LOW
------- -------- ------ ------ ------ --------- ---------- ----- ------ ------ ---- ---
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
2000
1st (b)(c) $ 6,502 $ 832 $ (544) $ (549) $(0.42) $(0.42) $0.045 1,301.5 1,301.5 $104.94 $64.75
2nd (c) 7,024 961 75 72 0.05 0.05 0.045 1,319.4 1,319.4 99.00 72.25
3rd (c) 6,811 937 88 85 0.06 0.06 0.045 1,324.2 1,324.2 89.25 74.94
4th (c) 8,177 1,129 206 203 0.15 0.15 0.045 1,329.2 1,329.2 91.24 52.24
Year (c) 28,514 3,859 (175) (189) (0.14) (0.14) 0.18 1,318.6 1,318.6 104.94 52.24
1999
1st (d) $ 6,046 $ 935 $ 138 $ 120 $0.10 $0.10 $0.045 1,243.1 1,243.1 $72.44 $58.88
2nd (d) 6,459 1,703 593 575 0.46 0.43 0.045 1,249.3 1,403.7 78.25 62.00
3rd (d) 6,682 1,295 369 360 0.28 0.27 0.045 1,288.9 1,397.8 77.31 58.50
4th (d) 7,936 2,118 848 841 0.65 0.62 0.045 1,286.5 1,391.8 72.31 59.63
Year (d) 27,123 6,051 1,948 1,896 1.50 1.42 0.18 1,267.0 1,398.3 78.25 58.50
-------------------
(a) Revenues reflect the provisions of SAB 101, which was adopted in the fourth
quarter of 2000, and other reclassifications to conform to the 2000
presentation. The impact of SAB 101 was to reduce revenues and costs by
equal amounts of $58 million, $53 million, $59 million and $28 million in
the first, second, third and fourth quarters of 2000, respectively, thereby
aggregating $198 million for the year, and $42 million, $70 million, $39
million and $49 million in the first, second, third and fourth quarters of
1999, respectively, thereby aggregating $200 million for the year.
(b) First quarter operating results reflect the provisions of SOP 00-2, which
was adopted in the second quarter of 2000, retroactively to the beginning
of 2000.
(c) Time Warner's income per common share in 2000 has been affected by certain
significant nonrecurring items. These items consisted of (i) a net pretax,
investment-related gain of approximately $65 million recognized in the
third quarter, principally relating to additional proceeds received in
connection with the 1999 sale of an interest in CanalSatellite, a satellite
television platform servicing France and Monaco, (ii) net pretax gains
(losses) relating to the sale or exchange of various cable television
systems and investments of $28 million recognized in the first quarter,
$(7) million recognized in the second quarter and $16 million recognized in
the fourth quarter, thereby aggregating $37 million of net pretax gains for
the year, (iii) a $50 million pretax charge recognized in the second
quarter relating to the Six Flags litigation, (iv) a pretax gain of $10
million recognized in the first quarter relating to the partial recognition
of a deferred gain on the 1998 sale of Six Flags, (v) merger-related costs
relating to Time Warner's proposed merger with America Online and Time
Warner's recently terminated merger agreement with EMI of approximately $46
million recognized in the first quarter, $31 million recognized in the
second quarter, $52 million recognized in the third quarter and $16 million
recognized in the fourth quarter, thereby aggregating $145 million for the
year, (vi) a pretax charge of $41 million recognized in the fourth quarter
relating to the Road Runner Joint Venture restructuring, (vii) a noncash
pretax charge of $44 million recognized in the fourth quarter to reduce the
carrying value of Time Warner's digital media investment portfolio,
primarily due to significant market declines experienced in the fourth
quarter, (viii) a noncash pretax charge of approximately $220 million
recognized in the first quarter relating to the write-down of Time Warner's
carrying value of its investment in Columbia House and (ix) a noncash,
after-tax charge of $443 million (impact of $0.33 per basic and diluted
common share) recognized in the first quarter reflecting the cumulative
effect of an accounting change in connection with the adoption of a new
film accounting standard. The aggregate net effect of these items in 2000
was to decrease basic income per common share by $0.46 in the first
quarter, $0.06 in the second quarter, $0.01 in the third quarter and $0.03
in the fourth quarter, thereby aggregating $0.53 per common share for the
year (see Note (e) below).
(d) Time Warner's income per common share in 1999 has been affected by certain
significant nonrecurring items. These items consisted of (i) a pretax gain
of $10 million recognized in each quarter of 1999 relating to the partial
recognition of a deferred gain on the 1998 sale of Six Flags, thereby
aggregating $40 million for the year, (ii) a net pretax gain of
approximately $215 million recognized in the first quarter relating to the
early termination and settlement of a long-term, home video distribution
agreement, (iii) a net pretax gain of approximately $97 million recognized
in the fourth quarter in connection with the sale of an interest in
CanalSatellite, (iv) a noncash pretax charge of approximately $106 million
recognized in the fourth quarter relating to Warner Bros.'s retail stores,
(v) an approximate $115 million pretax gain recognized in the second
quarter in connection with the initial public offering of a 20% interest in
Time Warner Telecom Inc., (vi) gains relating to the sale and exchange of
various cable television systems and investments of $771 million recognized
in the second quarter, $477 million recognized in the third quarter and
$999 million recognized in the fourth quarter, thereby aggregating to
$2.247 billion for the year and (vii) an extraordinary loss on retirement
of debt of $12 million (impact of $0.01 per basic and diluted common share)
recognized in the third quarter. The aggregate net effect of these items in
1999 was to increase basic income per common share by $.11 in the first
quarter, $.35 in the second quarter, $.21 in the third quarter and $.45 in
the fourth quarter, thereby aggregating $1.13 per common share for the year
(see Note (e) below).
(e) Per common share amounts for the quarters and full years have each been
calculated separately. Accordingly, quarterly amounts may not add to the
annual amounts because of differences in the average common shares
outstanding during each period and, with regard to diluted per common share
amounts only, because of the inclusion of the effect of potentially
dilutive securities only in the periods in which such effect would have
been dilutive.
53
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Time Warner Companies, Inc. ("TW Companies") and Turner Broadcasting
System, Inc. ("TBS" and, together with TW Companies, the "Guarantor
Subsidiaries") are wholly owned subsidiaries of Time Warner Inc. ("Time
Warner"). Time Warner, TW Companies and TBS have fully and unconditionally, and
jointly and severally, guaranteed all of the outstanding publicly traded
indebtedness of each other. Set forth below are condensed consolidating
financial statements of Time Warner, including each of the Guarantor
Subsidiaries, presented for the information of each company's public
debtholders. Separate financial statements and other disclosures relating to the
Guarantor Subsidiaries have not been presented because management has determined
that this information would not be material to such debtholders. The following
condensed consolidating financial statements present the results of operations,
financial position and cash flows of (i) 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 Time Warner and (iii) the eliminations necessary to arrive at
the information for Time Warner on a consolidated basis. These condensed
consolidating financial statements should be read in conjunction with the
accompanying consolidated financial statements of Time Warner.
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ --------- --- ------------ ------------ -----------
(MILLIONS)
Revenues................................... $ - $ - $ 906 $27,635 $ (27) $ 28,514
------ ------ ----- ------- ------- --------
Cost of revenues............................ - - (356) (15,438) (2) (15,796)
Selling, general and administrative......... - - (257) (7,351) - (7,608)
Amortization of goodwill and other
intangible assets........................ - - - (1,353) - (1,353)
Gain on sale or exchange of cable
systems and investments.................. - - - 37 - 37
Gain on sale of interest in CanalSatellite.. - - - 65 - 65
------ ------ ----- ------- ------- --------
Business segment operating income........... - - 293 3,595 (29) 3,859
Equity in pretax income of consolidated
subsidiaries............................. 1,182 1,347 423 - (2,952) -
Interest expense............................ (219) (604) (196) (679) 2 (1,696)
Other income (expense), net................. (192) 2 15 (842) (37) (1,054)
Corporate expenses.......................... (100) (61) (17) (144) 148 (174)
Minority interest........................... - (1) - (263) - (264)
------ ------ ----- ------- ------- --------
Income before income taxes and cumulative
effect of accounting change.............. 671 683 518 1,667 (2,868) 671
Income taxes................................ (403) (381) (282) (802) 1,465 (403)
------ ------ ----- ------- ------- --------
Income before cumulative effect of
accounting change........................ 268 302 236 865 (1,403) 268
Cumulative effect of accounting change,
net of income tax benefit................ (443) (340) (128) (443) 911 (443)
------ ------ ----- ------- ------- --------
Net income (loss)........................... $ (175) $ (38) $ 108 $ 422 $ (492) $ (175)
====== ====== ===== ======= ======= ========
54
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ --------- --- ------------ ------------ ------------
(MILLIONS)
Revenues.................................... $ - $ - $868 $26,306 $ (51) $27,123
------ ------- ---- ------- -------- -------
Cost of revenues............................ - - (362) (14,422) 51 (14,733)
Selling, general and administrative......... - - (228) (7,285) - (7,513)
Amortization of goodwill and other
intangible assets........................ - - - (1,279) - (1,279)
Gain on sale or exchange of cable
systems and investments.................. - - - 2,247 - 2,247
Gain on early termination of video
distribution agreement................... - - - 215 - 215
Gain on sale of interest in CanalSatellite.. - - - 97 - 97
Write-down of retail store assets........... - - - (106) - (106)
------- -------- -------- ------- -------- ------
Business segment operating income........... - - 278 5,773 - 6,051
Equity in pretax income of consolidated
subsidiaries............................. 3,857 4,050 460 - (8,367) -
Interest expense............................ (152) (660) (168) (533) 2 (1,511)
Other income (expense), net................. (114) 39 20 (255) (92) (402)
Corporate expenses.......................... (91) (57) (16) (138) 139 (163)
Minority interest........................... - (52) - (423) - (475)
--------- -------- ------- ------- ---------- ------
Income before income taxes and
extraordinary item....................... 3,500 3,320 574 4,424 (8,318) 3,500
Income taxes................................ (1,540) (1,445) (297) (1,909) 3,651 (1,540)
------ ------ ---- ------- ------ ------
Income before extraordinary item............ 1,960 1,875 277 2,515 (4,667) 1,960
Extraordinary loss on retirement of debt,
net of income tax benefit................ (12) (12) - - 12 (12)
------- ------- ------ -------- ------- ------
Net income.................................. $1,948 $1,863 $ 277 $ 2,515 $(4,655) $ 1,948
====== ====== ====== ======= ======= =======
55
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ --------- --- ------------ ------------ ------------
(MILLIONS)
Revenues ................................... $ - $ - $720 $13,712 $ (24) $14,408
----- ------ ---- ------- ------- -------
Cost of revenues............................ - - (303) (7,078) 24 (7,357)
Selling, general and administrative......... - - (211) (4,591) - (4,802)
Amortization of goodwill and other
intangible assets........................ - - - (781) - (781)
Gain on sale or exchange of cable systems
and investments.......................... - - - 18 - 18
----- ----- ------ ------- ------ -------
Business segment operating income........... - - 206 1,280 - 1,486
Equity in pretax income of consolidated
subsidiaries............................. 770 1,283 327 - (2,380) -
Equity in pretax income of Entertainment
Group ................................... - - - 423 (67) 356
Interest expense............................ 14 (715) (176) (14) - (891)
Other income (expense), net................. (112) 11 17 (79) (64) (227)
Corporate expenses.......................... (86) (55) (16) (64) 135 (86)
Minority interest........................... - (52) - - - (52)
------- ------ ------- -------- -------- -------
Income before income taxes.................. 586 472 358 1,546 (2,376) 586
Income taxes................................ (418) (322) (212) (816) 1,350 (418)
---- ----- ----- ----- ------ ------
Net income.................................. $168 $ 150 $146 $ 730 $(1,026) $ 168
==== ====== ==== ====== ======= =======
56
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ ----- ------------
(MILLIONS)
ASSETS
CURRENT ASSETS
Cash and equivalents....................................... $ (1) $ 198 $ 40 $ 453 $ - $ 690
Receivables, net........................................... 37 20 98 5,265 - 5,420
Inventories................................................ - - 117 1,466 - 1,583
Prepaid expenses........................................... 24 - 5 1,408 - 1,437
----- ------ ------ ------- ------ -------
Total current assets....................................... 60 218 260 8,592 - 9,130
Noncurrent inventories and film costs...................... - - 278 4,797 - 5,075
Investments in and amounts due to and from
consolidated subsidiaries............................... 15,074 15,188 8,696 - (38,958) -
Other investments.......................................... 299 6 25 1,979 (761) 1,548
Property, plant and equipment.............................. 33 - 59 10,056 - 10,148
Music catalogues, contracts and copyrights................. - - - 707 - 707
Cable television and sports franchises..................... - - - 8,055 - 8,055
Goodwill................................................... - - - 15,594 - 15,594
Other assets............................................... 189 94 80 1,581 - 1,944
------ ------ ------ ------- ------ -------
Total assets............................................... $15,655 $15,506 $9,398 $51,361 $(39,719) $52,201
======= ======= ====== ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................... $ 43 $ - $ 13 $ 1,964 $ - $ 2,020
Participations payable..................................... - - - 1,190 - 1,190
Royalties and programming costs payable.................... - - 13 1,475 - 1,488
Debt due within one year................................... - - - 45 - 45
Other current liabilities.................................. 398 199 192 4,714 (3) 5,500
------ ------ ------ ------- ------ -------
Total current liabilities.................................. 441 199 218 9,388 (3) 10,243
Long-term debt ............................................ 1,585 6,278 748 11,296 - 19,907
Debt due to affiliates..................................... - - 1,647 158 (1,805) -
Deferred income taxes...................................... 3,079 2,997 162 3,159 (6,318) 3,079
Unearned portion of paid subscriptions..................... - - - 832 - 832
Other liabilities.......................................... 591 - 197 3,452 - 4,240
Minority interests......................................... - - - 3,364 - 3,364
TW Companies-obligated mandatorily redeemable
preferred securities of a subsidiary holding solely
subordinated debentures of TW Companies................. - - - 575 - 575
SHAREHOLDERS' EQUITY
Due from Time Warner and subsidiaries...................... - (1,973) (1,461) (4,997) 8,431 -
Other shareholders' equity................................. 9,959 8,005 7,887 24,134 (40,024) 9,961
------- ------- ------- ------- ------- -------
Total shareholders' equity................................. 9,959 6,032 6,426 19,137 (31,593) 9,961
------- ------- ------- ------- ------- -------
Total liabilities and shareholders' equity................. $15,655 $15,506 $9,398 $51,361 $(39,719) $52,201
======= ======= ====== ======= ======== =======
57
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ ----- ------------
(MILLIONS)
ASSETS
CURRENT ASSETS
Cash and equivalents....................................... $ - $ 366 $ 77 $ 841 $ - $ 1,284
Receivables, net........................................... 18 27 89 4,797 - 4,931
Inventories................................................ - - 125 1,347 - 1,472
Prepaid expenses........................................... 12 - 4 1,397 - 1,413
----- ------ ------ ------- ----- ------
Total current assets....................................... 30 393 295 8,382 - 9,100
Noncurrent inventories and film costs...................... - - 203 5,073 - 5,276
Investments in and amounts due to and from
consolidated subsidiaries............................... 17,212 16,711 9,354 - (43,277) -
Other investments.......................................... 236 7 24 2,562 (733) 2,096
Property, plant and equipment.............................. 42 - 47 8,639 - 8,728
Music catalogues, contracts and copyrights................. - - - 782 - 782
Cable television and sports franchises..................... - - - 8,472 - 8,472
Goodwill................................................... - - - 15,458 - 15,458
Other assets............................................... 91 103 65 1,286 - 1,545
------- ------ ------ ------- ------- -------
Total assets............................................... $17,611 $17,214 $9,988 $50,654 $(44,010) $51,457
======= ======= ====== ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................... $ 13 $ - $ 25 $ 1,885 $ - $ 1,923
Participations payable..................................... - - - 1,403 - 1,403
Royalties and programming costs payable.................... - - 35 1,529 - 1,564
Debt due within one year................................... - - - 22 - 22
Other current liabilities.................................. 342 190 150 4,195 (38) 4,839
------ ------ ------ ------ ------ ------
Total current liabilities.................................. 355 190 210 9,034 (38) 9,751
Long-term debt ............................................ 1,585 6,745 746 9,007 - 18,083
Debt due to affiliates..................................... - - 1,647 158 (1,805) -
Borrowings against future stock option proceeds............ 1,243 - - - - 1,243
Deferred income taxes...................................... 4,234 3,978 337 4,314 (8,629) 4,234
Unearned portion of paid subscriptions..................... - - - 762 - 762
Other liabilities.......................................... 481 - 130 3,299 - 3,910
Minority interests......................................... - - - 3,186 - 3,186
TW Companies-obligated mandatorily redeemable
preferred securities of a subsidiary holding solely
subordinated debentures of TW Companies................. - - - 575 - 575
SHAREHOLDERS' EQUITY
Due from Time Warner and subsidiaries...................... - (1,997) (903) (3,791) 6,691 -
Other shareholders' equity................................. 9,713 8,298 7,821 24,110 (40,229) 9,713
------ ------- ------ ------ ------- ------
Total shareholders' equity................................. 9,713 6,301 6,918 20,319 (33,538) 9,713
------ ------- ------ ------ ------- ------
Total liabilities and shareholders' equity................. $17,611 $17,214 $9,988 $50,654 $(44,010) $51,457
======= ======= ====== ======= ======== =======
58
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ ----- ------------
(MILLIONS)
OPERATIONS
Net income (loss).......................................... $(175) $ (38) $ 108 $ 422 $ (492) $ (175)
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change.................. 443 340 128 443 (911) 443
Depreciation and amortization........................... - - 9 2,648 - 2,657
Amortization of film costs.............................. - - - 2,032 - 2,032
Noncash interest expense................................ - 4 - - - 4
Gain on sale or exchange of cable systems and
investments........................................... - - - (37) - (37)
Excess (deficiency) of distributions over equity in pretax
income of consolidated subsidiaries................... 21 (234) 368 - (155) -
Equity in losses of other investee companies after
distributions......................................... - 2 - 531 75 608
Changes in operating assets and liabilities................ (557) 3 (68) (2,113) (113) (2,848)
----- ----- --- ------ ------ -------
Cash provided by operations................................ (268) 77 545 3,926 (1,596) 2,684
----- ---- ---- ------ ------ ------
INVESTING ACTIVITIES
Investments and acquisitions............................... - - - (1,216) - (1,216)
Advances to parents and consolidated subsidiaries.......... - - - (1,443) 1,443 -
Repayment of advances from consolidated subsidiaries....... - 198 - - (198) -
Capital expenditures....................................... - - (24) (2,749) - (2,773)
Investment proceeds........................................ - - - 425 - 425
------ ------ ------ ------- ------ -------
Cash provided (used) by investing activities............... - 198 (24) (4,983) 1,245 (3,564)
------ ----- ------ ------ ------ -------
FINANCING ACTIVITIES
Borrowings................................................. - 111 - 4,445 - 4,556
Debt repayments............................................ - (578) - (2,464) - (3,042)
Change in due to/from parent............................... 1,443 24 (558) (1,260) 351 -
Borrowings against future stock option proceeds............ 2 - - - - 2
Repayments against future stock option proceeds............ (1,245) - - - - (1,245)
Repurchases of Time Warner common stock.................... (65) - - - - (65)
Dividends paid............................................. (254) - - - - (254)
Proceeds received from stock option and dividend
reinvestment plans...................................... 386 - - - - 386
Other...................................................... - - - (52) - (52)
-------- ------ ------ ------ ------ ----
Cash provided (used) by financing activities............... 267 (443) (558) 669 351 286
------ ------ ------ ----- ------ ------
DECREASE IN CASH AND
EQUIVALENTS............................................. (1) (168) (37) (388) - (594)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD..................................... - 366 77 841 - 1,284
-------- ------ ----- ------ ------ ------
CASH AND EQUIVALENTS AT END OF PERIOD...................... $ (1) $ 198 $ 40 $ 453 $ - $ 690
======= ====== ====== ====== ====== =======
59
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ ------- ------------
(MILLIONS)
OPERATIONS
Net income................................................. $1,948 $1,863 $ 277 $2,515 $(4,655) $1,948
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt................ 12 12 - - (12) 12
Depreciation and amortization........................... - - 9 2,501 - 2,510
Amortization of film costs.............................. - - - 2,268 - 2,268
Noncash interest expense................................ - 4 - - - 4
Gain on sale or exchange of cable systems and
investments........................................... - - - (2,247) - (2,247)
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries............ (1,675) (1,279) 119 - 2,835 -
Equity in losses of other investee companies after
distributions......................................... - 4 - 330 83 417
Changes in operating assets and liabilities................ (195) (145) 85 (153) (551) (959)
------ ------ ----- ----- ------ -----
Cash provided by operations................................ 90 459 490 5,214 (2,300) 3,953
------ ----- ----- ----- ------ ------
INVESTING ACTIVITIES
Consolidation of the Entertainment Group's cash and
equivalents............................................. - - - 87 - 87
Investments and acquisitions............................... - - - (870) - (870)
Advances to parents and consolidated subsidiaries.......... - - - (1,558) 1,558 -
Repayment of advances from consolidated subsidiaries....... - 140 - 232 (372) -
Capital expenditures....................................... - - (14) (2,217) - (2,231)
Investment proceeds........................................ - - - 1,084 - 1,084
------ ---- ----- ------ ------ ------
Cash provided (used) by investing activities............... - 140 (14) (3,242) 1,186 (1,930)
------ ---- ----- ------ ------ ------
FINANCING ACTIVITIES
Borrowings................................................. - 173 - 4,159 - 4,332
Debt repayments............................................ - (767) - (2,982) - (3,749)
Change in due to/from parent............................... 1,326 316 (424) (2,332) 1,114 -
Borrowings against future stock option proceeds............ 348 - - - - 348
Redemption of mandatorily redeemable preferred
securities of subsidiary................................ - - - (217) - (217)
Repurchases of Time Warner common stock.................... (1,896) - - - - (1,896)
Dividends paid............................................. (289) - - - - (289)
Proceeds received from stock option and dividend
reinvestment plans...................................... 421 - - - - 421
Other...................................................... - (21) - (110) - (131)
----- ------ ----- ------ -------- -----
Cash used by financing activities.......................... (90) (299) (424) (1,482) 1,114 (1,181)
----- ----- ----- ------ ------ ------
INCREASE IN CASH AND
EQUIVALENTS............................................. - 300 52 490 - 842
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD..................................... - 66 25 351 - 442
------ ----- ----- ------ ------ -----
CASH AND EQUIVALENTS AT END OF PERIOD...................... $ - $ 366 $ 77 $ 841 $ - $1,284
======= ====== ====== ====== ======= ======
60
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ ----- ------------
(MILLIONS)
OPERATIONS
Net income................................................. $ 168 $ 150 $ 146 $ 730 $(1,026) $ 168
Adjustments for noncash and nonoperating items:
Depreciation and amortization........................... - - 9 1,150 - 1,159
Amortization of film costs.............................. - - - 542 - 542
Noncash interest expense................................ - 30 - - - 30
Gain on sale or exchange of cable systems and
investments........................................... - - - (18) - (18)
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries............ 1,767 (666) 374 - (1,475) -
Excess of distributions over equity in pretax income
of Entertainment Group................................ - - - 275 67 342
Equity in losses of other investee companies after
distributions......................................... - - - 109 57 166
Changes in operating assets and liabilities................ 212 2,869 (426) (1,062) (2,137) (544)
------- ------ ------ ------ ------ ------
Cash provided by operations................................ 2,147 2,383 103 1,726 (4,514) 1,845
------ ------ ------ ------ ------ ------
INVESTING ACTIVITIES
Investments and acquisitions............................... (213) - - 54 - (159)
Advances to parents and consolidated subsidiaries.......... - (2,716) - (263) 2,979 -
Repayment of advances from consolidated subsidiaries....... 75 - - - (75) -
Capital expenditures....................................... - - (12) (500) - (512)
Investment proceeds........................................ - - - 569 - 569
Proceeds received from distribution of TWE Senior
Capital................................................. - - - 455 - 455
----- ----- ----- ----- ----- -----
Cash provided (used) by investing activities............... (138) (2,716) (12) 315 2,904 353
---- ------ ----- ----- ------ -----
FINANCING ACTIVITIES
Borrowings................................................. 1,584 498 - 1,661 - 3,743
Debt repayments............................................ - (500) (75) (1,817) 75 (2,317)
Change in due to/from parent............................... 220 43 - (1,798) 1,535 -
Borrowings against future stock option proceeds............ 1,015 - - - - 1,015
Repayments of borrowings against future stock
option proceeds......................................... (653) - - - - (653)
Repurchases of Time Warner common stock.................... (2,240) - - - - (2,240)
Redemption of Series M Preferred Stock..................... (2,093) - - - - (2,093)
Dividends paid............................................. (524) - - - - (524)
Proceeds received from stock option and dividend
reinvestment plans...................................... 740 - - - - 740
Other...................................................... (58) (14) - - - (72)
------ ------ ----- ----- ------ ------
Cash provided (used) by financing activities............... (2,009) 27 (75) (1,954) 1,610 (2,401)
------ ------ ----- ------ ------ ------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................................. - (306) 16 87 - (203)
------ ------ ----- ------ ------ ------
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD..................................... - 372 9 264 - 645
----- ------ ----- ----- ----- -----
CASH AND EQUIVALENTS AT END OF PERIOD...................... $ - $ 66 $ 25 $ 351 $ - $ 442
====== ===== ===== ====== ====== ======
61
TIME WARNER INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CONSOLIDATION ADDITIONS
BALANCE AT OF THE CHARGED TO BALANCE
BEGINNING ENTERTAINMENT COSTS AND AT END
DESCRIPTION OF PERIOD(a) GROUP EXPENSES DEDUCTIONS PERIOD
----------- ----------- ---- -------- ---------- ------
(MILLIONS)
2000:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts........................ $ 578 $ - $ 344 $ (285)(b) $ 637
Reserves for sales returns and allowances.............. 1,104 - 2,921 (3,034)(c)(d) 991
------ ----- ------- ------- ------
Total..................................................... $1,682 $ - $ 3,265 $(3,319) $1,628
====== ===== ======= ======= ======
Reserves deducted from amounts due to publishers
(accounts payable)
Allowance for magazine and book returns................ $ (194) $ - $(1,234) $ 1,244(d) $ (184)
====== ===== ======= ======= ======
1999:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts........................ $ 316 $ 271 $ 279 $ (288)(b) $ 578
Reserves for sales returns and allowances.............. 691 235 1,843 (1,665)(c)(d) 1,104
------ ----- ------- ------- ------
Total..................................................... $1,007 $ 506 $ 2,122 $(1,953) $1,682
====== ===== ======= ======= ======
Reserves deducted from amounts due to publishers
(accounts payable)
Allowance for magazine and book returns................ $ (220) $ - $(1,236) $ 1,262(d) $ (194)
======= ===== ======= ======= ======
1998:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts........................ $ 311 $ - $ 323 $ (318)(b) $ 316
Reserves for sales returns and allowances.............. 680 - 2,490 (2,479)(c)(d) 691
------ ----- ------- ------- -----
Total..................................................... $ 991 $ - $ 2,813 $(2,797) $1,007
====== ===== ======= ======= ======
Reserves deducted from amounts due to publishers
(accounts payable)
Allowance for magazine and book returns................ $ (171) $ - $(1,206) $ 1,157(d) $ (220)
====== ===== ======= ======= ======
---------------
(a) In 1999, Time Warner consolidated the Entertainment Group, which
substantially consists of TWE, retroactive to the beginning of 1999. Time
Warner's historical financial information for prior periods have not been
changed.
(b) Represents uncollectible receivables charged against reserve.
(c) Represents returns or allowances applied against reserve.
(d) The distribution of magazines and books not owned by Time Warner results
in a receivable recorded at the sales price and a corresponding liability
to the publisher recorded at the sales price less the distribution
commission recognized by Time Warner as revenue. Therefore, it would be
misleading to compare magazine and book revenues to the provision charged
to the reserve for magazine and book returns that is deducted from
accounts receivable without also considering the related offsetting
activity in the reserve for magazine and book returns that is deducted
from the liability due to the publishers.
62
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AOL TIME WARNER INC.
By: /s/ J. Michael Kelly
_______________________________
Name: J. Michael Kelly
Title: Executive Vice President and
Chief Financial Officer
Date: February 9, 2001
By: /s/ James W. Barge
_______________________________
Name: James W. Barge
Title: Vice President and Controller
Date: February 9, 2001
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
---- -----------------------
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Financial statements of Time Warner Entertainment Company, L.P. as of
December 31, 2000 and 1999 and for each of the years ended December
31, 2000, 1999 and 1998, including the report thereon of Ernst & Young
LLP, Independent Auditors.
99.2 Financial statements of TWE General Partners as of December 31, 2000
and 1999 and for each of the years ended December 31, 2000, 1999 and
1998, including the report thereon of Ernst & Young LLP, Independent
Auditors.