SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): January 18, 2001
AOL TIME WARNER INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 1-15062 13-4099534
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
75 Rockefeller Plaza, New York, New York 10019
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 484-8000
Item 5. Other Events.
As a result of the share repurchase program announced by AOL Time
Warner Inc. (the "Company") on January 18, 2001, three mergers previously
accounted for by America Online, Inc. as a pooling of interests in the September
30, 2000 quarter are now being accounted for under the purchase method of
accounting. The result of this change for the quarter ended September 2000
reduces net income by approximately $1 million, has no effect on earnings per
share and results in approximately $277 million of additional goodwill and other
intangible assets that will be amortized over five years.
Following are the financial statements of America Online, Inc. for the
period ended September 30, 2000, which have been updated only to reflect this
change.
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share data)
September 30, June 30,
2000 2000
------------- -------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 2,039 $2,490
Short-term investments.............................................................. 1,192 925
Trade accounts receivable, less allowances of $91 and $83, respectively............. 451 422
Other receivables, net.............................................................. 137 110
Prepaid expenses and other current assets........................................... 527 481
------------ --------
Total current assets................................................................ 4,346 4,428
Property and equipment at cost, net................................................. 1,026 991
Other assets:
Investments including available-for-sale securities................................. 4,627 4,358
Product development costs, net...................................................... 202 159
Goodwill and other intangible assets, net........................................... 786 501
Other assets........................................................................ 239 236
------------ --------
$11,226 $10,673
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.............................................................. $ 256 $ 153
Other accrued expenses and liabilities.............................................. 773 919
Deferred revenue.................................................................... 1,083 1,109
Accrued personnel costs............................................................. 119 138
Deferred network services credit.................................................... 76 76
------------ --------
Total current liabilities........................................................... 2,307 2,395
Long-term liabilities:
Notes payable....................................................................... 1,646 1,630
Deferred revenue.................................................................... 326 358
Other liabilities................................................................... 7 8
Deferred network services credit.................................................... 102 121
------------ --------
Total liabilities................................................................... 4,388 4,512
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued
or outstanding at September 30 and June 30, 2000.................................. - -
Common stock, $.01 par value; 6,000,000,000 shares authorized,
2,332,608,519 and 2,316,494,480 shares issued and outstanding at
September 30 and June 30, 2000, respectively..................................... 23 23
Additional paid-in capital.......................................................... 4,799 4,314
Accumulated other comprehensive income - unrealized gain on
available-for-sale securities, net................................................ 325 478
Retained earnings................................................................... 1,691 1,346
------------ --------
Total stockholders' equity.......................................................... 6,838 6,161
------------ --------
$11,226 $10,673
============ =========
See accompanying notes.
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions, except per share data)
(Unaudited)
Three months ended
September 30,
2000 1999
-------- --------
Revenues:
Subscription services..................................................... $1,206 $ 995
Advertising, commerce and other........................................... 649 360
Enterprise solutions...................................................... 120 122
-------- --------
Total revenues............................................................ 1,975 1,477
Costs and expenses:
Cost of revenues.......................................................... 929 792
Sales and marketing....................................................... 298 213
Product development....................................................... 59 71
General and administrative................................................ 181 123
Amortization of goodwill and other intangible assets...................... 26 18
-------- --------
Total costs and expenses.................................................. 1,493 1,217
Income from operations... ................................................ 482 260
Other income, net......................................................... 89 39
-------- --------
Income before provision for income taxes.................................. 571 299
Provision for income taxes................................................ (227) (118)
-------- --------
Net income................................................................ $ 344 $ 181
======== ========
Earnings per share:
Earnings per share-diluted................................................ $ 0.13 $ 0.07
Earnings per share-basic.................................................. $ 0.15 $ 0.08
Weighted average shares outstanding-diluted............................... 2,600 2,587
Weighted average shares outstanding-basic................................. 2,325 2,231
See accompanying notes.
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
Three months ended
September 30,
2000 1999
------- -------
Cash flows from operating activities:
Net income ............................................................................ $ 344 $ 181
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash restructuring charges......................................................... - 2
Amortization of deferred network services credit....................................... (19) (19)
Depreciation and amortization.......................................................... 110 79
Compensatory stock options............................................................. 3 3
Gain on available-for-sale securities.................................................. (34) -
Equity in loss of investees............................................................ 27 -
Deferred income taxes.................................................................. 227 117
Changes in assets and liabilities, net of the effects of acquisitions and dispositions:
Trade accounts receivable............................................................ (28) (28)
Other receivables.................................................................... (27) (43)
Prepaid expenses and other current assets............................................ (49) (28)
Other assets......................................................................... (3) (52)
Investments including available-for-sale securities.................................. (36) (99)
Accrued expenses and other current liabilities....................................... (60) 206
Deferred revenue and other liabilities............................................... (57) 147
------- -------
Total adjustments...................................................................... 54 285
------- -------
Net cash provided by operating activities.............................................. 398 466
Cash flows from investing activities:
Purchase of property and equipment..................................................... (94) (136)
Product development costs.............................................................. (52) (18)
Proceeds from sale of investments, including available-for-sale securities............. 230 -
Purchase of investments, including available-for-sale securities....................... (697) (94)
(Purchase)/Proceeds of short-term investments, net..................................... (267) 97
Other investing activities............................................................. (51) 14
------- -------
Net cash used in investing activities.................................................. (931) (137)
Cash flows from financing activities:
Proceeds from issuance of common stock, net............................................ 84 97
Principal and accrued interest payments on debt........................................ (2) (3)
------- -------
Net cash provided by financing activities.............................................. 82 94
------- -------
Net (decrease) increase in cash and cash equivalents................................... (451) 423
Cash and cash equivalents at beginning of period....................................... 2,490 936
------- -------
Cash and cash equivalents at end of period............................................. $2,039 $1,359
======= =======
Supplemental cash flow information:
Cash paid during the period for: Interest (net of amount capitalized).................. $ 2 $ 4
======= ======
See accompanying notes.
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in millions, except share data)
(Unaudited)
Accumulated
Common Stock Additional Other
----------------------- Paid-In Comprehensive Retained
Shares Amount Capital Income, Net Earnings
-------------- ------- --------- --------------- ------------
Balances at June 30, 2000................. 2,316,494,480 $ 23 $ 4,314 $ 478 $1,346
Common stock issued:
Exercise of options..................... 11,543,499 - 83 - -
Business acquisitions................... 4,278,873 - 271 - -
Amortization of compensatory
stock options.......................... - - 3 - -
Unrealized loss on
available-for-sale securities, net..... - - (90) (153) -
Tax benefit related to stock options...... - - 218 - -
Effect of immaterial pooling.............. 291,667 - - - 1
Net income................................ - - - - 344
-------------- ------- --------- --------------- ------------
Balances at September 30, 2000............ 2,332,608,519 $ 23 $ 4,799 $ 325 $1,691
============== ======= ========= =============== ============
Comprehensive
Income For The
Three Months Ended
Total September 30, 2000
--------- ---------------------
Balances at June 30, 2000................. $6,161
Common stock issued:
Exercise of options.................... 83
Business acquisitions................. 271
Amortization of compensatory
stock options.......................... 3
Unrealized loss on
available-for-sale securities, net..... (243) (153)
Tax benefit related to stock options...... 218
Effect of immaterial poolings............ 1
Net income................................ 344 344
--------- -----------------
Balances at September 30, 2000............ $6,838 $191
======== =================
See accompanying notes.
AMERICA ONLINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements,
which include the accounts of America Online, Inc. (the "Company") and its
wholly owned subsidiaries, have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting only of normal recurring accruals
considered necessary for a fair presentation, have been included in the
accompanying unaudited condensed consolidated financial statements. All
significant intercompany transactions and balances have been eliminated in
consolidation. Operating results for the three months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the full
year ending June 30, 2001. For further information, refer to the consolidated
financial statements and notes thereto, included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2000.
Note 2. Recent Pronouncements
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation" ("FIN 44"), which
contains rules designed to clarify the application of APB 25. As of July 1,
2000, the Company has adopted FIN 44 with no material effect on earnings and
financial position.
The FASB recently issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement
No. 133". The Statement deferred for one year the effective date of FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The rule now applies to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company adopted the standard as of July 1,
2000. The Statement requires the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not designated as hedges must
be adjusted to fair value through income. If the derivative is designated as a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the change in fair value of a derivative that is
designated as a hedge will be immediately recognized in earnings. Certain of the
Company's holdings of equity instruments have been deemed derivatives pursuant
to the criteria established in SFAS 133. The Company has designated certain of
those derivatives as hedges. The adoption of SFAS 133 by the Company as of July
1, 2000 had no material effect on earnings and financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which clarifies certain existing accounting principles for the
timing of revenue recognition and its classification in the financial
statements. The SEC delayed the required implementation date of SAB 101 by
issuing Staff Accounting Bulletins No. 101A, "Amendment: Revenue Recognition in
Financial Statements" and 101B, "Second Amendment: Revenue Recognition in
Financial Statements" in March and June 2000, respectively. In anticipation of
the merger between the Company and Time Warner Inc. being completed prior to
December 31, 2000, the Company will adopt SAB 101 in the quarter ending December
31, 2000. The Company believes the adoption of SAB 101 will not be material to
the earnings and financial position of the Company and it will mainly impact
Enterprise revenues and cost of revenues.
Note 3. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended September 30, 2000 and 1999:
Three months ended
September 30,
(in millions, except per share data) 2000 1999
-------- --------
Basic earnings per share:
Net income available to common shareholders................................... $ 344 $ 181
-------- --------
Weighted average shares outstanding........................................... 2,325 2,231
Basic earnings per share...................................................... $ 0.15 $ 0.08
======== ========
Diluted earnings per share:
Net income available to common shareholders................................... $ 344 $ 181
Interest on convertible debt, net of tax...................................... 2 2
-------- --------
Adjusted net income available to common shareholders
assuming conversion........................................................ $ 346 $ 183
-------- --------
Weighted average shares outstanding........................................... 2,325 2,231
Effect of dilutive securities:
Employee stock options..................................................... 237 316
Convertible debt........................................................... 38 40
-------- --------
Adjusted weighted average shares and assumed conversions...................... 2,600 2,587
======== ========
Diluted earnings per share.................................................... $ 0.13 $ 0.07
======== ========
Excluded from the diluted share base calculation above for the three
months ended September 30, 2000 are incremental weighted shares of approximately
13.6 million and approximately 35 million related to convertible subordinated
notes and stock options, respectively. Excluded from the diluted share base
calculation above for the three months ended September 30, 1999 are incremental
weighted shares of approximately 23.1 million related to stock options. The
shares related to the convertible subordinated notes are excluded due to their
antidilutive effect as a result of adjusting net income by $6 million for
interest expense (net of tax) that would be forfeited if the notes were
converted to equity. The shares related to the stock options are excluded due to
their antidilutive effect as a result of the option's exercise prices being
greater than the average market price of the common shares during the three
months ended September 30, 2000 and September 30, 1999.
Note 4. Comprehensive Income
For the three months ended September 30, 2000 and 1999, comprehensive
income was $191 million and $437 million, respectively. The difference between
net income and comprehensive income for each period presented is due to net
unrealized gains or losses on available-for-sale securities.
Note 5. Business Developments
During the quarter ended September 30, 2000, the Company completed its
mergers with Quack.com, Inc., iAmaze, Inc., LocalEyes Corporation. As a result
of the Company's announced stock repurchase program, these have been accounted
for under the purchase method of accounting. The proforma effect of these merged
companies is immaterial to those of the Company. The Company also merged with
Prophead Development, Inc. ("Prophead"). The merger with Prophead was accounted
for as pooling-of-interests. As the historical results of operations of Prophead
was not material in relation to those of the Company, the financial information
prior to the quarter ended June 30, 2000 has not been restated to reflect this
merger. The Company exchanged approximately 4.6 million shares of common stock
for all the outstanding common and/or preferred shares of these merged
companies. The Company incurred $6 million of acquisition costs related to these
mergers. Substantially all of these costs were capitalized under the purchase
method of accounting. These costs consisted mainly of investment banking and
legal services. As of September 30, 2000, approximately $5 million of the merger
related costs had been paid. The Company expects the remaining costs associated
with the mergers to be paid by December 31, 2000.
Note 6. Segment Information
America Online has four major lines of businesses:
o the Interactive Services Group,
o the Interactive Properties Group,
o the AOL International Group, and
o the Netscape Enterprise Group.
The Interactive Services Group and the Netscape Enterprise Group are
the only two reportable segments. The results of the Interactive Properties
Group and the AOL International Group have been combined in the "Other Segments"
line shown below. Prior period information has been restated to conform to the
current presentation. There are no intersegment revenues between the four
operating segments. Shared support service functions such as human resources,
facilities management and other infrastructure support groups are allocated
based on usage or headcount, where practical, to the four operating segments.
Charges that cannot be allocated are reported as general and administrative
costs and are not allocated to the segments. Special charges determined to be
significant are reported separately in the Condensed Consolidated Statements of
Operations and are not assigned or allocated to the segments. All other
accounting policies are applied consistently to the segments, where applicable.
A summary of the segment financial information is as follows:
Three months ended
September 30,
2000 1999
------------ -----------
(Amounts in millions)
Revenues:
Interactive Services Group (1).............. $1,726 $1,290
Netscape Enterprise Group (2)............... 120 122
Other Segments (3).......................... 129 65
------------ -----------
Total revenues.......................... $1,975 $1,477
Income (loss) from operations:
Interactive Services Group (1).............. $ 494 $ 325
Netscape Enterprise Group(2)................ 50 18
Other Segments (3).......................... 54 15
General and Administrative (4).............. (116) (98)
------------ -----------
Total income from operations............ $ 482 $ 260
(1) For the three months ended September 30, 2000 and 1999, the Interactive
Services Group includes online service revenues of $1,206 million and $995
million, respectively; advertising, commerce and other revenues of $520
million and $295 million, respectively; and goodwill and other intangible
assets amortization of $13 million and $11 million, respectively.
(2) For the three months ended September 30, 2000 and 1999, the Netscape
Enterprise Group is comprised solely of enterprise revenues.
(3) For the three months ended September 30, 2000 and 1999, Other Segments are
comprised solely of advertising, commerce and other revenues and include
goodwill and other intangible assets amortization of $13 million and $7
million, respectively.
(4) Bad debt has been allocated to the applicable segment.
The Company does not have any material revenues and/or assets outside the
United States and no single customer accounts for more than 10% of total
revenues.
Note 7. Subsequent Events
Time Warner Merger
On January 10, 2000, the Company and Time Warner Inc. announced that
they had entered into an Agreement and Plan of Merger, dated as of January 10,
2000 (the "Merger Agreement"), which sets forth the terms and conditions of the
proposed merger of equals of America Online and Time Warner. Pursuant to the
Merger Agreement, America Online and Time Warner have formed AOL Time Warner and
each holds one share of AOL Time Warner. AOL Acquisition Sub, a newly formed and
wholly owned subsidiary of AOL Time Warner, will be merged with and into America
Online, with stockholders of America Online receiving one share of AOL Time
Warner common stock for each share of America Online Common Stock, and TW
Acquisition Sub, a newly formed and wholly owned subsidiary of AOL Time Warner,
will be merged with and into Time Warner, with common stockholders of Time
Warner receiving 1.5 shares of AOL Time Warner common stock for each share of
Time Warner common stock. As a result of the merger, the separate corporate
existence of each of AOL Acquisition Sub and TW Acquisition Sub will cease and
each of America Online and Time Warner will survive the merger as a wholly owned
subsidiary of AOL Time Warner. The merger was approved by the stockholders of
each of America Online and Time Warner on June 23, 2000. In addition, the
European Union Commission approved the merger on October 11, 2000. The merger is
expected to close in the fall of 2000 and is subject to customary closing
conditions, including required U.S. government regulatory approvals, which the
companies are in the process of seeking. There can be no assurance that such
approvals can be obtained.
Redemption of Notes
The Company has issued a notice of its election to exercise its option
to redeem in whole, the 4% Convertible Subordinated Notes due November 15, 2002
(the "Notes") on November 15, 2000. Under the redemption prices set forth in the
Notes, the Company will be obligated to redeem the outstanding Notes at a price
of 101.6% (expressed as a percentage of principal amount) together with accrued
interest at the date of redemption. Noteholders may convert their Notes to
shares of the Company's common stock on or prior to the redemption date. The
principal amount, net of unamortized discount, was $244 million as of September
30, 2000.
Note 8. Legal Proceedings
The Company is a party to various litigation matters, investigations
and proceedings, including several complaints that have been filed and remain
pending in the Delaware Court of Chancery naming as defendants one or more of
America Online, the directors of America Online, Time Warner Inc. and the
directors of Time Warner. The complaints purport to be filed on behalf of
holders of America Online or Time Warner stock, as applicable, and allege
breaches of fiduciary duty by the applicable company and its directors or aiding
and abetting breaches of fiduciary duty by the other company and its directors
in connection with the proposed merger of America Online and Time Warner. The
plaintiffs in each case seek to enjoin completion of the merger and/or damages.
These cases are at a preliminary stage, but the Company does not believe these
lawsuits have any merit and intends to defend against them vigorously. The
Company is unable, however, to predict the outcome of these cases, or reasonably
estimate a range of possible loss given the current status of the litigation.
Since March 2000, America Online has been named as a defendant in
several class action lawsuits that have been filed in state and federal courts.
The complaints in these lawsuits contend that consumers and competing Internet
service providers have been injured because of the default selection features in
AOL 5.0. Plaintiffs are seeking damages, an injunction enjoining the
distribution of AOL Version 5.0 software, and disgorgement of all monies that
the Company has earned through the distribution of its Version 5.0 software.
These cases are at a preliminary stage, but America Online does not believe they
have merit and intends to contest them vigorously. The Company is unable,
however, to predict the outcome of these cases, or reasonably estimate a range
of possible loss given the current status of the litigation.
In the spring of 1999, the Department of Labor ("DOL") began an
investigation of the applicability of the Fair Labor Standards Act ("FLSA") to
the Company's Community Leader program. The Company believes the Community
Leaders are volunteers, not employees, that the Community Leader program
reflects industry practices, and that its actions comply with the law. The
Company is cooperating with the DOL's inquiry, but is unable to predict the
outcome of the DOL's investigation and cannot reasonably estimate a range of
possible loss given the current status of the DOL's investigation. Former
volunteers have sued the Company on behalf of an alleged class consisting of
current and former volunteers, alleging violations of the FLSA and comparable
state statutes. The Company believes the claims have no merit and intends to
defend them vigorously. The Company cannot predict the outcome of the claims or
whether other former or current volunteers will file additional actions, nor can
the Company reasonably estimate a range of possible loss given the current
status of the litigation.
The costs and other effects of pending or future litigation,
governmental investigations, legal and administrative cases and proceedings
(whether civil or criminal), settlements, judgments and investigations, claims
and changes in those matters (including those matters described above), and
developments or assertions by or against the Company relating to intellectual
property rights and intellectual property licenses, could have a material
adverse effect on the Company's business, financial condition and operating
results.
SIGNATURES
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.
DATE: January 26, 2001 SIGNATURE: /s/J. Michael Kelly
------------------------------
J. Michael Kelly
Executive Vice President
and Chief Financial Officer