DIVIDEND POLICY
Dividend Policy
The Company intends to institute a regular quarterly dividend to holders of our Class A common stock and Class B common stock whereby we intend to pay quarterly cash dividends of $0.12 per share. We expect to pay the first dividend under this prospectus.
Any increasepolicy in the aggregate amountSeptember 2020. The declaration of net proceeds to us from the sale of common stock in this offeringeach dividend will result in a corresponding increase in the amount available for general corporate purposes. Any decrease in the amount of net proceeds to us below $574 million (which equals the amountcontinue to be usedat the discretion of our board of directors and will depend on our financial condition, earnings, liquidity and capital requirements, level of indebtedness, contractual restrictions with respect to redeem the indebtedness in the table above), will result in a corresponding reduction in either (i) the amount of Holdings Discount Notes to be redeemed or (ii) the $141.5 million special cash dividend to be paid to our existing stockholders in connection with the Concurrent Transactions.
DIVIDEND POLICY
We paid $202 million, including $2 millionpayment of dividends, on preferred sharesrestrictions imposed by Delaware law, general business conditions and any other factors that our board of Holdings, to our Investors at the time of the Acquisition Corp. Refinancing, $350 milliondirectors deems relevant in connection with the Return of Capital and Dividend on Preferred and $631 million in connection with the Holdings' Payment to Investors throughmaking such a combination of dividends and share repurchases. We distributed $42.5 million of the remaining $50 million of net proceeds from the issuance of the Holdings Notes to the Investors on March 28, 2005 and intend to distribute the remaining $7.5 million to the Investors prior to this offering.
In addition, prior to this offering, Warner Music Group Corp. intends to declare anddetermination. Therefore, there can be no assurance that we will pay a dividend equal to the Remaining Preference Amount to the Investors in the form of promissory notes. Warner Music Group Corp. also intends to declare a $141.5 million cash dividend to the holders of its Class L Common Stock and Class A Common Stock, consisting of the Investors and certain members of management. Though this dividend would be paid following consummation of this offering, stockholders who buy common stock in this offering will not participate in such dividend. See "Prospectus Summary—Recent Developments—The Concurrent Transactions."
The amounts available to us to pay further cash dividends will be restricted by Acquisition Corp.'s senior secured credit agreement and indentures governing the various notes of our subsidiaries, including the indenture governing the Holdings Notes and the indenture governing the Acquisition Corp. Notes. Under Acquisition Corp.'s senior secured credit agreement, generally neither Holdings nor Holdings' subsidiaries may pay dividends or otherwise transfer their assets to us. However, Acquisition Corp.'s senior secured credit agreement permits such restricted payments in an amount not to exceed $10.0 million, subject to increase up to $50.0 million if the leverage ratio is less than 3.5 to 1, and subject to additional increase in an amount equal to 50% of excess cash flow that is not otherwise applied pursuant to Acquisition Corp.'s senior secured credit agreement. The proposed amendment to the senior secured credit agreement is also expected to permit (i) the distribution of $141.5 million to our stockholders as described under "Prospectus Summary—Recent Developments—The Concurrent Transactions" in connection with the Concurrent Transactions and (ii) distributions not in excess of $90 million in any fiscal year to be applied to pay regular quarterly cash dividends to holders of our common stock, after this offering.or as to the amount of any such dividends.
WMG is a holding company for all of our operations and is a legal entity separate from its subsidiaries. All of WMG’s business operations are conducted through our subsidiaries. Dividends and other distributions from WMG’s subsidiaries are the principal sources of funds available to WMG to pay corporate operating expenses, to pay stockholder dividends, to repurchase stock and to meet its other obligations. The indentures governingagreements to which our subsidiaries are party, including the HoldingsSecured Notes Indenture, the Senior Notes Indenture, the Revolving Credit Agreement and the Acquisition Corp.Senior Term Loan Credit Agreement, each contain certain provisions that restrict the payment of dividends, subject to certain exceptions. Generally, the Secured Notes also limitIndenture, the ability of Holdings, Acquisition Corp.Senior Notes Indenture, the Revolving Credit Facility and theirthe Senior Term Loan Credit Agreement permit our subsidiaries to pay dividends to us. Under such indentures, generally our subsidiaries may pay dividends orand make certain other restricted payments depending on(i) only if, at the time of the restricted payment and after giving pro form effect thereto, Acquisition Corp. would have been able to incur at least $1.00 of additional indebtedness and remain in compliance with the fixed charge coverage ratio of 2.00 to 1.00 and (ii) the aggregate amount of dividends distributed over a formula based onspecified reference period does not exceed 50% of consolidatedAcquisition Corp.’s net income. In addition, Acquisition Corp. may also make such restricted payments if, on a pro forma basis after giving effectincome calculated over the same reference period, subject to any such payment, it has a net indebtednesscertain other limitations and basket exceptions. We believe that these agreements will permit our subsidiaries to adjusted EBITDA ratio of no greater than 3.75distribute funds to 1.0 and a net senior indebtednessus in an amount sufficient to adjusted EBITDA ratio of no greater than 2.5permit us to 1.0, and Holdings may make such restricted payments if, on a pro forma basis after giving effect to any such payment, it has a net indebtedness to adjusted EBITDA ratio of no greater than 4.25 to 1.0. Acquisition Corp. and Holdings may also make restricted payments under the indentures of up to $45.0 million and $75.0 million, respectively, without regard to any such provisions. The Holdings indenture permits Holdings to dividend up to 6% per annum from proceeds of this offering received by Holdings. See "Management'spay our currently intended dividends. For more details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition and Liquidity—Liquidity."Liquidity” and “Risk Factors—Risks Related to Our Leverage—As a holding company, WMG depends on the ability of its subsidiaries to transfer funds to it to meet its obligations.”
We currently intendDelaware law requires that dividends be paid only out of “surplus,” which is defined as the fair market value of our net assets, minus our stated capital; or out of the current or the immediately preceding year’s earnings.
On March 25, 2020, the Company’s board of directors declared a cash dividend of $37.5 million which was paid to pay regular quarterlystockholders on April 17, 2020 and recorded as an accrual as of March 31, 2020. On December 16, 2019, the Company’s board of directors declared a cash dividendsdividend of $37.5 million which was paid to stockholders on our common stock in an amount notJanuary 17, 2020. On September 23, 2019, the Company’s board of directors declared a cash dividend of $206.25 million which was paid to exceedstockholders on October 4, 2019. For fiscal year 2019, the Company paid an aggregate of $80 million per year. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant.
CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2004 (1) on an actual basis and (2) on an as-adjusted basis to reflect:
•the $42.5 million dividend to the Investors paid on March 28, 2005, and the remaining $7.5 million dividend to the Investors which we expect to pay prior to this offering, in each case from a portion of the remaining proceeds from the Holdings Notes;
•the Recapitalization;
•the sale by us of approximately 27.2 million shares of our common stock in this offering at an assumed initial public offering price of $23.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses;
•the application of the estimated net proceeds as described in "Use of Proceeds;" and
•the Concurrent Transactions.
The information should be read in conjunction with "The Transactions," "Pro Forma Consolidated Condensed Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical combined financial statements and the accompanying notes thereto appearing elsewhere in this prospectus.
| | As of December 31, 2004
| |
|---|
| | Actual
| | As Adjusted
| |
|---|
| | (unaudited, in millions)
| |
|---|
| Cash and equivalents | | $ | 306 | | $ | 96 | |
| | |
| |
| |
| Debt: | | | | | | | |
| | Revolving credit facility(1) | | $ | — | | $ | — | |
| | Term loan(2) | | | 1,191 | | | 1,441 | |
| | Acquisition Corp. Notes(3) | | | 658 | | | 658 | |
| Holdings Floating Rate Notes | | | 250 | | | — | |
| Holdings Discount Notes(4) | | | 251 | | | 163 | |
| Holdings PIK Notes(5) | | | 196 | | | — | |
| | |
| |
| |
| Total debt | | $ | 2,546 | | $ | 2,262 | |
| | |
| |
| |
| Shareholders' equity: | | | | | | | |
| | Actual: Class A Common Stock, par value $0.001 per share, 200,000 shares authorized and 92,294 shares issued and outstanding; Class L Common Stock, par value $0.001 per share, 20,000 shares authorized and 9,444.4444 shares issued and outstanding; As adjusted: common stock, par value $0.001 per share, 500 million shares authorized, approximately 143 million shares issued and outstanding(6); preferred stock, par value $0.001 per share, 100 million shares authorized, no shares issued and outstanding | | $ | — | | $ | — | |
| Additional paid-in capital | | | 93 | | | 474 | |
| Accumulated deficit | | | (202 | ) | | (351 | ) |
| Accumulated other comprehensive earnings | | | (16 | ) | | (16 | ) |
| | |
| |
| |
| Total shareholders' equity | | $ | (125 | ) | $ | 107 | |
| | |
| |
| |
| Total capitalization | | $ | 2,421 | | $ | 2,369 | |
| | |
| |
| |
(1)Acquisition Corp. currently has no borrowings outstanding under the $250 million revolving portion of Acquisition Corp.'s senior secured credit facility but has issued $4$93.75 million in letters of credit under such agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Indebtedness—Senior Secured Credit Facility."(2)Acquisition Corp. is seekingcash dividends to amend its senior secured credit facility to, among other things, increase the term loan borrowings thereunder by an additional $250 million, which would bring the total amount of the new facility to $1,441 million. See "Description of Indebtedness" and "Prospectus Summary—Recent Developments—The Concurrent Transactions."(3)Includes $465 million aggregate principal amount of the dollar notes and the U.S. dollar equivalent, as of December 31, 2004, of the £100 million aggregate principal amount of the sterling notes of our wholly owned subsidiary, Acquisition Corp. See "Description of Indebtedness."(4)Represents the accreted value as of December 31, 2004 of the $396.81 million ($306.81 million, as adjusted) aggregate principal amount at maturity of the Holdings Discount Notes. See "Description of Indebtedness."(5)Represents the outstanding amount due as of December 31, 2004 with respect to the $200 million Holdings PIK Notes, including accrued PIK interest on such Holdings PIK Notes, less unamortized discount. See "Description of Indebtedness."(6)Amount does not include shares reserved for issuance pursuant to (i) the Three-Year Warrants or MMT Warrants, (ii) any stock option agreements or LTIP stock option agreements and (iii) the option to purchase additional shares of common stock in this offering granted to the underwriters.
DILUTION
Dilution is the amount by which the offering price paid by the purchasers of the common stock to be sold in this offering will exceed the net tangible book value per share of common stock after the offering. The net tangible book value per share presented below is equal to the amount of our total tangible assets (total assets less intangible assets) less total liabilities as of December 31, 2004. As of December 31, 2004, we had a net tangible book deficit of $(3,116) million, or $(26.98) per share after giving effect to the Recapitalization. On a pro forma basis, after giving effect to:
•the $42.5 million dividend to the Investors paid on March 28, 2005, and the remaining $7.5 million dividend to the Investors which we expect to pay prior to this offering, in each case from a portion of the remaining proceeds from the Holdings Notes;
•the sale of 27,170,000 shares of common stock by us in this offering at an assumed initial public offering price of $23.00 per share, the mid-point of the price range on the cover of this prospectus; and
•the Concurrent Transactions
our pro forma net tangible book deficit as of December 31, 2004 would have been $(2,884) million, or $(20.22) per share of common stock. This represents an immediate decrease in net tangible book deficit of $6.76 per share to existing stockholders and an immediate dilution in net tangible book value of $43.22 per share to new investors.
The following table illustrates this dilution on a per share basis:
| Assumed initial public offering price per share | | | | | $ | 23.00 | |
| | Net tangible book deficit per share at December 31, 2004 | | $ | (26.98 | ) | | | |
| | Increase in net tangible book value per share attributable to new investors | | | 6.76 | | | | |
| | |
| | | | |
| Pro forma net tangible book deficit per share after the offering | | | | | | (20.22 | ) |
| | | | | |
| |
| Dilution per share to new investors | | | | | $ | 43.22 | |
| | | | | |
| |
The following table summarizes, on the same pro forma basis as of December 31, 2004, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by the existing shareholders and by new investors purchasing shares in this offering:
| | Shares Purchased
| | Total Consideration
| |
| |
|---|
| | Average Price
Per Share
| |
|---|
| | Number
| | Percent
| | Amount
| | Percent
| |
|---|
| | (in millions)
| |
|---|
| The Investors | | 107,544,922 | | 75 | % | $ | (104 | ) | (20 | )% | $ | (0.97 | ) |
| Management | | 7,946,908 | | 6 | % | $ | (5 | ) | (1 | )% | $ | (0.63 | ) |
| New investors | | 27,170,000 | | 19 | % | $ | 625 | | 121 | % | $ | 23.00 | |
| | |
| |
| |
| |
| |
| |
| | Total | | 142,661,830 | | 100 | % | $ | 516 | | 100 | % | $ | 3.62 | |
Total consideration and average price per share paid by the Investors in the table above give effect to the $131.4 million cash dividend (which represents the portion of the $141.5 million cash dividend we intend to pay to the Investors), the repayment of the promissory notes issued in connection with the dividend to holders of Class L Common Stock, the $42.5 million dividend to the Investors paid on March 28, 2005, and the remaining $7.5 million dividend to the Investors which we expect to pay prior to this offering. Total consideration and average price per share paid by certain members of our management in the table above give effect to the $10.1 million cash dividend (which represents the portion of the $141.5 million cash dividend we intend to pay to, or withhold for, such members of
management). See "Prospectus Summary—Recent Developments—The Concurrent Transactions." As the table indicates, the Investors' total consideration for their shares would be $(104) million, with an average share price of $(0.97), which means that the Investors in the aggregate will have received $104 million more than they originally invested and management's total consideration for their shares would be $(5) million, with an average share price of $(0.63), which means that management in the aggregate will have received $5 million more than they originally invested.
The tables and calculations above include all vested and unvested restricted shares of common stock and assume no exercise of outstanding options, of the option granted to the underwriters to purchase additional shares of common stock in this offering or of the Three-Year Warrants. The table and calculation above excludes the proceeds from the secondary offering, as such proceeds are received directly by the selling stockholders. After giving effect to the Recapitalization, there will be approximately 5,304,414 shares of our common stock subject to options outstanding at an average exercise price per share of $3.97 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Results of Operations and Financial Condition—Future Charges and Payments Relating to Executive Compensation"), of which approximately 99,579 shares have vested and of which up to an additional 199,157 shares may vest as a result of this offering. To the extent that these options are exercised or the Three-Year Warrants are not purchased by us, there will be further dilution to new investors. See "Management," "Shares Eligible for Future Sale—Stock Options and Restricted Stock" and "Prospectus Summary—Recent Developments—The Concurrent Transactions."
The number of shares held by stockholders selling shares in this offering will be reduced by the secondary offering and to the extent the underwriters exercise their option to purchase additional shares. If the underwriters fully exercise their option, the selling stockholders will own a total of 97,224,922 shares or approximately 68% of our total outstanding shares which, along with the secondary offering, will decrease the average price paid by the selling stockholders per share to $(1.07). In addition, after giving effect to Recapitalization, there will be approximately 8,305,390 restricted shares of our common stock outstanding, of which approximately 497,732 shares have vested and of which up to 995,464 shares may vest as a result of this offering, based on the initial public offering price per share.
THE TRANSACTIONS
The following is, among other things, a summary of the Acquisition and certain terms of the purchase agreement, dated as of November 24, 2003, as amended on March 1, 2004, between Time Warner and Acquisition Corp. The following summary is qualified in its entirety by reference to the purchase agreement.
In addition to the purchase agreement, at the closing of the Acquisition, the parties entered into agreements governing certain relationships between and among the parties after the closing of the Acquisition. These agreements include a stockholders agreement, a seller services agreement, a purchaser services agreement, and a management agreement. See "Certain Relationships and Related Party Transactions" for descriptions of these agreements.
The Acquisition
On March 1, 2004, Acquisition Corp., an indirect subsidiary of Warner Music Group, acquired substantially all of Time Warner's music division. The initial purchase price for the Acquisition was $2.595 billion (subject to customary post-closing adjustments), consisting of $2.560 billion in cash and $35 million in non-cash consideration in the form of warrants issued to Historic TW.
On November 15, 2004, Acquisition Corp. and Time Warner made certain Section 338(h)(10) elections under the Internal Revenue Code, which, for tax purposes, increased the cost basis of our domestic net assets and will allow us to deduct the associated annual depreciation and amortization expenses.
The Original Financing and the Acquisition Corp. Refinancing
We financed the Acquisition, related fees and expenses and a portion of our identified restructuring costs through our Original Financing of (i) $1.15 billion of borrowings under the term loan portion of Acquisition Corp.'s senior secured credit facility, which, in addition to the term loan facility, includes a $250 million revolving credit facility, (ii) borrowings under a $500 million senior subordinated bridge loan facility and (iii) a $1.25 billion aggregate initial capital investment by the Investors. See "Description of Indebtedness."
For the Acquisition Corp. Refinancing we applied the proceeds from the offering of the Acquisition Corp. Notes, an additional $50 million of borrowings under the term loan portion of the senior secured credit facility plus available cash on hand, to (i) repay all amounts outstanding under the senior subordinated bridge loan facility plus accrued and unpaid interest, (ii) return a portion of the initial capital investment by the Investors and (iii) pay fees and expenses (the Acquisition Corp. Refinancing, together with the Original Financing and the Acquisition, the "Transactions").
The following table sets forth the sources and uses of funds as if the Acquisition Corp. Refinancing had occurred on March 1, 2004 simultaneously with the Acquisition and the Original Financing:
Sources
| |
| | Uses
| |
| |
|---|
(in millions)
| |
| | (in millions)
| |
| |
|---|
| Revolving credit facility(1) | | $ | — | | Purchase price(2) | | $ | 2,606 | |
| Term loan | | | 1,200 | | Purchase price adjustments(4) | | | (72 | ) |
| Senior subordinated notes(3) | | | 650 | | Interest to Time Warner(5) | | | 26 | |
| | | | | | | |
| |
| Capital investment by the Investors | | | 1,048 | | Total cash consideration(2) | | | 2,560 | |
| | | | | | Fees and expenses(6) | | | 200 | |
| | | | | | Cash to balance sheet | | | 138 | |
| | |
| | | |
| |
| Total sources | | $ | 2,898 | | Total uses | | $ | 2,898 | |
| | |
| | | |
| |
(1)The revolving credit facility provides for borrowings of up to $250 million.
(2)Excludes warrants issued to Time Warner valued at approximately $35 million. Total consideration includes purchase price adjustments and interest to Time Warner.
(3)Includes the U.S. dollar equivalent of the sterling notes, based on the exchange rate as of the date of issuance of the sterling notes.
(4)Approximately $67 million of the purchase price adjustments for the Acquisition relates primarily to cash that Time Warner swept from our balance sheet after December 1, 2003 (the day at which the Investors began receiving the economic benefit of our business), net of the existing cash balance as of November 30, 2003. Approximately $5 million was an adjustment for negotiations in the tax structuring process between signing and closing of the Acquisition. Pursuant to the terms of the purchase agreement between the Investors and Time Warner, the purchase consideration is subject to certain adjustments, generally based on changes in the financial position of Old WMG between the date the purchase agreement was signed and the date the transaction closed. The parties currently are in discussions over the terms of final settlement. Such changes are not expected to be material; however, the purchase price has been reduced by approximately $24 million on a preliminary basis to reflect a reimbursement by Time Warner to the Investors of a portion of the purchase consideration already agreed upon by the parties.
(5)In exchange for an arrangement in which the economic benefit of the acquired business accrued to the Investors as of December 1, 2003, we agreed to pay interest to Time Warner on the cash purchase price between December 1, 2003 and the closing of the Acquisition.
(6)This amount includes commitment, placement, financial advisory and other transaction fees as well as legal, accounting and other professional fees.
Warrants
A portion of the consideration paid to Time Warner by us was in the form of warrants in Parent Corp. and Holdings that were issued to Historic TW.
One of the two classes of warrants we issued to Historic TW in March 2004 gives Historic TW the right to purchase up to approximately 19.9% of the Class L Common Stock of Warner Music Group Corp., 19.9% of the Class A Common Stock of Warner Music Group Corp. and 19.9% of the preferred securities of Holdings issued to the Investors and taking into account the exercise of the warrants (the "MMT Warrants"). Subsequent to the issuance of the MMT Warrants, Holdings redeemed all of its preferred securities in connection with the Acquisition Corp. Refinancing and the Holdings' Payment to Investors and, immediately prior to this offering, we will effect the Recapitalization. As a result, the
MMT Warrants will represent the right to purchase up to 26.7 million shares of our common stock (or approximately 19.9% of our common stock held by the Investors taking into account the exercise of the MMT Warrants). The MMT Warrants provide that Historic TW may exercise its rights in whole or in part under the MMT Warrants (i) upon the sale to certain music companies of all or substantially all of the recorded music business or music publishing business conducted by us or the acquisition by certain music companies of 35% of the outstanding shares of Warner Music Group Corp. or Holdings; (ii) the acquisition of all or substantially all of the recorded music business or music publishing business of certain music companies; or (iii) a merger with or the formation of a joint venture or other combination of all or substantially all of Warner Music Group Corp. or Holdings' recorded music business or music publishing business with that of certain music companies. If a definitive agreement for such a transaction is not executed by March 1, 2007, or if the MMT Warrants are not exercised within 90 days of the consummation of such a transaction, the MMT Warrants will expire. Additionally, the MMT Warrants will expire if the Three-Year Warrants (defined herein) are exercised either in whole or in part. The MMT Warrants will expire upon the exercise of the Three-Year Warrants.
The other class of warrant we issued to Historic TW in March 2004 was the Three-Year Warrants, which give Historic TW the right to purchase up to approximately 15% of the Class L Common Stock of Warner Music Group Corp., 15% of the Class A Common Stock of Warner Music Group Corp. and 15% of the preferred securities of Holdings issued to the Investors and taking into account the exercise of the Three-Year Warrants. Subsequent to the issuance of the Three-Year Warrants, Holdings redeemed all of its preferred securities and, immediately prior to this offering, we will effect the Recapitalization. As a result, the Three-Year Warrants will represent the right to purchase up to approximately 19.0 million shares of our common stock (or approximately 15% of our common stock held by the Investors taking into account the exercise of the Three-Year Warrants). The Three-Year Warrants provide that Historic TW may exercise its rights in whole or in part under the Three-Year Warrants at any time after the closing of the Acquisition until the earliest of: (i) March 1, 2007; (ii) the consummation of any public equity offering that results in the common stock of Warner Music Group Corp. being publicly traded; (iii) the sale for cash and/or securities of a class that is publicly traded to a third-party of a majority of the then-outstanding common and preferred securities of Warner Music Group Corp. or Holdings; and (iv) the exercise of either the Three-Year Warrants or the MMT Warrants. The Three-Year Warrants will expire at the consummation of this offering if not exercised prior to the consummation of this offering. We have agreed with Historic TW to repurchase the Three-Year Warrants in connection with the Concurrent Transactions. Upon repurchase, the Three-Year Warrants will be deemed to have been exercised and the MMT Warrants will expire as decribed in the preceeding paragraph.
Representations and Warranties; Indemnification
The purchase agreement contains customary representations and warranties of Time Warner and of Acquisition Corp., including representations and warranties of Time Warner regarding organization, authorization, non-contravention, governmental consents, capital stock of the companies, subsidiaries, financial statements, absence of certain changes, no undisclosed material liabilities, material contracts, compliance with laws and court orders, litigation, title to real property, sufficiency of the acquired assets, intellectual property rights, licenses and permits, tax matters, employee plans, environmental compliance and brokers. Acquisition Corp.'s right to obtain indemnification from Time Warner, and the right of Time Warner to obtain indemnification from Acquisition Corp., for any breach of these respective representations and warranties is generally limited to an aggregate amount of losses in excess of approximately $26 million, subject to a cap equal to approximately $260 million.
Other Provisions
No-Solicit; No-Hire
Subject to certain exceptions, for two years after March 1, 2004, Time Warner and its affiliates may not solicit or employ any employee who was employed in our businesses immediately before the closing.
Employee Matters and Pension
For one year after March 1, 2004, we agreed to provide Acquisition Corp.'s employees with base salary, bonus and other cash-based compensation opportunities based on targets Acquisition Corp. established and severance benefits that are no less favorable than provided to the employees of Time Warner's music division immediately prior to the Acquisition. In addition, Acquisition Corp. has agreed to be responsible for funding of pension benefit obligations of up to $25 million subsequent to the date of the purchase agreement for current and former employees of the business under non-U.S.-based defined benefit pension plans maintained by Time Warner or any of its subsidiaries. Acquisition Corp. has also otherwise agreed to be responsible for any employment-related liabilities attributable to current and former employees of the business under Time Warner benefit plans other than any U.S. defined benefit pension plan, U.S. retiree medical plan, non-qualified deferred compensation plan or severance plan covering individuals who were not employees of the business as of November 24, 2003.
Use of Names and Logos
Acquisition Corp. has agreed to license from two subsidiaries of Time Warner, on a royalty free basis pursuant to trademark license agreements, certain trademarks and service marks used in the business. The terms of the licenses, subject to provisions providing for termination for cause, is in perpetuity with respect to the marks WARNER, WARNER MUSIC, and a "W" logo and fifteen years from February 29, 2004 with respect WARNER BROS. RECORDS, WARNER BROS. PUBLICATIONS, and WB & Shield designs.
The Investors
With in excess of $35 billion under management in the aggregate, THL, Bain Capital and Providence Equity have considerable private equity investment experience and a long history of working and investing together. These firms, in particular, have a deep knowledge of the global media and entertainment industry with recent investments in media, entertainment, publishing and cable television.
In addition, Edgar Bronfman, Jr., an investor through Music Capital and our Chairman of the Board and Chief Executive Officer, has significant and directly relevant management experience in the music industry. From 1994 to 2000, Mr. Bronfman served as President and CEO of Seagram. During his tenure as CEO of Seagram, he consummated $85 billion in transactions, transformed the company into one of the world's leading media and communications companies and supervised the creation of the world's largest music company in 1998 through the merger of Universal and PolyGram.
THL is a private equity firm founded in 1974 that currently manages several private equity funds with aggregate capital commitments of approximately $14 billion. THL has invested in more than 80 businesses and is currently investing from Thomas H. Lee Equity Fund V, an equity fund with over $6.1 billion of committed capital. Recent media-related investments include ProSiebenSAT.1 Media, the largest private television network in Germany, Houghton Mifflin Company, a leading educational publisher, American Media and TransWestern Publishing. THL has more than 20 investment professionals based in Boston.
Bain Capital is a private investment firm that manages several pools of capital including private equity, venture capital, high-yield assets, mezzanine capital and public equity with over $16 billion in
assets under management. Since its inception in 1984, the firm has raised seven private equity funds and made private equity investments and add-on acquisitions in over 250 companies around the world, in a variety of sectors, including media and entertainment. Recent media-related investments include ProSiebenSAT.1 Media, Houghton Mifflin Company, Artisan Entertainment and Loew's Cineplex Entertainment Corporation. Bain Capital has more than 160 investment professionals, with its headquarters in Boston and additional offices in New York, London and Munich.
Providence Equity is a private investment firms specializing in equity investments in media and communications companies. The principals of Providence manage funds with over $9.0 billion in equity commitments, including Providence Equity Partners V, a $4.25 billion private equity fund, and have invested in more than 80 companies operating in over 20 countries since the firm's inception in 1990. Current and previous areas of investment include cable television content and distribution, wireless and wireline telephony, publishing, radio and television broadcasting and other media and communications sectors. Recent investments include PanAmSat Holding Corporation, Kabel Deutschland (Germany's largest cable operator), Mountain States Cable, Casema, F&W Publications and ProSiebenSAT.1 Media.
Ownership and Corporate Structure
The chart below summarizes our ownership and corporate structure as of December 31, 2004 after giving effect to the Initial Common Stock Offering and the Concurrent Transactions.
(1)We currently have no borrowings outstanding under the $250 million revolving portion of Acquisition Corp.'s senior secured credit facility but have issued $4 million of letters of credit under such agreement. Borrowings under the senior secured credit facility and the senior secured term loan facility are guaranteed by Holdings.
(2)Includes the U.S. dollar equivalent of the sterling notes, based on the exchange rate as of December 31, 2004.
(3)Only wholly owned U.S. subsidiaries that guarantee the senior secured credit facility guarantee the Acquisition Corp. Notes. Such guarantees are on a senior subordinated basis. The Holdings Notes are not currently guaranteed, but pursuant to the indenture governing the Holdings Notes, will be guaranteed by any wholly owned U.S. subsidiary that guarantees indebtedness of Holdings.
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated condensed balance sheet as of December 31, 2004 gives effect to the Holdings Refinancing (to the extent not already reflected), the Initial Common Stock Offering and the Concurrent Transactions as if they had occurred as of that date. All financial effects resulting from the Acquisition and the Original Financing, the Cinram Agreements and the Acquisition Corp. Refinancing are already reflected in our historical balance sheet as of December 31, 2004, and accordingly, no pro forma adjustments to the balance sheet are necessary.
The following unaudited pro forma consolidated condensed statement of operations for the twelve months ended September 30, 2004 gives effect to (i) the Acquisition and the Original Financing, (ii) the Cinram Agreements, (iii) the Acquisition Corp. Refinancing, (iv) the Holdings Refinancing, (v) the Initial Common Stock Offering and (vi) the Concurrent Transactions as if they occurred as of October 1, 2003. Because we presented a shortened ten-month, transition period in the historical financial statements relating to our change in fiscal year that was enacted in 2004,2018, the unaudited pro forma consolidated condensed statement of operations has been further adjusted to present a full consecutive twelve-month period ended September 30, 2004 in order to provide more meaningful information to the users of our financial information.
The following unaudited pro forma consolidated condensed statement of operations for the three months ended December 31, 2004 gives effect to (i) the Holdings Refinancing, (ii) the Initial Common Stock Offering and (iii) the Concurrent Transactions, as of October 1, 2003. All financial effects resulting from the Acquisition and the Original Financing, the Cinram Agreements and the Acquisition Corp. Refinancing are already reflected in our historical statement of operations for the three months ended December 31, 2004, and accordingly, no pro forma adjustments to the statement of operations for such period are necessary.
The pro forma consolidated condensed financial statements have been derived from, and should be read in conjunction with, our historical audited and interim unaudited financial statements, including the notes thereto, included elsewhere herein. The pro forma consolidated condensed financial statements are presented for informational purposes only and are not necessarily indicative of our financial position or results of operations that would have occurred had the events been consummated as of the dates indicated. In addition, the pro forma consolidated condensed financial statements are not necessarily indicative of our future financial condition or operating results.
The Acquisition and the Original Financing
Pro forma adjustments for the Acquisition and the Original Financing reflect the purchase of substantially all of Time Warner's music division effective on March 1, 2004 for an aggregate purchase price of $2.649 billion, including $78 million of direct acquisition costs (excluding financing fees) and a $24 million reduction in the purchase price subsequently agreed to between the Investors and Time Warner that has yet to be settled. The consideration exchanged consisted of $2.560 billion of cash and $35 million of non-cash consideration in the form of warrants that give Historic TW the right to purchase common stock of Warner Music Group Corp. under certain conditions. The terms of the warrants are described elsewhere herein.
The cash portion of the Acquisition, including $78 million of direct acquisition costs, was financed by a $1.250 billion initial capital investment by the Investors and aggregate borrowings of $1.388 billion under the term loan portion of Acquisition Corp.'s senior secured credit facility and under Acquisition Corp.'s former senior subordinated bridge loan facility. We incurred $262 million of additional indebtedness under the term loan portion of the senior secured credit facility to pay certain
financing-related fees, as well as to fund future working capital requirements that included a portion of the anticipated costs to restructure the business.
Restructuring Plan
We have conducted a detailed assessment of our existing cost structure. As a result of this assessment, we have identified substantial cost-reduction opportunities in our business, the majority of which are associated with headcount reductions from the consolidation of operations and the streamlining of corporate and label overhead. By the end of December 2004, we had implemented approximately $250 million of annualized cost savings, of which approximately $144 million has been reflected in our statement of operations through December 31, 2004. We have completed substantially all of our restructuring efforts. We project the one-time costs associated with our restructuring to be $225 million to $250 million, of which approximately $140 million has beenCompany paid through December 31, 2004. We expect to pay a majority of the remaining costs in 2005 and 2006. Because there are still significant risks associated with the Restructuring Plan, we have not given pro forma effect to any cost savings or incremental one-time costs that have not already been reflected in the historical financial statements of Warner Music Group Corp. See "Risk Factors."
Purchase Price Allocation
The Acquisition was accounted for under the purchase method of accounting for business combinations. Accordingly, the estimated cost to acquire such assets was allocated to our underlying net assets in proportion to their respective fair values. Most of the valuations and other studies which provide the basis for such an allocation have been completed; however, we are still waiting for certain information in order to finalize the purchase price allocation, including a final settlement of terms with Time Warner. As more fully described in the notes to the pro forma condensed financial statements, a preliminary allocation of the excess of cost over the book value of net tangible assets has been made to identifiable intangible assets in the amounts of $1.216 billion to recorded music catalog, $808 million to music publishing copyrights, $978 million to goodwill and $110 million to trademarks.
The Cinram Agreements
Prior to the end of October 2003, we purchased manufacturing, packaging and physical distribution services from affiliates of Time Warner that were under the common control of Time Warner and our management. Pricing for such services was not negotiated on an arm's-length basis and did not reflect market rates. At the end of October 2003, Time Warner sold its CD and DVD manufacturing, packaging and physical distribution operations to Cinram. As part of the sale, we and Time Warner entered into long-term arrangements with Cinram under which Cinram provides manufacturing, packaging and physical distribution services for our products in the U.S. and Europe. Accordingly, the pro forma consolidated condensed statement of operations for the twelve-month period ended September 30, 2004 has been adjusted to reflect the more favorable market-based rates negotiated on an arm's-length basis under the Cinram Agreements for the October 2003 period in which the Cinram Agreements were not in effect.
The Acquisition Corp. Refinancing
Pro forma adjustments for the Acquisition Corp. Refinancing reflect the interest-related effects relating to the issuance of approximately $650 million principal amount of the Acquisition Corp. Notes, an additional $50 million of borrowings under the term loan portion of Acquisition Corp.'s senior secured credit facility plus available cash on hand to (i) repay all $500 million in borrowings under Acquisition Corp.'s senior subordinated bridge loan facility and (ii) redeem a portion of the preferred
stock in Holdings held by the Investors in the amount of $202 million, including accrued dividends of $2 million.
The Holdings Refinancing
Pro forma adjustments for the Holdings Refinancing reflect (i) the interest-related effects relating to the issuance by Holdings of $847 million aggregate principal amount at maturity of the Holdings Notes on December 23, 2004 and the use of the $681 million of proceeds therefrom, net of $15 million of debt issuance costs, to redeem the remaining preferred stock in Holdings in the amount of $209 million, including accrued dividends of $9 million, and to pay a dividend on the Class L Common Stock of $422 million and (ii) the payment of an aggregate of $50$925 million in cash dividends on the Class L Common Stock using the proceeds from the offering of the Holdings Notes, of which $42.5 million was paid on March 28, 2005 and the remaining $7.5 million will be distributed to the Investors prior to this offering.
The Initial Common Stock Offering
Pro forma adjustments for the Initial Common Stock Offering reflect (i) the Recapitalization, (ii) the issuance of 27,170,000 shares of our common stock and (iii) the use of $574 million of our net proceeds from the issuance of common stock to repay all outstanding Holdings Floating Rate Notes, all outstanding Holdings PIK Notes and 35% of the outstanding aggregate principal amount at maturity of Holdings Discount Notes, including redemption premiums and interest obligations through the anticipated redemption date of June 15, 2005.
Pro forma adjustments for the Initial Common Stock Offering exclude (i) 5,430,000 shares currently held by the existing stockholders, which will be sold as part of this offering and (ii) up to an additional 4,890,000 shares currently held by the existing stockholders, which are subject to the underwriters' option to acquire and sell such shares as part of this offering. No change in the amount of outstanding shares will resultreflected proceeds from the sale of suchSpotify shares andacquired in the proceeds for these currently outstanding shares will be received directly byordinary course of business. For fiscal year 2017, the sellingCompany paid an aggregate of $84 million in cash dividends to stockholders.
Concurrent Transactions
Pro forma adjustments for the Concurrent Transactions reflect the effect of obtaining the proposed amendment to Acquisition Corp.'s senior secured credit facility, including the incurrence of $250 million of additional borrowings. Pro forma adjustments also reflect the use of the $247 million of net proceeds therefrom, plus $177 million of available cash on hand (i) to pay approximately $166 million to Historic TW to repurchase the Three-Year Warrants, (ii) to pay $73 million to terminate the management services agreement with the Investors, (iii) to pay an $8.5 million dividend in satisfaction of the remaining liquidation preference on our Class L Common Stock, (iv) to pay For a $141.5 million dividend to the holders of Warner Music Group Corp.'s Class L Common Stock and Class A Common Stock, including approximately $10 million relating to the holders of unvested shares of restricted stock which will be paid at a later date when, and if, such restricted shares vest, and (v) to pay one-time special bonuses of approximately $35 million to management and employees of Warner Music Group, consisting of (a) approximately $20 million to be paid to holders of restricted stock and stock options to make employees whole for certain unfavorable tax consequences, (b) approximately $5 million to be paid to holders of stock options representing an adjustment for outstanding options as a result of the $141.5 million special cash dividend on the Class L and Class A Common Stock and (c) approximately $10 million to substantially alldiscussion of our employees who will have no equity participation in our company upon the consummation of this offering.
Interest Rate Sensitivity
As of December 31, 2004, on a pro forma basis after giving effect to (i) the use of $574 million of our net proceeds from the issuance of common stock to repay all outstanding Holdings Floating Rate Notes, all outstanding Holdings PIK Notes and 35% of outstanding Holdings Discount Notes, and (ii) the Concurrent Transactions, including the $250 million of new term loan borrowings under Acquisition Corp.'s proposed amendment to its senior secured credit facility, Warner Music Group would have had $1.041 billion of funded variable-rate indebtedness, net of the effect of $400 million notional amount of interest-rate swaps that effectively convert a portion of our variable-rate indebtedness to fixed-rate indebtedness. As such, we are sensitive to changes in interest rates. For each 0.125% increase or decrease in interest rates, our interest expense and net loss each would increase or decrease, respectively, by approximately $1 million.
Non-cash, Stock-based Compensation Expense
As further described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Results of Operations and Financial Condition," our compensation committee recently approved certain changes to the terms of previously granted stock options. For accounting purposes, these changes constituted a modification of the terms of the grants. Accordingly, we will be required to remeasure the aggregate compensation expense relating to such grants. Based on our preliminary analysis, we expect our aggregate non-cash compensation expense to increase to approximately $34 million for all awards granted as of April 14, 2005, which will be recognized over the vesting period of such awards. Such amount of non-cash compensation expense is expected to be recognized in the following manner: $15 million in fiscal 2005, $10 million in fiscal 2006, $6 million in fiscal 2007 and $3 million in fiscal 2008. This compares to previously recorded non-cash, stock-based compensation expense included in our pro forma consolidated condensed statements of operations of $1 million for the twelve months ended September 30, 2004 and $2 million for the three months ended December 31, 2004.
WARNER MUSIC GROUP CORP.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
As of December 31, 2004
| |
| | Pro Forma Adjustments
| |
|
|---|
| | Historical(1)
| | The Holdings
Refinancing(2)
| | The Initial Common
Stock Offering(3)
| | The Concurrent Transactions(4)
| | Pro Forma
|
|---|
| | (in millions, unaudited)
|
|---|
| Assets | | | | | | |
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Cash and equivalents | | $ | 306 | | $ | (50 | ) | $ | 7 | | $ | (167 | ) | $ | 96 |
| | Accounts receivable | | | 821 | | | — | | | — | | | — | | | 821 |
| | Inventories | | | 65 | | | — | | | — | | | — | | | 65 |
| | Royalty advances expected to be recouped within one year | | | 204 | | | — | | | — | | | — | | | 204 |
| | Deferred tax assets | | | 48 | | | — | | | — | | | — | | | 48 |
| | Other current assets | | | 74 | | | — | | | — | | | — | | | 74 |
| | |
| |
| |
| |
| |
|
| Total current assets | | | 1,518 | | | (50 | ) | | 7 | | | (167 | ) | | 1,308 |
| Royalty advances expected to be recouped after one year | | | 204 | | | — | | | — | | | — | | | 204 |
| Investments | | | 9 | | | — | | | — | | | — | | | 9 |
| Property, plant and equipment | | | 180 | | | — | | | — | | | — | | | 180 |
| Goodwill | | | 966 | | | — | | | — | | | — | | | 966 |
| Intangible assets subject to amortization | | | 1,925 | | | — | | | — | | | — | | | 1,925 |
| Intangible assets not subject to amortization | | | 100 | | | — | | | — | | | — | | | 100 |
| Other assets | | | 121 | | | — | | | (12 | ) | | 3 | | | 112 |
| | |
| |
| |
| |
| |
|
| Total assets | | $ | 5,023 | | $ | (50 | ) | $ | (5 | ) | $ | (164 | ) | $ | 4,804 |
| | |
| |
| |
| |
| |
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Accounts payable | | $ | 223 | | | — | | | — | | | — | | $ | 223 |
| | Accrued royalties | | | 1,166 | | | — | | | — | | | — | | | 1,166 |
| | Taxes and other withholdings | | | 32 | | | — | | | — | | | — | | | 32 |
| | Current portion of long-term debt | | | 12 | | | — | | | — | | | — | | | 12 |
| | Other current liabilities | | | 622 | | | — | | | — | | | (177 | ) | | 445 |
| | |
| |
| |
| |
| |
|
| Total current liabilities | | | 2,055 | | | — | | | — | | | (177 | ) | | 1,878 |
Long-term debt |
|
|
2,534 |
|
|
— |
|
|
(534 |
) |
|
250 |
|
|
2,250 |
| Deferred tax liabilities | | | 272 | | | — | | | — | | | — | | | 272 |
| Other noncurrent liabilities | | | 287 | | | — | | | — | | | 10 | | | 297 |
| | |
| |
| |
| |
| |
|
| Total liabilities | | | 5,148 | | | — | | | (534 | ) | | 83 | | | 4,697 |
| Shareholders' equity | | | (125 | ) | | (50 | ) | | 529 | | | (247 | ) | | 107 |
| | |
| |
| |
| |
| |
|
| Total liabilities and shareholders' equity | | $ | 5,023 | | $ | (50 | ) | $ | (5 | ) | $ | (164 | ) | $ | 4,804 |
| | |
| |
| |
| |
| |
|
WARNER MUSIC GROUP CORP.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(1)Reflects the historical consolidated financial position of Warner Music Group Corp. as of December 31, 2004.
(2)Reflects a decrease in equity of $50 million and a corresponding decrease in cash and equivalents related to the payment of a dividend on Class L Common Stock using the remaining proceeds from the Holdings Refinancing. Of such amount, $42.5 million was paid on March 28, 2005 and the remaining $7.5 million will be distributed to the Investors prior to this offering.
(3)Pro forma adjustments to record the Initial Common Stock Offering as of December 31, 2004 reflect:
•a decrease in long-term debt of $534 million consisting of (i) the redemption of all $200 million principal amount of Holdings PIK Notes, which had a carrying value of $196 million as of December 31, 2004 after considering $4 million of unamortized original issuance discount, (ii) the redemption of all $250 million of Holdings Floating Rate Notes and (iii) the redemption of $88 million accreted principal amount of Holdings Discount Notes as of December 31, 2004.
•a decrease in other noncurrent assets of $12 million relating to the write off of a portion of the debt issuance costs relating to the Holdings Notes that will be redeemed using a portion of the proceeds from the Initial Common Stock Offering.
•an increase in cash and equivalents of $7 million consisting of (i) net proceeds raised of $581 million from the issuance of 27.2 million shares of our common stock to the public and (ii) the use of $574 million of such proceeds to redeem a portion of the Holdings Notes. The aggregate $574 million redemption cost for the Holdings Notes, including redemption premiums and interest obligations through the anticipated redemption date, includes $209 million to redeem all of the Holdings PIK Notes, $265 million to redeem all of the Holdings Floating Rate Notes and $100 million to redeem 35% of the outstanding Holdings Discount Notes.
•a net increase in shareholders' equity of $529 million consisting of (i) a $581 million increase in shareholders' equity relating to the issuance of 27.2 million shares of our common stock to the public, which is expected to raise net proceeds of $581 million, after deducting stock issuance costs of $44 million, (ii) a $36 million aggregate decrease in shareholders' equity relating to the payment of debt redemption premiums and unaccrued interest obligations through the anticipated redemption date relating to the Holdings' debt as of December 31, 2004 and (iii) a $16 million decrease in shareholders' equity relating to the write off of $12 million of debt issuance costs and $4 million of unamortized original issue discount relating to the Holdings Notes that will be redeemed using a portion of the proceeds from the Initial Common Stock Offering.
Of the $36 million of redemption premium and unaccrued interest obligations through the anticipated redemption date noted above, $9 million relates to the redemption of all $200 million principal amount of the Holdings PIK Notes, $15 million relates to the redemption of all $250 million of the Holdings Floating Rate Notes and $12 million relates to the redemption of $88 million accreted principal amount of the Holdings Discount Notes as of December 31, 2004.
The Recapitalization, which includes (i) the conversion of all outstanding shares of Class L Common Stock into shares of Class A Common Stock, (ii) the renaming of all outstanding shares of Class A Common Stock as common stock, which will have the effect of eliminating from our authorized capital stock the Class L Common Stock and Class A Common Stock and (iii) a 1,139 for 1 split of our common stock, had no effect on the pro forma consolidated condensed balance sheet as of December 31, 2004. This is because all such effects are limited to reclassifications within shareholders' equity.
(4)Pro forma adjustments to record the Concurrent Transactions as of December 31, 2004 reflect:
•an increase in long-term debt of $250 million to reflect the incurrence of additional borrowings under Acquisition Corp.'s proposed amended and restated senior secured credit facility.
•an increase in non-current assets of $3 million relating to the debt issuance costs to be incurred in connection with the $250 million additional borrowings under Acquisition Corp.'s proposed amended and restated senior secured credit facility.
•a decrease in other current liabilities of $177 million relating to the repurchase of the Three-Year Warrants held by Historic TW. Such amount represents the recorded value of the liability as of December 31, 2004,
•an increase in other noncurrent liabilities of $10 million relating to the portion of the $141.5 million dividend that would be paid at a later date to holders of record of unvested shares of restricted stock when, and if, such restricted shares vest,
•a net decrease in shareholders' equity of $247 million consisting of (i) a $12 million increase relating to a one-time gain expected to be realized in connection with the repurchase of the Three-Year Warrants held by Historic TW, representing the excess of the $177 million carrying value of the liability as of December 31, 2004 over the $166 million cash paid to Historic TW, (ii) a $73 million decrease relating to the one-time charge expected to be incurred in connection with the payment to terminate the management services agreement with the Investors, (iii) a $35 million decrease relating to the one-time charge expected to be incurred in connection with the one-time special bonuses to be paid to management and employees of Warner Music Group, (iv) an $8.5 million decrease relating to a dividend to be paid in satisfaction of the remaining liquidation preference on our Class L Common Stock and (v) a $141.5 million decrease relating to a dividend to be paid to all of our shareholders existing immediately prior to this offering,
•a net decrease in cash and equivalents of $167 million consisting of (i) $247 million of net proceeds received from additional borrowings under Acquisitions Corp.'s senior secured credit facility, net of $3 million of debt issuance costs, (ii) the payment of $166 million to Historic TW to repurchase the Three-Year Warrants, (iii) the payment of $73 million to terminate the management services agreement with the Investors, (iv) the payment of an $8.5 million dividend in satisfaction of the remaining liquidation preference on our Class L Common Stock, (v) the payment of a $141.5 million dividend, of which approximately $10 million relating to the holders of unvested shares of restricted stock will be paid at a later date when, and if, such restricted shares vest and (vi) the payment of approximately $35 million of one-time special bonuses to management and employees of Warner Music Group.
WARNER MUSIC GROUP CORP.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
For the Twelve Months Ended September 30, 2004
| |
| |
| |
| | Pro Forma Adjustments
| |
| |
|---|
| |
| |
| | Subtotal
Historical
Twelve
Months
Ended
September 30,
2004
| |
| |
|---|
| | Historical
Combined Ten
Months Ended
September 30,
2004(1)
| | Historical
Two Months
Ended
November 30,
2003(2)
| | Excluded Net
Assets(3)
| | The
Acquisition
and the
Original
Financing(4)
| | The Cinram
Agreements(5)
| | The Acquisition Corp.
Refinancing(6)
| | The Holdings
Refinancing(7)
| | The Initial
Common Stock
Offering(8)
| | The Concurrent Transactions(9)
| | Pro Forma
| |
|---|
| | (in millions, except per share data) (unaudited)
| |
| |
| |
|---|
| Revenues | | $ | 2,548 | | $ | 889 | | $ | 3,437 | | $ | (1 | ) | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 3,436 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costs of revenues(a) | | | (1,359 | ) | | (491 | ) | | (1,850 | ) | | 2 | | | — | | | 5 | | | — | | | — | | | — | | | — | | | (1,843 | ) |
| | Selling, general and administrative expenses(a) | | | (996 | ) | | (291 | ) | | (1,287 | ) | | — | | | (4 | ) | | — | | | — | | | — | | | — | | | — | | | (1,291 | ) |
| | Impairment of goodwill and other intangible assets | | | — | | | (1,019 | ) | | (1,019 | ) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,019 | ) |
| | Amortization of intangible assets | | | (160 | ) | | (41 | ) | | (201 | ) | | — | | | 23 | | | — | | | — | | | — | | | — | | | — | | | (178 | ) |
| | Restructuring costs | | | (26 | ) | | (8 | ) | | (34 | ) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (34 | ) |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Total costs and expenses | | | (2,541 | ) | | (1,850 | ) | | (4,391 | ) | | 2 | | | 19 | | | 5 | | | — | | | — | | | — | | | — | | | (4,365 | ) |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Operating income (loss) | | | 7 | | | (961 | ) | | (954 | ) | | 1 | | | 19 | | | 5 | | | — | | | — | | | — | | | — | | | (929 | ) |
| Interest expense, net | | | (82 | ) | | — | | | (82 | ) | | (5 | ) | | (40 | ) | | — | | | (8 | ) | | (64 | ) | | 48 | | | 1 | | | (150 | ) |
| Net investment-related losses | | | — | | | (9 | ) | | (9 | ) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (9 | ) |
| Equity in the losses of equity—method investees, net | | | (4 | ) | | (9 | ) | | (13 | ) | | (1 | ) | | — | | | — | | | — | | | — | | | — | | | — | | | (14 | ) |
| Deal-related transaction and other costs | | | — | | | (63 | ) | | (63 | ) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (63 | ) |
| Loss on repayment of bridge loan | | | (6 | ) | | — | | | (6 | ) | | — | | | — | | | — | | | 6 | | | — | | | — | | | — | | | — | |
| Unrealized loss on warrants | | | (120 | ) | | — | | | (120 | ) | | — | | | — | | | — | | | — | | | — | | | — | | | 120 | | | — | |
| Other expense, net | | | (4 | ) | | (7 | ) | | (11 | ) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (11 | ) |
| Minority interest expense | | | (14 | ) | | — | | | (14 | ) | | — | | | (26 | ) | | — | | | 20 | | | 20 | | | — | | | — | | | — | |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Income (loss) before income taxes | | | (223 | ) | | (1,049 | ) | | (1,272 | ) | | (5 | ) | | (47 | ) | | 5 | | | 18 | | | (44 | ) | | 48 | | | 121 | | | (1,176 | ) |
| Income tax benefit (expense) | | | (47 | ) | | (65 | ) | | (112 | ) | | 423 | | | — | | | — | | | 2 | | | — | | | — | | | — | | | 313 | |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Net income (loss) | | $ | (270 | ) | $ | (1,114 | ) | $ | (1,384 | ) | $ | 418 | | $ | (47 | ) | $ | 5 | | $ | 20 | | $ | (44 | ) | $ | 48 | | $ | 121 | | $ | (863 | ) |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Net loss per common share(10): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Basic | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (6.42 | ) |
| | Diluted | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (6.42 | ) |
| Average common shares(10): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Basic | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 134.3 | |
| | Diluted | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 134.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (a) Includes depreciation expense of: | | $ | (52 | ) | $ | (15 | ) | $ | (67 | ) | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (67 | ) |
WARNER MUSIC GROUP CORP.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(1)Reflects our historical operating results for the combined ten-month transition period ended September 30, 2004, as follows:
| | Successor
| | Predecessor
| | Combined
| |
|---|
| | Seven-Month
Period Ended
September 30, 2004
| | Three-Month
Period Ended
February 29, 2004
| | Ten-Month
Period Ended
September 30, 2004
| |
|---|
| |
| | (in millions)
| |
| |
|---|
| Revenues | | $ | 1,769 | | $ | 779 | | $ | 2,548 | |
| Costs and expenses: | | | | | | | | | | |
| | Costs of revenues(a) | | | (944 | ) | | (415 | ) | | (1,359 | ) |
| | Selling, general and administrative expenses(a) | | | (677 | ) | | (319 | ) | | (996 | ) |
| | Impairment of goodwill and other intangible assets | | | — | | | — | | | — | |
| | Amortization of intangible assets | | | (104 | ) | | (56 | ) | | (160 | ) |
| | Restructuring costs | | | (26 | ) | | — | | | (26 | ) |
| | |
| |
| |
| |
| Total costs and expenses | | | (1,751 | ) | | (790 | ) | | (2,541 | ) |
| | |
| |
| |
| |
| Operating income (loss) | | | 18 | | | (11 | ) | | 7 | |
| Interest expense, net | | | (80 | ) | | (2 | ) | | (82 | ) |
| Net investment-related losses | | | — | | | — | | | — | |
| Equity in the losses of equity-method investees, net | | | (2 | ) | | (2 | ) | | (4 | ) |
| Deal-related transaction and other costs | | | — | | | — | | | — | |
| Loss on repayment of bridge loan | | | (6 | ) | | — | | | (6 | ) |
| Unrealized loss on warrants | | | (120 | ) | | — | | | (120 | ) |
| Other expense, net | | | (4 | ) | | — | | | (4 | ) |
| Minority interest expense | | | (14 | ) | | — | | | (14 | ) |
| | |
| |
| |
| |
| Income (loss) before income taxes | | | (208 | ) | | (15 | ) | | (223 | ) |
| Income tax benefit (expense) | | | (30 | ) | | (17 | ) | | (47 | ) |
| | |
| |
| |
| |
| Net income (loss) | | $ | (238 | ) | $ | (32 | ) | $ | (270 | ) |
| | |
| |
| |
| |
| | | | | | | | | | |
| (a) Includes depreciation expense of: | | $ | (36 | ) | $ | (16 | ) | $ | (52 | ) |
(2)Reflects our historical operating results for the pre-acquisition, two-month period ended November 30, 2003.
(3)Reflects pro forma adjustments to exclude the historical, pre-acquisition operating results relating to assets and liabilities that were not acquired or assumed by us in the Acquisition. Such adjustments consist of (i) the elimination of $15 million of interest income on cash and equivalents that were not acquired, (ii) the elimination of $10 million of interest expense on debt, capital lease
and intercompany obligations that were not assumed, (iii) the elimination of $1 million of net, income on equity-method investees that were not acquired, (iv) the elimination of $1 million of revenues and $2 million of distribution costs relating to the sale of our physical distribution operations to Cinram, and (v) the elimination of $423 million of tax expense relating to the write-off of a deferred tax asset for net operating losses that was only available to us while we remained a member of the Time Warner consolidated tax return.
No tax benefit has been provided on the aggregate pro forma decrease in pretax income due to the uncertainty of realization of Holdings' U.S.-based deferred tax assets.
(4)Pro forma adjustments to record the Acquisition and the Original Financing for the twelve months ended September 30, 2004 reflect:
•an increase in interest expense of $40 million for the five-month period ended February 29, 2004 consisting of (i) a $19 million increase relating to $1.15 billion of borrowings under the term loan portion of our senior secured credit facility used to fund a portion of the cash purchase price and other transaction costs at a variable interest rate of 3.90% per annum based on three-month LIBOR rates for the five-month period ended February 29, 2004 plus a margin of 2.75%, (ii) a $16 million increase relating to $500 million of borrowings under Acquisition Corp.'s senior subordinated bridge loan facility used to fund a portion of the cash purchase price at an interest rate of 7.5% per annum and (iii) a $5 million increase relating to the amortization of $78 million of financing-related fees using a weighted-average life of 7 years paid in connection with the senior secured credit facility and senior subordinated bridge loan facility;
•an increase in selling, general and administrative expenses of $4 million for the five-month, pre-acquisition period ended February 29, 2004 relating to the $10 million annual management advisory fees paid to the Investors under the management services agreement described elsewhere herein;
•an increase in minority interest in the amount of $26 million to reflect aggregate annual preferred dividends of $40 million based on the original liquidation preference of $400 million and a dividend rate of 10% per annum on Holdings' preferred shares held by the Investors;
•a net decrease in amortization expense of intangible assets in the amount of $23 million for the five-month, pre-acquisition period ended February 29, 2004 consisting of (i) the elimination of $97 million of historical amortization expense which more than offset (ii) an increase in amortization expense of $74 million relating to the new values allocated on a preliminary basis
Intangible Assets Acquired
| | Allocated Value
| | Weighted-Average
Useful Life
| | Annual
Amortization
Expense
| | Pro Forma
Adjustments For
the Five-Month,
Pre-Acquisition
Period Ended
February 29, 2004
|
|---|
| | (millions)
| | (years)
| | (millions)
| | (millions)
|
|---|
| Finite-Lived Intangible Assets: | | | | | | | | | | | |
| | Recorded music catalog | | $ | 1,216 | | 10 | | $ | 122 | | $ | 51 |
| | Music publishing catalog | | | 808 | | 15 | | | 54 | | | 23 |
| | Trademarks | | | 10 | | 15 | | | 1 | | | — |
| | Other intangible assets subject to amortization | | | 5 | | 5 | | | 1 | | | — |
| | |
| | | |
| |
|
| | | $ | 2,039 | | | | $ | 178 | | $ | 74 |
| | |
| | | |
| |
|
Indefinite-Lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
| | Trademarks | | $ | 100 | | Indefinite | | | — | | | — |
| | Goodwill | | | 978 | | Indefinite | | | — | | | — |
| | |
| | | |
| |
|
| | | $ | 1,078 | | | | | — | | | — |
| | |
| | | |
| |
|
| Total intangible assets | | $ | 3,117 | | | | $ | 178 | | $ | 74 |
| | |
| | | |
| |
|
No tax benefit has been provided on the aggregate pro forma decrease in pretax income due to the uncertainty of realization of Warner Music Group Corp.'s U.S.-based deferred tax assets.
(5)Reflects pro forma adjustments to decrease cost of revenues in the amount of $5 million for the October 2003 period in which the more favorable, market-based pricing arrangements under the third-party Cinram Agreements for manufacturing, packaging and physical distribution services were not in effect.
No tax provision has been provided on the pro forma increase in pretax income arising from this adjustment. This is because this adjustment, when taken in combination with the other pro forma adjustments described herein, still results in an aggregate net pretax loss for the Company. Accordingly, no tax benefit has been provided on the aggregate pro forma adjustments to pretax loss due to the uncertainty of realization of the Warner Music Group Corp.'s U.S.-based deferred tax assets.
(6)Pro forma adjustments to record the Acquisition Corp. Refinancing for the twelve months ended September 30, 2004 reflect:
•a net increase in interest expense of $8 million and the elimination of a $6 million loss incurred on the repayment of the bridge loan. The pro forma adjustment to interest expense is calculated as follows:
Description
| | Annual Interest
Expense(a)
| | Amount of Interest
Expense in Historical
Operating Results
| | Pro Forma
Adjustment
| |
|---|
| |
| | (in millions)
| |
|---|
| • | | Issuance of $465 million principal amount of U.S. dollar notes at a fixed interest rate of 7.375% per annum | | $ | 34 | | $ | 16 | | $ | 18 | |
| • | | Issuance of £100 million principal amount of sterling notes at a fixed interest rate of 8.125% per annum, which has been translated at a U.S. Dollar equivalent rate of $1.80 per British Pound | | | 15 | | | 7 | | | 8 | |
| • | | Additional $50 million of borrowings under the term loan portion of Acquisition Corp.'s senior secured credit facility at a variable interest rate of 4.01% per annum | | | 2 | | | 1 | | | 1 | |
| • | | Amortization of $34 million of debt issuance costs arising from the issuance of the Acquisition Corp. Notes over a weighted average life of 10 years | | | 3 | | | 2 | | | 1 | |
| | | | |
| |
| |
| |
| | | | | $ | 54 | | $ | 26 | | $ | 28 | |
| | | | |
| |
| | | | |
| • | | Elimination of pro forma interest expense relating to the repayment of $500 million of borrowings under Acquisition Corp.'s senior subordinated bridge facility | | | | | | | | | (20 | ) |
| | | | | | | | | | |
| |
| | | | | | | | | | | $ | 8 | |
| | | | | | | | | | |
| |
(a)With respect to variable-rate debt, interest expense is based upon underlying three-month LIBOR rates for the twelve months ended September 30, 2004.
•a decrease in minority interest expense of $20 million resulting from the redemption of half of the shares of Holdings preferred stock that had a liquidation preference of $200 million and a dividend rate of 10% per annum.
Tax benefits of $2 million have been provided at a 30% tax rate on the $8 million pro forma decrease in international pretax income relating to Acquisition Corp.'s sterling notes. However, no tax provision has been provided on the pro forma increase in U.S.-based pretax income relating to minority interest expense. This is because this adjustment, when taken in combination with the other pro forma adjustments described herein, still results in an aggregate net pretax loss for the
Company. Accordingly, no tax benefit has been provided on the aggregate pro forma adjustments to U.S.-based pretax loss due to the uncertainty of realization of Warner Music Group Corp.'s U.S.-based deferred tax assets.
(7)Pro forma adjustments to record the Holdings Refinancing for the twelve months ended September 30, 2004 reflect:
•an increase in interest expense of $64 million consisting of (i) an $18 million increase relating to the issuance of $250 million principal amount of Holdings Floating Rate Notes at a variable interest rate of 7.085% based on three-month LIBOR rates plus a margin of 4.375%, (ii) a $24 million increase relating to the issuance of $397 million principal amount at maturity of Holdings Discount Notes ($250 million of proceeds after the original issuance discount) at a fixed interest rate of 9.5%, (iii) a $20 million increase relating to the issuance of $200 million principal amount of Holdings PIK Notes at a variable interest rate of 9.73% based on six-month LIBOR rates plus a margin of 7% and accretion of original issue discount, and (iv) a $2 million increase relating to the amortization of $15 million of debt issuance costs over a weighted-average period of 9 years.
•a decrease in minority interest expense of $20 million resulting from the redemption of the remaining shares of Holdings preferred stock that had a liquidation preference of $200 million and a dividend rate of 10% per annum.
No tax benefit has been provided on the aggregate pro forma decrease in U.S.-based pretax income arising from the Holdings Refinancing due to the uncertainty of realization of Warner Music Group's U.S.-based deferred tax assets.
(8)Pro forma adjustments to record the Initial Common Stock Offering for the twelve months ended September 30, 2004 reflect:
•an aggregate decrease in interest expense of $48 million consisting of (i) a $20 million decrease relating to the redemption of all $200 million principal amount of Holdings PIK Notes at a variable interest rate of 9.75% based on six-month LIBOR rates plus a margin of 7%, (ii) an $18 million decrease relating to the redemption of all $250 million of Holdings Floating Rate Notes at a variable interest rate of 7.09% based on three-month LIBOR rates plus a margin of 4.375%, (iii) an $8 million decrease relating to the redemption of $88 million accreted principal amount of Holdings Discount Notes as of December 31, 2004 at a fixed interest rate of 9.5% and (iv) a $2 million decrease relating to the amortization of $16 million of allocable deferred financing costs and original issuance discount that was being amortized over a weighted-average period of 9 years.
No tax provision has been provided on the pro forma increase in U.S.-based pretax income. This is because this adjustment, when taken in combination with the other pro forma adjustments described herein, still results in an aggregate net pretax loss for the Company. Accordingly, no tax benefit has been provided on the aggregate pro forma adjustment to U.S.-based pretax loss due to the uncertainty of realization of Warner Music Group Corp.'s U.S.-based deferred tax assets.
In addition, the pro forma consolidated condensed statement of operations excludes $52 million of one-time, pretax charges because they have no continuing impact on our operations. Such charges consist of (i) $16 million to write off debt issuance costs and unamortized original issuance discount relating to the Holdings Notes that will be redeemed using a portion of the proceeds from the Initial Common Stock Offering and (ii) $36 million to redeem a portion of the Holdings
Notes, representing the aggregate redemption price (including redemption premiums and interest obligations through the anticipated redemption date thereon) in excess of the carrying value of the corresponding portion of the Holdings Notes as of December 31, 2004.
(9)Pro forma adjustments to record the Concurrent Transactions for the twelve months ended September 30, 2004 reflect:
•a net decrease in interest expense of $1 million consisting of (i) an increase in interest expense of $9 million relating to the incurrence of $250 million of additional term loan borrowings under Acquisition Corp.'s proposed amended and restated senior secured credit facility at a variable interest rate of 3.76% per annum based on three-month LIBOR rates plus a margin of 2.5% and (ii) a cumulative decrease in interest expense of $10 million relating to an average 71 basis point reduction in the applicable credit margin on the $1.441 billion pro forma, weighted-average term loan borrowings during the period under our proposed amendment to the senior secured credit agreement.
•the elimination of a $120 million unrealized loss on warrants resulting from the assumed repurchase of the Three-Year Warrants held by Historic TW.
No tax provision has been provided on the pro forma increase in U.S.-based pretax income. This is because this adjustment, when taken in combination with the other pro forma adjustments described herein, still results in an aggregate net pretax loss for the Company. Accordingly, no tax benefit has been provided on the aggregate pro forma adjustments to U.S.-based pretax loss due to the uncertainty of realization of Warner Music Group Corp.'s U.S.-based deferred tax assets.
In addition, the pro forma consolidated condensed statement of operations excludes a net $97 million one-time, pretax charge because it has no continuing impact on our operations. Such charge consists of (i) an $11 million gain relating to the assumed repurchase of the Three-Year Warrants held by Historic TW, representing the excess of the $177 million carrying value of the liability as of December 31, 2004 over the $166 million of cash paid to Historic TW, (ii) a $73 million charge relating to the termination of the management services agreement and (iii) a $35 million charge relating to the payment of one-time, special bonuses to management and employees of Warner Music Group.
(10)Pro forma basic earnings (loss) per common share is computed by dividing earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Pro forma diluted earnings per common share is computed by dividing earnings (loss) available to common stockholders by the sum of weighted average common shares outstanding plus dilutive common shares for the period. Pro forma basic and diluted common shares also include the number of shares from this offering whose proceeds were used for the repayment of debt.
In connection with the Initial Common Stock Offering, the Company will (i) convert all of the outstanding shares of Class L Common Stock into shares of Class A Common Stock, (ii) rename all of the outstanding shares of Class A Common Stock as common stock, which will have the effect of eliminating from our authorized capital stock the Class L Common Stock and Class A Common Stock and (iii) authorize a 1,139 for 1 split of our common stock. Pro forma basic and diluted net income (loss) per common share has been computed after giving effect to the above transactions.
The following table sets forth the computation of pro forma basic and diluted net income (loss) per share (in millions, except per share amounts):
| | Twelve Months Ended
September 30,
2004
| |
|---|
| Basic and diluted pro forma net loss per common share: | | | | |
| | Numerator: | | | | |
| | | | Net loss | | $ | (863 | ) |
| | |
| |
| | Denominator: | | | | |
| | | | Weighted average common shares outstanding | | | 113.6 | |
| | | | Less: Weighted average unvested common shares subject to repurchase or cancellation | | | (6.1 | ) |
| | | | Add: | | | | |
| | | | | | Shares from this offering whose proceeds would be used for the repayment of debt(1) | | | 26.8 | |
| | |
| |
| | | | | | | | Denominator for basic calculation | | | 134.3 | |
| | | | Effect for dilutive securities | | | — | |
| | |
| |
| | | | | | | | Denominator for diluted calculation | | | 134.3 | |
| | |
| |
| | Pro forma net loss per common share—basic and diluted | | $ | (6.42 | ) |
| | |
| |
(1)Calculated as $574 million of proceeds to be used in the redemption of debt, including redemption premiums and accrued interest thereon through the anticipated date of redemption, divided by the offering proceeds of $21.38 per share, net of issuance costs.
Because the Company recognized a pro forma net loss for the twelve months ended September 30, 2004, the effects from the exercise of any outstanding stock options or the vestiture of shares of restricted stock, during such period would have been antidilutive. Accordingly, they have not been included in the presentation of diluted net income (loss) per common share.
WARNER MUSIC GROUP CORP.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
For the Three Months Ended December 31, 2004
| | Historical
Three
Months
Ended
December 31,
2004(11)
| |
| |
| |
| |
| |
|---|
| | Pro Forma Adjustments
| |
| |
|---|
| | The Holdings
Refinancing(12)
| | The Initial
Common Stock
Offering(13)
| | The Concurrent Transactions(14)
| | Pro Forma
| |
|---|
| | (in millions, except per share data) (unaudited)
| |
|---|
| Revenues | | $ | 1,088 | | $ | — | | $ | — | | $ | — | | $ | 1,088 | |
| Costs and expenses: | | | | | | | | | | | | | | | | |
| | Costs of revenues(a) | | | (581 | ) | | — | | | — | | | — | | | (581 | ) |
| | Selling, general and administrative expenses(a) | | | (331 | ) | | — | | | — | | | — | | | (331 | ) |
| | Amortization of intangible assets | | | (46 | ) | | — | | | — | | | — | | | (46 | ) |
| | |
| |
| |
| |
| |
| |
| Total costs and expenses | | | (958 | ) | | | | | — | | | — | | | (958 | ) |
| | |
| |
| |
| |
| |
| |
| Operating income (loss) | | | 130 | | | — | | | | | | — | | | 130 | |
| Interest expense, net | | | (38 | ) | | (15 | ) | | 12 | | | (1 | ) | | (42 | ) |
| Equity in the losses of equity-method investees, net | | | (1 | ) | | — | | | — | | | — | | | (1 | ) |
| Unrealized loss on warrants | | | (22 | ) | | — | | | | | | 22 | | | — | |
| Other income (expense) net | | | 4 | | | — | | | — | | | — | | | 4 | |
| Minority interest expense | | | (5 | ) | | 5 | | | — | | | — | | | — | |
| | |
| |
| |
| |
| |
| |
| Income (loss) before income taxes | | | 68 | | | (10 | ) | | 12 | | | 21 | | | 91 | |
| Income tax benefit (expense) | | | (32 | ) | | — | | | — | | | — | | | (32 | ) |
| | |
| |
| |
| |
| |
| |
| Net income (loss) | | $ | 36 | | $ | (10 | ) | $ | 12 | | $ | 21 | | $ | 59 | |
| | |
| |
| |
| |
| |
| |
| Net income per common share(15): | | | | | | | | | | | | | | | | |
| | Basic | | | | | | | | | | | | | | $ | 0.44 | |
| | Diluted | | | | | | | | | | | | | | $ | 0.42 | |
| Average common shares(15): | | | | | | | | | | | | | | | | |
| | Basic | | | | | | | | | | | | | | | 134.3 | |
| | Diluted | | | | | | | | | | | | | | | 142.1 | |
| | | | | | | | | | |
| (a) Includes depreciation expense of: | | $ | (14 | ) | $ | — | | $ | — | | $ | — | | $ | (14 | ) |
(11)Reflects our historical operating results for the three months ended December 31, 2004.
(12)Pro forma adjustments to record the Holdings Refinancing for the three months ended December 31, 2004 reflect:
•an increase in interest expense of $15 million consisting of (i) a $4 million increase relating to the issuance of $250 million principal amount of Holdings Floating Rate Notes at a variable interest rate of 6.675% based on three-month LIBOR rates plus a margin of 4.375%, (ii) a $6 million increase relating to the issuance of $397 million principal amount at maturity of Holdings Discount Notes ($250 million of proceeds after the original issuance discount) at a fixed interest rate of 9.5%, (iii) a $5 million increase relating to the issuance of $200 million principal amount of Holdings PIK Notes at a variable interest rate of 9.48% based on six-month LIBOR rates plus a margin of 7% and accretion of original issuance discount, (iv) a $1 million increase relating to the amortization of $15 million of debt issuance costs over a weighted-average period of 9 years and (v) a $1 million decrease relating to the amount of interest expense included in our historical operating results that was already considered in the adjustments above,
•a decrease in minority interest expense of $5 million resulting from the redemption of the remaining shares of Holdings preferred stock that had a liquidation preference of $200 million and a dividend rate of 10% per annum.
No tax benefit has been provided on the aggregate pro forma decrease in U.S.-based pretax income arising from the Holdings Refinancing due to the uncertainty of realization of U.S.-based deferred tax assets.
(13)Pro forma adjustments to record the Initial Common Stock Offering for the three months ended December 31, 2004 reflect:
•an aggregate decrease in interest expense of $12 million consisting of (i) a $5 million decrease relating to the redemption of all $200 million principal amount of Holdings PIK Notes at a variable interest rate of 9.48% based on six-month LIBOR rates plus a margin of 7%, (ii) a $4 million decrease relating to the redemption of all $250 million of Holdings Floating Rate Notes at a variable interest rate of 6.67% based on three-month LIBOR rates plus a margin of 4.375%, (iii) a $2 million decrease relating to the redemption of $88 million accreted principal amount of Holdings Discount Notes as of December 31, 2004 at a fixed interest rate of 9.5% and (iv) a $1 million decrease relating to the amortization of $16 million of allocable deferred financing costs and original issuance discount that was being amortized over a weighted-average period of 9 years.
No tax provision has been provided on the pro forma increase in U.S.-based pretax income. This is because this adjustment, when taken in combination with the other pro forma adjustments described herein and additional projected pretax losses for fiscal 2005, results in an aggregate net pretax loss for the Company. Accordingly, no tax benefit has been provided on the aggregate pro forma adjustment to U.S.-based pretax income due to the uncertainty of realization of Warner Music Group Corp.'s U.S.-based deferred tax assets.
In addition, the pro forma consolidated condensed statement of operations excludes $52 million of one-time, pretax charges because they have no continuing impact on our operations. Such charges consist of (i) $16 million to write off debt issuance costs and unamortized original issuance
discount relating to the Holdings Notes that will be redeemed using a portion of the proceeds from the Initial Common Stock Offering and (ii) $36 million to redeem a portion of the Holdings Notes, representing the aggregate redemption price (including redemption premiums and interest obligations through the anticipated redemption date thereon) in excess of the carrying value of the corresponding portion of the Holdings Notes as of December 31, 2004.
(14)Pro forma adjustments to record the Concurrent Transactions for the three months ended December 31, 2004 reflect:
•a net increase in interest expense of $1 million consisting of (i) an increase in interest expense of $4 million relating to the incurrence of $250 million of additional term loan borrowings under Acquisition Corp.'s senior secured credit facility at a variable interest rate of 5.6% per annum based on three-month LIBOR rates plus a margin of 2.5%, and (ii) a cumulative decrease in interest expense of $3 million relating to an average 71 basis point reduction in the average applicable credit margin on $1.441 billion pro forma, weighted-average term loan borrowings during the period under our proposed amendment to the senior secured credit agreement,
•the elimination of the $22 million of unrealized loss on warrants resulting from the assumed repurchase of the Three-Year Warrants held by Historic TW.
No tax provision has been provided on the pro forma increase in U.S.-based pretax income. This is because this adjustment, when taken in combination with the other pro forma adjustments described herein and additional projected pretax losses for fiscal 2005, results in an aggregate net pretax loss for the Company. Accordingly, no tax benefit has been provided on the aggregate pro forma adjustments to U.S.-based pretax income due to the uncertainty of realization of Warner Music Group Corp.'s U.S.-based deferred tax assets.
In addition, the pro forma consolidated condensed statement of operations excludes a net $97 million one-time, pretax charge because it has no continuing impact on our operations. Such charge consists of (i) an $11 million gain relating to the assumed repurchase of the Three-Year Warrants held by Historic TW, representing the excess of the $177 million carrying value of the liability as of December 31, 2004 over the $166 million of cash paid to Historic TW, (ii) a $73 million charge relating to the termination of the management services agreement and (iii) a $35 million charge relating to the payment of one-time, special bonuses to management and employees of Warner Music Group.
(15)Pro forma basic earnings (loss) per common share is computed by dividing earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Pro forma diluted earnings per common share is computed by dividing earnings (loss) available to common stockholders by the sum of weighted average common shares outstanding plus dilutive common shares for the period. Pro forma basic and diluted common shares also include the number of shares from this offering whose proceeds were used for the repayment of debt.
In connection with the Initial Common Stock Offering, the Company will (i) convert all of the outstanding shares of Class L Common Stock into shares of Class A Common Stock, (ii) rename all of the outstanding shares of Class A Common Stock as common stock, which will have the effect of eliminating from our authorized capital stock the Class L Common Stock and Class A Common Stock and (iii) authorize a 1,139 for 1 split of our common stock. Pro forma basic and diluted net income (loss) per common share has been computed after giving effect to the above transactions.
The following table sets forth the computation of pro forma basic and diluted net income (loss) per share (in millions, except per share amounts):
| | Three Months Ended
December 31,
2004
| |
|---|
| Basic and diluted pro forma net income per common share: | | | | |
| | Numerator: | | | | |
| | | | Net income | | $ | 59 | |
| | |
| |
| | Denominator: | | | | |
| | | | Weighted average common shares outstanding | | | 114.6 | |
| | | | Less: Weighted average unvested common shares subject to repurchase or cancellation | | | (7.1 | ) |
| | | | Add: | | | | |
| | | | | | Shares from this offering whose proceeds would be used for the repayment of debt(1) | | | 26.8 | |
| | |
| |
| | | | | | | | Denominator for basic calculation | | | 134.3 | |
| | | | Effect for dilutive securities: | | | | |
| | | | Add: Weighted average stock options and unvested common shares subject to repurchase or cancellation | | | 7.8 | |
| | |
| |
| | | | | | | | Denominator for diluted calculation | | | 142.1 | |
| | |
| |
| | Pro forma net income per common share—basic | | $ | 0.44 | |
| | |
| |
| | Pro forma net income per common share—diluted | | $ | 0.42 | |
| | |
| |
(1)Calculated as $574 million of proceeds to be used in the redemption of debt, including redemption premiums and accrued interest thereon through the anticipated date of redemption, divided by the offering proceeds of $21.38 per share, net of issuance costs.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth our selected historical financial and other data as of the dates and for the periods indicated.
Our selected balance sheet data as of September 30, 2004 and November 30, 2003 and the statement of operations and other data for each of (i) the seven months ended September 30, 2004, (ii) the three months ended February 29, 2004, (iii) the ten months ended September 30, 2003 and (iv) the years ended November 30, 2003 and 2002 have been derived from our audited financial statements included elsewhere in this prospectus. The summary balance sheet data as of December 31, 2004 and the statement of operations and other data for the three months ended December 31, 2004 and 2003, have been derived from our unaudited interim financial statements included elsewhere in this prospectus. The balance sheet data as of November 30, 2002 are derived from our audited financial statements that are not included in this prospectus. Our summary historical balance sheet data as of September 30, 2003, December 31, 2003 and our summary historical financial data as of and for each of the two years ended November 30, 2001 and 2000 have been derived from our unaudited financial statements that are not included in this prospectus.
The comparability of our selected historical financial data has been affected by a number of significant events and transactions. These include the Acquisition in 2004, a related change in our fiscal year to September 30 from November 30, which was enacted in 2004, and the AOL Time Warner Merger in 2001. For all periods prior to the Acquisition, the music and publishing businesses formerly owned by Time Warner are referred to as "Old WMG" or the "Predecessor." For all periods subsequent to the Acquisition, the business is referred to as the "Company" or the "Successor." Due to the change in our year end, financial information for 2004 reflects a shortened ten-month period ended September 30, 2004 and is separated into two pre-acquisition and post-acquisition periods as a result of the change in accounting basis that occurred relating to the Acquisition. In addition, summary historical financial data for 2000 does not reflect the pushdown of a portion of the purchase price relating to the AOL Time Warner Merger that occurred in 2001 to our financial statements.
| |
| |
| |
| |
| |
| |
| |
| | Successor
| |
|---|
| | Predecessor
| |
|---|
| | Seven
Months
Ended
September 30,
2004
| |
| |
|---|
| | Fiscal Years Ended November 30,
| | Ten Months
Ended
September 30,
2003
| | Three Months
Ended
December 31,
2003
| | Three Months
Ended
February 29,
2004
| | Three Months
Ended
December 31,
2004
| |
|---|
| | 2000
| | 2001
| | 2002
| | 2003
| |
|---|
| | (unaudited)
| | (unaudited)
| | (audited)(1)
| | (audited)(1)
| | (unaudited)
| | (unaudited)
| | (audited)(1)
| | (audited)(1)
| | (unaudited)
| |
|---|
| | (in millions, except per share data)
| |
|---|
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues | | $ | 3,461 | | $ | 3,226 | | $ | 3,290 | | $ | 3,376 | | $ | 2,487 | | $ | 1,178 | | $ | 779 | | $ | 1,769 | | $ | 1,088 | |
| | Cost of revenues | | | (1,960 | ) | | (1,731 | ) | | (1,873 | ) | | (1,940 | ) | | (1,449 | ) | | (648 | ) | | (415 | ) | | (944 | ) | | (581 | ) |
| | Selling, general and administrative expenses | | | (1,297 | ) | | (1,402 | ) | | (1,282 | ) | | (1,286 | ) | | (995 | ) | | (391 | ) | | (319 | ) | | (677 | ) | | (331 | ) |
| | Impairment of goodwill and other intangible assets | | | — | | | — | | | (1,500 | ) | | (1,019 | ) | | — | | | (1,019 | ) | | — | | | — | | | — | |
| | Depreciation and amortization | | | (282 | ) | | (868 | ) | | (249 | ) | | (328 | ) | | (272 | ) | | (80 | ) | | (72 | ) | | (140 | ) | | (60 | ) |
| | Operating income (loss) | | | (36 | ) | | (766 | ) | | (1,542 | ) | | (1,158 | ) | | (197 | ) | | (948 | ) | | (11 | ) | | 18 | | | 130 | |
| | Interest expense, net | | | (13 | ) | | (34 | ) | | (23 | ) | | (5 | ) | | (5 | ) | | (3 | ) | | (2 | ) | | (80 | ) | | (38 | ) |
| | Income (loss) before cumulative effect of accounting change | | | (408 | ) | | (910 | ) | | (1,230 | ) | | (1,353 | ) | | (239 | ) | | (1,146 | ) | | (32 | ) | | (238 | ) | | 36 | |
| | Net income (loss) | | $ | (408 | ) | $ | (910 | ) | $ | (6,026 | ) | $ | (1,353 | ) | $ | (239 | ) | $ | (1,146 | ) | $ | (32 | ) | $ | (238 | ) | $ | 36 | |
| | Pro forma net income (loss) per common share(3): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Basic | | | | | | | | | | | | | | | | | | | | | | | $ | (2.21 | ) | $ | 0.33 | |
| | | Diluted | | | | | | | | | | | | | | | | | | | | | | | $ | (2.21 | ) | $ | 0.31 | |
| | Pro forma average common shares(3): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Basic | | | | | | | | | | | | | | | | | | | | | | | | 107.5 | | | 107.5 | |
| | | Diluted | | | | | | | | | | | | | | | | | | | | | | | | 107.5 | | | 115.3 | |
Segment Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Recorded Music | | $ | 2,929 | | $ | 2,701 | | $ | 2,752 | | $ | 2,839 | | $ | 2,039 | | $ | 1,028 | | $ | 630 | | $ | 1,429 | | $ | 940 | |
| | | Music Publishing | | | 554 | | | 547 | | | 563 | | | 563 | | | 467 | | | 159 | | | 157 | | | 348 | | | 155 | |
| | | Intersegment eliminations | | | (22 | ) | | (22 | ) | | (25 | ) | | (26 | ) | | (19 | ) | | (9 | ) | | (8 | ) | | (8 | ) | | (7 | ) |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | Total revenues | | $ | 3,461 | | $ | 3,226 | | $ | 3,290 | | $ | 3,376 | | $ | 2,487 | | $ | 1,178 | | $ | 779 | | $ | 1,769 | | $ | 1,088 | |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | Operating income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Recorded Music | | $ | (22 | ) | $ | (733 | ) | $ | (1,206 | ) | $ | (1,130 | ) | $ | (181 | ) | $ | (933 | ) | $ | (9 | ) | $ | 24 | | $ | 152 | |
| | | Music Publishing | | | 47 | | | 23 | | | (273 | ) | | 23 | | | 19 | | | 6 | | | 17 | | | 53 | | | 10 | |
| | | Corporate expenses | | | (61 | ) | | (56 | ) | | (63 | ) | | (51 | ) | | (35 | ) | | (21 | ) | | (19 | ) | | (59 | ) | | (32 | ) |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | Total operating income (loss) | | $ | (36 | ) | $ | (766 | ) | $ | (1,542 | ) | $ | (1,158 | ) | $ | (197 | ) | $ | (948 | ) | $ | (11 | ) | $ | 18 | | $ | 130 | |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | OIBDA (2): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Recorded Music | | $ | 214 | | $ | 73 | | $ | 173 | | $ | 116 | | $ | 8 | | $ | 141 | | $ | 38 | | $ | 120 | | $ | 194 | |
| | | Music Publishing | | | 91 | | | 81 | | | 88 | | | 107 | | | 88 | | | 27 | | | 38 | | | 87 | | | 24 | |
| | | Corporate expenses | | | (59 | ) | | (52 | ) | | (54 | ) | | (34 | ) | | (21 | ) | | (17 | ) | | (15 | ) | | (49 | ) | | (28 | ) |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | Total OIBDA (2) | | $ | 246 | | $ | 102 | | $ | 207 | | $ | 189 | | $ | 75 | | $ | 151 | | $ | 61 | | $ | 158 | | $ | 190 | |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | Successor
| |
|---|
| | Predecessor
| |
|---|
| | Seven
Months
Ended
September 30,
2004
| |
| |
|---|
| | Fiscal Years Ended November 30,
| | Ten Months
Ended
September 30,
2003
| | Three Months
Ended
December 31,
2003
| | Three Months
Ended
February 29,
2004
| | Three Months
Ended
December 31,
2004
| |
|---|
| | 2000
| | 2001
| | 2002
| | 2003
| |
|---|
| | (unaudited)
| | (unaudited)
| | (audited)(1)
| | (audited)(1)
| | (unaudited)
| | (unaudited)
| | (audited)(1)
| | (audited)(1)
| | (unaudited)
| |
|---|
| | (in millions)
| |
|---|
| Cash Flow Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cash flows provided by (used in): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Operating activities | | $ | 75 | | $ | (122 | ) | $ | (13 | ) | $ | 278 | | $ | 257 | | $ | 31 | | $ | 321 | | $ | 86 | | $ | 63 | |
| | | Investing activities | | | (153 | ) | | (175 | ) | | (365 | ) | | (65 | ) | | (73 | ) | | (7 | ) | | 14 | | | (2,663 | ) | | (25 | ) |
| | | Financing activities | | | 61 | | | 227 | | | 385 | | | (121 | ) | | (151 | ) | | 16 | | | (10 | ) | | 2,661 | | | (296 | ) |
| | Capital expenditures | | | (64 | ) | | (91 | ) | | (88 | ) | | (51 | ) | | (30 | ) | | (27 | ) | | (3 | ) | | (15 | ) | | (6 | ) |
Balance Sheet Data
(at period end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Cash and equivalents | | $ | 106 | | $ | 34 | | $ | 41 | | $ | 144 | | $ | 80 | | $ | 126 | | $ | 471 | | $ | 555 | | $ | 306 | |
| | Total assets | | | 6,791 | | | 17,642 | | | 5,679 | | | 4,484 | | | 5,255 | | | 4,606 | | | 4,560 | | | 5,090 | | | 5,023 | |
| | Total debt (including current portion of long-term debt) | | | 102 | | | 115 | | | 101 | | | 120 | | | 115 | | | 126 | | | 132 | | | 1,840 | | | 2,546 | |
| | Shareholders' equity | | | 5,228 | | | 14,588 | | | 3,001 | | | 1,587 | | | 2,635 | | | 1,696 | | | 1,691 | | | 280 | | | (125 | ) |
(1)Audited, except for Other Financial Data.
(2)We evaluate segment performance based on several factors, of which the primary measure is operating income (loss) before non-cash depreciation of tangible assets, non-cash amortization of intangible assets and non-cash impairment charges to reduce the carrying value of goodwill and intangible assets (which we refer to as "OIBDA"). See "Use of OIBDA" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" elsewhere herein. Note that OIBDA is different from Adjusted EBITDA as defined in "Management'shistory see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition and Liquidity—Covenant Compliance", which is presentedDividends.”
