TIME WARNER INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
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for
the quarterly period ended September 30, 2007 or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
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for the transition period from to
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Commission file number 001-15062
TIME WARNER INC.
(Exact name of Registrant as specified in its charter)
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| Delaware
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13-4099534 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification No.) |
One Time Warner Center
New York, NY 10019-8016
(Address of Principal Executive Offices) (Zip Code)
(212) 484-8000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2 of the Act). Yes o No þ
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| Description of Class
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Shares Outstanding
as of November 2, 2007 |
| Common Stock – $.01 par value
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3,614,595,917 |
TIME WARNER INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
Management’s discussion and analysis of results of operations and financial condition (“MD&A”)
is provided as a supplement to the accompanying consolidated financial statements and notes to help
provide an understanding of Time Warner Inc.’s (“Time Warner” or the “Company”) financial
condition, cash flows and results of operations. MD&A is organized as follows:
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Overview. This section provides a general description of Time Warner’s business
segments, as well as recent developments the Company believes are important in understanding
the results of operations and financial condition or in understanding anticipated future
trends. |
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Results of operations. This section provides an analysis of the Company’s results of
operations for the three and nine months ended September 30, 2007. This analysis is
presented on both a consolidated and a business segment basis. In addition, a brief
description is provided of significant transactions and events that impact the comparability
of the results being analyzed. |
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Financial condition and liquidity. This section provides an analysis of the Company’s
financial condition as of September 30, 2007 and cash flows for the nine months ended
September 30, 2007. |
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Caution concerning forward-looking statements. This section provides a description of
the use of forward-looking information appearing in this report, including in MD&A and the
consolidated financial statements. Such information is based on management’s current
expectations about future events, which are inherently susceptible to uncertainty and
changes in circumstances. Refer to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2006 (the “2006 Form 10-K”) for a discussion of the risk factors
applicable to the Company. |
As discussed more fully in Note 1 to the accompanying consolidated financial statements, the
2006 financial information has been recast so that the basis of presentation is consistent with
that of the 2007 financial information. Specifically, amounts were recast to reflect the
retrospective presentation of certain businesses that were sold as discontinued operations.
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
OVERVIEW
Time Warner is a leading media and entertainment company, whose major businesses encompass an
array of the most respected and successful media brands. Among the Company’s brands are HBO, CNN,
AOL, People, Sports Illustrated, Time and Time Warner Cable. The Company produces and distributes
films through Warner Bros. and New Line Cinema, including Harry Potter and the Order of the
Phoenix, 300, Ocean’s 13, Rush Hour 3 and Hairspray, as well as television programs, including ER,
Two and a Half Men, Cold Case, Without a Trace and The Closer. During the nine months ended
September 30, 2007, the Company generated revenues of $33.840 billion (up 8% from $31.349 billion
in 2006), Operating Income of $6.606 billion (up 27% from $5.218 billion in 2006), Net Income of
$3.356 billion (down 30% from $4.799 billion in 2006) and Cash Provided by Operations of $6.156
billion (down 6% from $6.570 billion in 2006).
Time Warner Businesses
Time Warner classifies its operations into five reportable segments: AOL, Cable, Filmed
Entertainment, Networks and Publishing.
Time Warner evaluates the performance and operational strength of its business segments based
on several factors, of which the primary financial measure is operating income before depreciation
of tangible assets and amortization of intangible assets (“Operating Income before Depreciation and
Amortization”). Operating Income before Depreciation and Amortization eliminates the uneven effects
across all business segments of considerable amounts of noncash depreciation of tangible assets and
amortization of certain intangible assets, primarily recognized in business combinations. Operating
Income before Depreciation and Amortization should be considered in addition to Operating Income,
as well as other measures of financial performance. Accordingly, the discussion of the results of
operations for each of Time Warner’s business segments includes both Operating Income before
Depreciation and Amortization and Operating Income. For additional information regarding Time
Warner’s business segments, refer to Note 10, “Segment Information.”
AOL. AOL LLC (together with its subsidiaries, “AOL”) is a leader in interactive services. In
the U.S. and internationally, AOL operates a leading network of web brands, offers free client
software and services to users who have their own Internet connection and provides services to
advertisers on the Internet. In addition, AOL operates one of the largest Internet access
subscription services in the United States. At September 30, 2007, AOL had 10.1 million AOL brand
subscribers in the U.S., which does not include registrations for the free AOL service. For the
nine months ended September 30, 2007, AOL reported total revenues of $3.930 billion (12% of the
Company’s overall revenues) and had $2.120 billion in Operating Income before Depreciation and
Amortization and $1.739 billion in Operating Income, both of which included a net pretax gain of
approximately $668 million related to the sale of AOL’s German access business.
Historically, AOL’s primary product offering has been an online subscription service that
includes dial-up Internet access, and this product currently generates the majority of AOL’s
revenues. AOL continued to experience significant declines in the first nine months of 2007 in the
number of its U.S. subscribers and related revenues, due primarily to AOL’s decisions to focus on
its advertising business and offer most of its services (other than Internet access) for free,
AOL’s significant reduction of subscriber acquisition and retention efforts, and the industry-wide
decline of the premium dial-up ISP business and growth in the broadband Internet access business.
The decline in subscribers has had an adverse impact on AOL’s Subscription revenues. However,
dial-up network costs have also decreased and are anticipated to continue to decrease as
subscribers decline. AOL’s Advertising revenues, in large part, are generated from the traffic to
and usage of the AOL service by AOL’s subscribers. Therefore, the decline in subscribers also could
have an adverse impact on AOL’s Advertising revenues generated on the AOL Network (as defined
below) to the extent that subscribers canceling their subscriptions do not maintain their
relationship with and usage of the AOL Network.
AOL’s strategy is to transition from a business that has relied heavily on Subscription revenues
from dial-up subscribers to one that attracts and engages more Internet users and takes advantage
of the growth in online advertising by providing advertising services on both the AOL Network and
on Internet sites of third-party entities (referred to as “Partner Sites”).
AOL’s focus is on growing its global web services business, while managing costs in this
business as well as in its access services business.
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
A part of AOL’s strategy is to maintain and expand relationships with current and former AOL
subscribers, whether or not they continue to purchase the dial-up Internet access subscription
service. Another component of the strategy is to permit access to most of the AOL services,
including use of the AOL client software and AOL e-mail accounts, without charge. Therefore, as
long as an individual has a means to connect to the Internet, that person can access and use most
of the AOL services for free.
The AOL Network consists of a variety of websites, related applications and services, and the
AOL and low-cost ISP services. Specifically, the AOL Network includes AOL.com, international
versions of the AOL portal, AIM, MapQuest, Moviefone, ICQ and Netscape, as well as other co-branded
websites owned by third-parties for which certain criteria have been met, including that the
Internet traffic has been assigned to AOL. Paid-search advertising activities on the AOL Network
are conducted primarily through AOL’s strategic relationship with Google Inc. (“Google”). Following
the expansion of this strategic relationship in April 2006, 95% of the equity interests in AOL are
indirectly held by the Company and 5% are indirectly held by Google.
During 2007, AOL’s advertising business has been adversely impacted by certain trends,
including accelerated fragmentation of online audiences away from the top portals, downward pricing
pressures on AOL Network advertising inventory, and the increasing usage by online advertisers of
third-party advertising networks. Consistent with these trends and AOL’s strategy, and to
supplement AOL’s online advertising businesses that provide advertising and related services on
Partner Sites, in the second quarter of 2007, AOL acquired Third Screen Media, Inc. (“TSM”), a
mobile advertising network and mobile ad-serving management platform provider, and a controlling
interest in ADTECH AG (“ADTECH”), an international online ad-serving company. In addition, as noted
under “Recent Developments,” in the third quarter of 2007, the Company purchased TACODA, Inc.
(“TACODA”), an online behavioral targeting advertising network. In addition, AOL has announced the
formation of a business group within AOL called Platform-A, which will offer advertisers access to
sophisticated targeting and measurement tools enabling AOL to optimize advertising inventory across
Platform-A’s network of Partner Sites, as well as the AOL Network.
In February 2006, Advertising.com, a wholly owned subsidiary of AOL that provides advertising
services on Partner Sites, entered into a two-year agreement with a major customer whereby
Advertising.com became the exclusive provider of online marketing services for this customer.
Advertising.com also agreed not to provide similar services to the customer’s competitors during
the term of the agreement. Under this agreement, Advertising.com has provided a variety of online
marketing services to the customer, including the management of relationships with third-party
affiliate Internet publishers, search engine marketing services, and performance and brand
advertising in the Advertising.com third-party network. The original term of the agreement was for
two years and could be terminated by either party upon ninety days’ written notice. Advertising.com
earned gross Advertising revenues from this relationship of $58 million and $162 million for the
three and nine months ended September 30, 2007, respectively, and $56 million and $102 million for
the three and nine months ended September 30, 2006, respectively.
In October 2007, Advertising.com and the customer entered into an amendment to the agreement
under which the exclusivity provisions of the original agreement, as they apply to both parties,
will terminate effective January 1, 2008. In addition, certain provisions in the contract that
provide for a minimum management fee to be paid to Advertising.com in the event the customer’s
monthly advertising expenditures drop below certain thresholds will terminate effective January 1,
2008. The amendment was entered into following receipt of a notice from the customer in August 2007
stating that the customer wanted to amend the agreement and, if the customer and Advertising.com
were not able to negotiate and enter into an acceptable amendment, the notice would serve as the
customer’s notice of termination of the agreement, to be effective ninety days later. In August
2007, the customer had announced its entry into an agreement to acquire a business believed to
perform online advertising services that are similar to those provided by Advertising.com. The
Company does not expect a significant decline in AOL’s Advertising revenues from this relationship
in the fourth quarter of 2007 as a result of the amendment. However, as described above, beginning
January 1, 2008, the customer is under no obligation to continue to do business with
Advertising.com. Accordingly, while the Company is unable to estimate the overall impact of the
amendment after January 1, 2008, it anticipates a significant decline in Advertising revenues from
this customer.
In connection with its strategy, AOL undertook certain restructuring and related activities in
2006 and the first nine months of 2007, including involuntary employee terminations, contract
terminations, facility closures and asset write-offs. As AOL continues to transition to a global
web services business, in the fourth quarter of 2007, AOL has taken and will
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
take further restructuring actions of this nature, which will result in additional restructuring charges during
the fourth quarter of 2007 and in the first quarter of 2008.
Cable. Time Warner’s cable business, Time Warner Cable Inc. and its subsidiaries (“TWC”), is
the second-largest cable operator in the U.S. and is an industry leader in developing and launching
innovative video, data and voice services. As of September 30, 2007, TWC had approximately 13.3
million basic video subscribers in technologically advanced, well-clustered systems located mainly
in five geographic areas — New York state, the Carolinas, Ohio, southern California and Texas. As
of September 30, 2007, TWC was the largest cable operator in a number of large cities, including
New York City and Los Angeles. For the nine months ended September 30, 2007, TWC delivered revenues
of $11.866 billion (35% of the Company’s overall revenues), $4.179 billion in Operating Income
before Depreciation and Amortization and $1.971 billion in Operating Income.
On July 31, 2006, a subsidiary of TWC, Time Warner NY Cable LLC (“TW NY”), and Comcast
Corporation (together with its subsidiaries, “Comcast”) completed the acquisition of substantially
all of the cable assets of Adelphia Communications Corporation (“Adelphia”) and related
transactions. In addition, effective January 1, 2007, TWC began consolidating the results of
certain cable systems located in Kansas City, south and west Texas and New Mexico (the “Kansas City
Pool”) upon the distribution of the assets of Texas and Kansas City Cable Partners, L.P. (“TKCCP”)
to TWC and Comcast. Prior to January 1, 2007, TWC’s interest in TKCCP was reported as an equity
method investment. Refer to “Recent Developments” for further details.
TWC principally offers three services — video, high-speed data and voice, which have been
primarily targeted to residential customers. Video is TWC’s largest service in terms of revenues
generated and providing video services is a competitive and highly penetrated business. TWC expects
to continue to increase video revenues through the offering of advanced digital video services, as
well as through price increases and digital video subscriber growth. TWC’s digital video
subscribers provide a broad base of potential customers for additional advanced services. Video
programming costs represent a major component of TWC’s expenses and are expected to continue to
increase, reflecting contractual rate increases, subscriber growth and the expansion of service
offerings. TWC expects that its video service margins will decline over the next few years as
increases in programming costs outpace growth in video revenues.
High-speed data has been one of TWC’s fastest-growing services over the past several years and
is a key driver of its results. As of September 30, 2007, TWC had approximately 7.4 million
residential high-speed data subscribers. TWC expects continued strong growth in residential
high-speed data subscribers and revenues for the foreseeable future; however, the rate of growth of
both subscribers and revenues is expected to continue to slow over time as high-speed data services
become increasingly well-penetrated. TWC also offers commercial high-speed data services and had
approximately 272,000 commercial high-speed data subscribers as of September 30, 2007.
Approximately 2.6 million subscribers received Digital Phone service, TWC’s voice service, as
of September 30, 2007. Under TWC’s primary calling plan, for a monthly fixed fee, Digital Phone
customers typically receive the following services: an unlimited local, in-state and U.S., Canada
and Puerto Rico calling plan, as well as call waiting, caller ID and E911 services. TWC also offers
additional calling plans with a variety of calling options that are designed to meet customers’
particular usage patterns. TWC is currently introducing an international calling plan and it
intends to offer additional plans in the future. Digital Phone enables TWC to offer its customers a
convenient package, or “bundle,” of video, high-speed data and voice services, and to compete
effectively against bundled services available from its competitors. TWC expects strong increases
in Digital Phone subscribers and revenues for the foreseeable future. TWC has begun to introduce
Business Class Phone, a commercial Digital Phone service, to small- and medium-sized businesses and
will continue to roll-out this service during the fourth quarter of 2007 in most of the systems TWC
owned before and retained after the transactions with Adelphia and Comcast (the “Legacy Systems”).
TWC has also been introducing this service in the systems acquired in and retained after the
transactions with Adelphia and Comcast (the “Acquired Systems”) during 2007 and will continue the
roll-out in the Acquired Systems during 2008.
Some of TWC’s principal competitors, direct broadcast satellite operators and incumbent local
telephone companies in particular, either offer or are making significant capital investments that
will allow them to offer services that provide
features and functions comparable to the video, data and/or voice services that TWC offers,
and they also offer them in bundles similar to TWC’s. The availability of these bundled service
offerings has intensified competition and TWC expects that competition will continue to intensify
in the future as these offerings become more prevalent.
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
In addition to the subscription services described above, TWC also earns revenues by selling
advertising time to national, regional and local businesses.
As of July 31, 2006, the date the transactions with Adelphia and Comcast closed, the
penetration rates for basic video, digital video and high-speed data services were generally lower
in the Acquired Systems than in the Legacy Systems. Furthermore, certain advanced services were not
available in some of the Acquired Systems, and an IP-based telephony service was not available in
any of the Acquired Systems. To increase the penetration of these services in the Acquired Systems,
TWC has undertaken a significant integration effort that includes upgrading the capacity and
technical performance of these systems to levels that will allow the delivery of these advanced
services and features. Such integration-related efforts are expected to be substantially complete
by the end of 2007. As of September 30, 2007, Digital Phone was available to nearly 80% of the
homes passed in the Acquired Systems. TWC expects the roll-out of Digital Phone service across the
remainder of the Acquired Systems to be substantially complete by the end of 2007.
Improvement in the financial and operating performance of the Acquired Systems depends in part
on the completion of these initiatives and the subsequent availability of TWC’s bundled advanced
services in the Acquired Systems. In addition, due to both historical and current operational and
competitive challenges, TWC expects that the acquired systems located in Los Angeles, CA and
Dallas, TX will continue to require more time and resources than the other acquired systems to
stabilize and then meaningfully improve their financial and operating performance. As of September
30, 2007, the Los Angeles and Dallas acquired systems together served approximately 1.9 million
basic video subscribers (about 50% of the basic video subscribers served by the Acquired Systems).
TWC believes that by upgrading the plant and integrating the Acquired Systems into its operations,
there is a significant opportunity over time to increase service penetration rates, and improve
Subscription revenues and Operating Income before Depreciation and Amortization in the Acquired
Systems.
Filmed Entertainment. Time Warner’s Filmed Entertainment businesses, Warner Bros.
Entertainment Group (“Warner Bros.”) and New Line Cinema Corporation (“New Line”), generated
revenues of $8.174 billion (23% of the Company’s overall revenues), $865 million in Operating
Income before Depreciation and Amortization and $592 million in Operating Income for the nine
months ended September 30, 2007.
One of the world’s leading studios, Warner Bros. has diversified sources of revenues with its
film and television businesses, including an extensive film library and global distribution
infrastructure. This diversification has helped Warner Bros. deliver consistent long-term
performance. New Line is the world’s oldest independent film company. Its primary source of
revenues is the creation and distribution of theatrical motion pictures.
Warner Bros. continues to be an industry-leader in the television business. For the 2007-2008
television season, Warner Bros. expects to produce approximately 24 prime-time series across the
five broadcast networks (including Without a Trace, Two and a Half Men, ER, Cold Case, Smallville
and Men In Trees), as well as original series for cable networks (including The Closer and
Nip/Tuck).
The sale of DVDs has been one of the largest drivers of the segment’s profit over the last
several years, and Warner Bros.’ extensive library of theatrical and television titles positions it
to continue to benefit from sales of home video product to consumers. However, the industry and the
Company have experienced a leveling of DVD sales due to several factors, including increasing
competition for consumer discretionary spending, piracy, the maturation of the standard definition
DVD format and the fragmentation of consumer time.
Piracy, including physical piracy as well as illegal online file-sharing, continues to be a
significant issue for the filmed entertainment industry. Due to technological advances, piracy has
expanded from music to movies and television programming. The Company has taken a variety of
actions to combat piracy over the last several years, including the launch of new services for
consumers at competitive price points, aggressive online and customs enforcement, compressed
release windows and educational campaigns, and will continue to do so, both individually and
together with cross-industry groups, trade associations and strategic partners.
Networks. Time Warner’s Networks segment comprises Turner Broadcasting System, Inc.
(“Turner”) and Home Box Office, Inc. (“HBO”). On September 17, 2006, Warner Bros. and CBS Corp.
(“CBS”) ceased the stand-alone operations of The WB Network and UPN, respectively, and formed The
CW, an equity method investee of the Company. The Networks
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
segment results included the operations
of The WB Network through the date of its shutdown on September 17, 2006. For the nine months ended
September 30, 2007, the Networks segment delivered revenues of $7.566 billion (20% of the Company’s
overall revenues), $2.479 billion in Operating Income before Depreciation and Amortization and
$2.245 billion in Operating Income.
The Turner networks — including such recognized brands as TNT, TBS, CNN, Cartoon Network and
CNN Headline News — are among the leaders in advertising-supported cable TV networks. For five
consecutive years, more prime-time households have watched advertising-supported cable TV networks
than the national broadcast networks. For the nine months ended September 30, 2007, TNT ranked
first among advertising-supported cable networks in total-day delivery of its key demographics,
Adults 18-49 and Adults 25-54 and in prime-time delivery ranked second for Adults 18-49 and Adults
25-54. TBS ranked second among advertising-supported cable networks in prime-time delivery of its
key demographic, Adults 18-34.
The Turner networks generate revenues principally from the sale of advertising time and
monthly subscriber fees paid by cable system operators, direct-to-home satellite operators and
other distributors. Key contributors to Turner’s success are its continued investments in
high-quality programming focused on sports, network movie premieres, original and syndicated
series, news and animation, leading to strong ratings and Advertising and Subscription revenue
growth, as well as strong brands and operating efficiency.
HBO operates the HBO and Cinemax multichannel pay television programming services, with the
HBO service ranking as the nation’s most widely distributed pay television network. HBO generates
revenues principally from monthly subscriber fees from cable system operators, direct-to-home
satellite operators and other distributors. An additional source of revenues are the ancillary
sales of its original programming, including The Sopranos, Sex and the City, Rome and Entourage.
Publishing. Time Warner’s Publishing segment consists principally of magazine publishing and
a number of direct-marketing and direct-selling businesses. The segment generated revenues of
$3.500 billion (10% of the Company’s overall revenues), $690 million in Operating Income before
Depreciation and Amortization and $545 million in Operating Income for the nine months ended
September 30, 2007.
As of September 30, 2007, Time Inc. published over 120 magazines globally, including People,
Sports Illustrated, In Style, Southern Living, Real Simple, Entertainment Weekly, Time, Cooking
Light and Fortune. It generates revenues primarily from advertising, magazine subscriptions and
newsstand sales, and its growth is derived from higher circulation of and advertising in existing
magazines, new magazine launches, acquisitions and advertising from digital properties. Time Inc.
owns IPC Media, the U.K.’s largest magazine company (“IPC”), and the magazine subscription marketer
Synapse Group, Inc. The Company’s Publishing segment has experienced sluggish print advertising
sales as advertisers are shifting advertising expenditures to digital media. As a result, Time Inc.
continues to invest in developing digital content, including the launch of MyRecipes.com, increased
functionality for CNNMoney.com, the expansion of Sports Illustrated’s digital properties and the
launch of various digital sites in the U.K. by IPC. For the nine months ended September 30, 2007,
digital Advertising revenues reflected approximately 6% of Time Inc.’s Advertising revenues. Time
Inc.’s direct-selling division, Southern Living At Home, sells home decor products through
independent consultants at parties hosted in people’s homes throughout the U.S.
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Recent Developments
Writers Guild of America Collective Bargaining Agreement
On November 5, 2007, the Writers Guild of America (East and West) (the “Guild”) commenced
a strike against film and television studios, subsequent to the expiration of the Guild’s
collective bargaining agreement on October 31, 2007. The Company’s Networks and Filmed
Entertainment segments and certain of their suppliers retain the services of writers who are
members of the Guild. If the strike continues for more than a short period of time, it could cause
delays in the production or the release dates of the segments’ television programs or feature
films, as well as higher costs resulting either from the strike or less favorable terms of a future
agreement. The Company is currently unable to estimate
the impact of the strike, if any.
Interest in TW NY Cable Holding Inc.
In September 2007, the Company proposed to TWC that it enter into discussions regarding a
transaction pursuant to which TWC’s subsidiary, TW NY Cable Holding Inc. (“TWNYCH”), would redeem a
significant portion of the Company’s 12.43% non-voting, equity interest in it. TWC’s Board of
Directors has appointed a special committee of independent directors and authorized it to consider
any proposal made by the Company and to negotiate with the Company regarding the terms of such a
transaction. No assurance can be given that any proposal will result in an agreement for TWNYCH to
redeem a portion of the Company’s interest in it or, if an agreement is reached, that a redemption
transaction will be consummated. In April 2005, in connection with the announcement of the
Adelphia/Comcast Transactions (as defined below), TWC valued the Company’s 12.43% interest (as if
the Adelphia/Comcast Transactions had occurred at that time) at approximately $2.9 billion. This
2005 valuation is not necessarily indicative of the fair value of the interest as of the date of
this report. If a redemption transaction takes place, the Company expects that TWC would finance
the transaction through available borrowing capacity under TWC’s existing committed revolving
credit facility or by accessing the bank credit or debt capital markets. If a redemption
transaction is completed, it will not change the 84% ownership interest the Company has in TWC’s
common stock (Note 2).
Common Stock Repurchase Program
In July 2005, Time Warner’s Board of Directors authorized a common stock repurchase program
that, as amended over time, allowed the Company to purchase up to an aggregate of $20 billion of
common stock during the period from July 29, 2005 through December 31, 2007. As of June 30, 2007,
the Company completed this common stock repurchase program, having repurchased approximately 1.1
billion shares of common stock from the program’s inception through such date.
On July 26, 2007, Time Warner’s Board of Directors authorized a new common stock repurchase
program that allows the Company to purchase up to an aggregate of $5 billion of common stock.
Purchases under this new stock repurchase program may be made from time to time on the open market
and in privately negotiated transactions. The size and timing of these purchases are based on a
number of factors, including price and business and market conditions. From the program’s inception
through November 6, 2007, the Company repurchased approximately 119 million shares of common stock
for approximately $2.2 billion pursuant to trading programs under Rule 10b5-1 of the Exchange Act
(Note 6).
Claxson
On October 3, 2007, the Company completed the purchase of seven pay television networks and
the sales representation rights for eight third-party-owned networks operating principally in Latin
America from Claxson Interactive Group, Inc. (“Claxson”) for $234 million in cash (Note 3).
TACODA
On September 6, 2007, the Company completed the acquisition of TACODA, an online behavioral
targeting advertising network, for $274 million in cash, net of cash acquired. The TACODA
acquisition did not significantly impact the Company’s consolidated financial results for the three
and nine months ended September 30, 2007 (Note 3).
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Divestitures of Certain Non-Core AOL Wireless Businesses
On August 24, 2007, the Company completed the sale of Tegic Communications, Inc. (“Tegic”), a
wholly owned subsidiary of AOL, to Nuance Communications, Inc. (“Nuance”) for $265 million in cash.
In the third quarter of 2007, the Company recorded a pretax gain on this sale of approximately $200
million. In addition, in the third quarter of 2007, the Company transferred the assets of Wildseed
LLC (“Wildseed”), a wholly owned subsidiary of AOL, to a third-party. The Company recorded a pretax
charge of approximately $7 million related to this divestiture in the second quarter of 2007 and an
impairment charge of approximately $18 million on the long-lived assets of Wildseed in the first
quarter of 2007. All amounts related to both Tegic and Wildseed have been reflected as discontinued
operations for all periods presented (Note 3).
Transaction with Liberty
On May 16, 2007, the Company completed a transaction in which Liberty Media Corporation
(“Liberty”) exchanged 68.5 million shares of Time Warner common stock for the stock of a subsidiary
of Time Warner that owned assets including the Atlanta Braves baseball franchise (the “Braves”) and
Leisure Arts, Inc. (“Leisure Arts”) (at a fair value of $473 million) and $960 million of cash
(collectively, the “Liberty Transaction”). Included in the 68.5 million shares of Time Warner
common stock are 4 million shares expected to be delivered to the Company upon the resolution of a
working capital adjustment that is expected to be completed in the fourth quarter of 2007. The 4
million shares have been reflected as common stock due from Liberty in the accompanying
consolidated balance sheet at September 30, 2007. The Company recorded a pretax gain of $71 million
on the sale of the Braves, which is net of indemnification obligations valued at $60 million. The
Company has agreed to indemnify Liberty for, among other things, increases in the amount due by the
Braves under Major League Baseball’s revenue sharing rules from expected amounts for fiscal years
2007 to 2027, to the extent attributable to local broadcast and other contracts in place prior to
the Liberty Transaction. The Liberty Transaction was designed to qualify as a tax-free split-off
under Section 355 of the Internal Revenue Code of 1986, as amended, and, as a result, the
historical deferred tax liabilities of $83 million associated with the Braves were no longer
required. In the first quarter of 2007, the Company recorded an impairment charge of $13 million on
its investment in Leisure Arts. The results of operations of the Braves and Leisure Arts have been
reflected as discontinued operations for all periods presented (Note 3).
Bookspan
On April 9, 2007, the Company sold its 50% interest in Bookspan, a joint venture accounted for
as an equity method investment that primarily owns and operates book clubs via direct mail and
e-commerce, to a subsidiary of Bertelsmann AG (“Bertelsmann”) for a purchase price of $145 million,
which resulted in a pretax gain of approximately $100 million (Note 3).
Parenting and Time4 Media
On March 3, 2007, the Company sold its Parenting Group and most of the Time4 Media magazine
titles, consisting of 18 of Time Inc.’s smaller niche magazines, to a subsidiary of Bonnier for
approximately $220 million, which resulted in a pretax gain of approximately $54 million. The
results of operations of the Parenting Group and Time4 Media magazine titles that were sold have
been reflected as discontinued operations for all periods presented (Note 3).
Sales of AOL’s European Access Businesses
On February 28, 2007, the Company completed the sale of AOL’s German access business to
Telecom Italia S.p.A. for $850 million in cash, resulting in a net pretax gain of approximately
$668 million. In connection with this sale, the Company entered into a separate agreement to
provide ongoing web services, including content, e-mail and other online tools and services to
Telecom Italia S.p.A. As a result of the historical interdependency of AOL’s European access and
audience businesses, the historical cash flows and operations of the access and audience businesses
were not clearly distinguishable. Accordingly, AOL’s German access business and its other European
access businesses, which were sold in 2006, have not been reflected as discontinued operations in
the accompanying consolidated financial statements (Note 3).
8
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Texas/Kansas City Cable Joint Venture
TKCCP was a 50-50 joint venture between a consolidated subsidiary of TWC (Time Warner
Entertainment-Advance/Newhouse Partnership (“TWE-A/N”)) and Comcast. On January 1, 2007, TKCCP
distributed its assets to TWC and Comcast. TWC received the Kansas City Pool, which served
approximately 788,000 basic video subscribers as of December 31, 2006, and Comcast received the
pool of assets consisting of the Houston cable systems (the “Houston Pool”), which served
approximately 795,000 basic video subscribers as of December 31, 2006. TWC began consolidating the
results of the Kansas City Pool on January 1, 2007. TKCCP was formally dissolved on May 15, 2007.
For accounting purposes, the Company has treated the distribution of TKCCP’s assets as a sale of
the Company’s 50% equity interest in the Houston Pool and as an acquisition of Comcast’s 50% equity
interest in the Kansas City Pool. As a result of the sale of the Company’s 50% equity interest in
the Houston Pool, the Company recorded a pretax gain of approximately $146 million in the first
quarter of 2007, which is included as a component of other income (loss), net in the accompanying
consolidated statement of operations for the nine months ended September 30, 2007 (Note 2).
Transactions with Adelphia and Comcast
On July 31, 2006, TW NY and Comcast completed their respective acquisitions of assets
comprising in the aggregate substantially all of the cable assets of Adelphia (the “Adelphia
Acquisition”). Additionally, on July 31, 2006, immediately before the closing of the Adelphia
Acquisition, Comcast’s interests in TWC and Time Warner Entertainment Company, L.P. (“TWE”), a
subsidiary of TWC, were redeemed (the “TWC Redemption” and the “TWE Redemption,” respectively, and,
collectively, the “Redemptions”). Following the Redemptions and the Adelphia Acquisition, on July
31, 2006, TW NY and Comcast swapped certain cable systems, most of which were acquired from
Adelphia, in order to enhance TWC’s and Comcast’s respective geographic clusters of subscribers
(the “Exchange” and, together with the Adelphia Acquisition and the Redemptions, the
“Adelphia/Comcast Transactions”). The results of the systems acquired in connection with the
Adelphia/Comcast Transactions have been included in the accompanying consolidated statement of
operations since the closing of the transactions. As a result of the closing of the
Adelphia/Comcast Transactions, TWC acquired systems with approximately 4.0 million basic video
subscribers and disposed of systems with approximately 0.8 million basic video subscribers
previously owned by TWC that were transferred to Comcast in connection with the Redemptions and the
Exchange for a net gain of approximately 3.2 million basic video subscribers.
On February 13, 2007, Adelphia’s Chapter 11 reorganization plan became effective and, under
applicable securities law regulations and provisions of the U.S. bankruptcy code, TWC became a
public company subject to the requirements of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Under the terms of the reorganization plan, the shares of TWC’s Class A common
stock that Adelphia received in the Adelphia Acquisition (representing approximately 16% of TWC’s
outstanding common stock) are being distributed to Adelphia’s creditors. On March 1, 2007, TWC’s
Class A common stock began trading on the New York Stock Exchange under the symbol “TWC.” As of
September 30, 2007, Time Warner owned approximately 84% of TWC’s outstanding common stock (Note 2).
Amounts Related to Securities Litigation
During the first and second quarters of 2007, the Company reached agreements to settle
substantially all of the remaining securities litigation claims, a substantial portion of which had
been reserved for at December 31, 2006. For the nine months ended September 30, 2007, the Company
recorded charges of approximately $153 million for these settlements. At September 30, 2007, the
Company’s remaining reserve related to these matters is approximately $10 million, including
approximately $8 million that has been reserved for an expected attorneys’ fee award related to a
previously settled matter. The Company believes the potential exposure in the securities litigation
matters that remain pending at September 30, 2007 to be de minimis (Note 11).
The Company recognizes insurance recoveries when it becomes probable that such amounts will be
received. The Company recognized insurance recoveries related to Employee Retirement Income
Security Act (“ERISA”) matters of approximately $9 million for the nine months ended September 30,
2007 and approximately $4 million and $57 million for the three and nine months ended September 30,
2006, respectively (Note 1).
9
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
RESULTS OF OPERATIONS
Changes in Basis of Presentation
Discontinued Operations
As discussed more fully in Note 1 to the accompanying consolidated financial statements, the
2006 financial information has been recast so that the basis of presentation is consistent with
that of the 2007 financial information. Specifically, the Company has reflected as discontinued
operations for all periods presented the financial condition and results of operations of certain
businesses sold during the first nine months of 2007, which include the Parenting Group, most of
the Time4 Media magazine titles, The Progressive Farmer magazine, Leisure Arts, the Braves, Tegic
and Wildseed.
Consolidation of Kansas City Pool
On January 1, 2007, the Company began consolidating the results of the Kansas City Pool it
received upon the distribution of the assets of TKCCP to TWC and Comcast.
Recent Accounting Standards
Accounting for Sabbatical Leave and Other Similar Benefits
On January 1, 2007, the Company adopted the provisions of Emerging Issues Task Force (“EITF”)
Issue No. 06-02, Accounting for Sabbatical Leave and Other Similar Benefits (“EITF 06-02”), related
to certain sabbatical leave and other employment arrangements that are similar to a sabbatical
leave. EITF 06-02 provides that an employee’s right to a compensated absence under a sabbatical
leave or similar benefit arrangement in which the employee is not required to perform any duties
during the absence is an accumulating benefit. Therefore, such arrangements should be accounted for
as a liability with the cost recognized over the service period during which the employee earns the
benefit. Adoption of this guidance resulted in an increase to accumulated deficit of approximately
$97 million (approximately $59 million, net of tax) on January 1, 2007. The resulting change in the
accrual for the nine months ended September 30, 2007 was not material.
Accounting for Uncertainty in Income Taxes
On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of
FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income tax
positions. This interpretation requires the Company to recognize in the consolidated financial
statements those tax positions determined to be more likely than not of being sustained upon
examination, based on the technical merits of the positions. Upon adoption, the Company recognized
approximately $445 million of tax benefits for positions that were previously unrecognized, of
which approximately $433 million was accounted for as a reduction to the accumulated deficit
balance and approximately $12 million was accounted for as an increase to the paid-in-capital
balance as of January 1, 2007. Additionally, the adoption of FIN 48 resulted in the recognition of
additional tax reserves for positions where there is uncertainty about the timing or character of
such deductibility. These additional reserves were largely offset by increased deferred tax assets.
After considering the impact of adopting FIN 48, the Company had a $1.6 billion reserve for
uncertain income tax positions as of January 1, 2007.
During the three months ended September 30, 2007, the Company recorded additional reserves,
including a reserve of approximately $330 million attributable to uncertainties associated with
certain tax attributes utilized by the Company that was offset by a decrease to current taxes
payable.
The
Company does not presently anticipate that its existing reserves
related to uncertain tax positions as of September 30, 2007 will
significantly increase or decrease during the twelve month period
ended September 30, 2008; however, various events could cause
the Company’s current expectations to change in the future. The majority of these
uncertain tax positions, if ever recognized in the financial statements, would be recorded in the
statement of operations as part of the income tax provision (Note 1).
10
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Significant Transactions and Other Items Affecting Comparability
As more fully described herein and in the related notes to the accompanying consolidated
financial statements, the comparability of Time Warner’s results from continuing operations has
been affected by certain significant transactions and other items in each period as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Amounts related to securities litigation and government investigations |
|
$ |
(2 |
) |
|
$ |
(29 |
) |
|
$ |
(169 |
) |
|
$ |
(90 |
) |
Asset impairments |
|
|
(1 |
) |
|
|
(200 |
) |
|
|
(36 |
) |
|
|
(200 |
) |
Gain on disposal of assets, net |
|
|
4 |
|
|
|
— |
|
|
|
673 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Operating Income (Loss) |
|
|
1 |
|
|
|
(229 |
) |
|
|
468 |
|
|
|
(268 |
) |
| |
Investment gains, net |
|
|
14 |
|
|
|
727 |
|
|
|
288 |
|
|
|
1,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Other income (loss), net |
|
|
14 |
|
|
|
727 |
|
|
|
288 |
|
|
|
1,042 |
|
| |
Minority interest impact |
|
|
— |
|
|
|
— |
|
|
|
(57 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax impact |
|
|
15 |
|
|
|
498 |
|
|
|
699 |
|
|
|
774 |
|
Income tax impact |
|
|
(9 |
) |
|
|
(282 |
) |
|
|
(330 |
) |
|
|
(381 |
) |
Other tax items affecting comparability |
|
|
12 |
|
|
|
373 |
|
|
|
92 |
|
|
|
475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax impact |
|
$ |
18 |
|
|
$ |
589 |
|
|
$ |
461 |
|
|
$ |
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the items affecting comparability above, the Company incurred merger-related,
restructuring and shutdown costs of approximately $12 million and $113 million during the three and
nine months ended September 30, 2007, respectively, and approximately $73 million and $205 million
during the three and nine months ended September 30, 2006, respectively. For further discussions of
merger-related, restructuring and shutdown costs, refer to the “Consolidated Results” and “Business
Segment Results” discussions.
Amounts Related to Securities Litigation
The Company recognized legal reserves as well as legal and other professional fees related to
the defense of various shareholder lawsuits, totaling $2 million and $178 million for the three and
nine months ended September 30, 2007, respectively, and $33 million and $147 million for the three
and nine months ended September 30, 2006, respectively. In addition, the Company recognized related
insurance recoveries of $9 million for the nine months ended September 30, 2007 and $4 million and
$57 million for the three and nine months ended September 30, 2006, respectively.
Asset Impairments
During the three and nine months ended September 30, 2007, the Company recorded noncash asset
impairment charges of $1 million and $2 million, respectively, at the AOL segment related to asset
write-offs in connection with facility closures. In addition, during the nine months ended
September 30, 2007, the Company recorded a $34 million noncash charge at the Networks segment
related to the impairment of the Courtroom Television Network LLC (“Court TV”) tradename as a
result of rebranding the Court TV network name to truTV, effective January 1, 2008.
During the three and nine months ended September 30, 2006, the Company recorded a noncash
impairment charge of approximately $200 million to reduce the carrying value of The WB Network’s
goodwill. In September 2006, the stand-alone operations of The WB Network ceased and the business
was contributed into The CW joint venture, which is discussed below.
The Company, through its Warner Bros. division, owns a 50% interest in The CW, a national
broadcast network, which it accounts for using the equity method of accounting as prescribed by
Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in
Common Stock (“APB 18”). As of September 30, 2007, the Company’s investment balance in The CW is
approximately $100 million, which is recorded in Investments in the accompanying consolidated
balance sheet. To date, The CW has not reported profits and has only recently started its second
season of programming. The ratings achieved by the network in this current programming season will
be an important factor in
11
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
determining whether The CW’s 2007 budget and long-term plan will be
achieved. Additionally, the current programming season’s ratings will form the basis for The CW’s
2008 budget and long-term operating and cash flow plans through 2011 (which is expected to be
completed in the fourth quarter of 2007). Depending on developments in these areas, it is possible
that the Company could conclude that its interest in The CW has sustained an impairment on an
other than temporary basis. Such impairment, if any, would be recorded in other income (loss), net
in the consolidated statement of operations for the year ended December 31, 2007.
Gains on Disposal of Assets, Net
For the three and nine months ended September 30, 2007, the Company recorded a $2 million
reduction and a net pretax gain of $668 million on the sale of AOL’s German access business and,
for the nine months ended September 30, 2007, the Company recorded a $1 million reduction to the
gain on the sale of AOL’s U.K. access business. In addition, for the three and nine months ended
September 30, 2007, the Company recorded a $6 million gain on the sale of four non-strategic
magazine titles at the Publishing segment.
For the nine months ended September 30, 2006, the Company recorded a gain of approximately $20
million at the Corporate segment related to the sale of two aircraft and a $2 million gain at the
AOL segment from the resolution of a previously contingent gain related to the 2004 sale of
Netscape Security Solutions (“NSS”).
Investment Gains, Net
For the three and nine months ended September 30, 2007, the Company recognized net gains of
$14 million and $288 million, respectively, primarily related to the sale of investments,
including, for the nine months ended September 30, 2007, an approximate $100 million gain on the
Company’s sale in April 2007 of its 50% interest in Bookspan and a $146 million gain on TWC’s
deemed sale of its 50% interest in the Houston Pool in connection with the distribution of TKCCP’s
assets at the Cable segment. For the nine months ended September 30, 2007, investment gains, net
also included a $4 million gain to reflect market fluctuations in equity derivative instruments.
For the three and nine months ended September 30, 2006, the Company recognized net gains of
$727 million and $1.042 billion, respectively, primarily related to the sale of investments,
including $561 million and $800 million of gains, respectively, on sales of the Company’s
investment in Time Warner Telecom Inc. and a $157 million gain on the sale of the Company’s
investment in the Theme Parks. In addition, for the nine months ended September 30, 2006, the
Company recognized a $51 million gain on the sale of the Company’s investment in Canal Satellite
Digital. For the three and nine months ended September 30, 2006, investment gains, net also
included $1 million of losses and $10 million of gains, respectively, to reflect market
fluctuations in equity derivative instruments.
Minority Interest Impact
For the nine months ended September 30, 2007, income of $57 million was attributed to minority
interests, which primarily reflects the respective minority owner’s share of the gains on TWC’s
deemed sale of the Houston Pool interest and on the sale of AOL’s German access business.
Income Tax Impact and Other Tax Items Affecting Comparability
The income tax impact reflects the estimated tax or tax benefit associated with each item
affecting comparability. Such estimated taxes or tax benefits vary based on certain factors,
including the taxability or deductibility of the items and foreign tax on certain gains. The
Company’s tax provision may also include certain other items affecting comparability. For the three
and nine months ended September 30, 2007, these items included approximately $12 million and $81
million, respectively, of tax benefits related primarily to the realization of tax attribute
carryforwards. In addition, for the nine months ended September 30, 2007, these items included
approximately $11 million related to changes in certain state tax laws. For the three and nine
months ended September 30, 2006, these items included approximately $373 million and $475 million,
respectively, of tax benefits related primarily to the realization of tax attribute carryforwards.
12
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Three and Nine Months Ended September 30, 2007 Compared to Three and Nine Months Ended September
30, 2006
Consolidated Results
Revenues. The components of revenues are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
Subscription |
|
$ |
6,170 |
|
|
$ |
6,136 |
|
|
|
1 |
% |
|
$ |
18,638 |
|
|
$ |
17,298 |
|
|
|
8 |
% |
Advertising |
|
|
2,095 |
|
|
|
2,003 |
|
|
|
5 |
% |
|
|
6,295 |
|
|
|
5,925 |
|
|
|
6 |
% |
Content |
|
|
3,141 |
|
|
|
2,349 |
|
|
|
34 |
% |
|
|
8,163 |
|
|
|
7,364 |
|
|
|
11 |
% |
Other |
|
|
270 |
|
|
|
262 |
|
|
|
3 |
% |
|
|
744 |
|
|
|
762 |
|
|
|
(2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
11,676 |
|
|
$ |
10,750 |
|
|
|
9 |
% |
|
$ |
33,840 |
|
|
$ |
31,349 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in Subscription revenues for the three and nine months ended September 30, 2007
was primarily related to increases at the Cable and Networks segments, offset partially by a
decline at the AOL segment. The increase at the Cable segment was driven by the impact of the
Acquired Systems, the consolidation of the Kansas City Pool, the continued penetration of digital
video services, video price increases and growth in high-speed data and Digital Phone subscriber
levels. The increase at the Networks segment was due primarily to higher subscription rates at both
Turner and HBO and, to a lesser extent, an increase in the number of subscribers at Turner. The
decline in Subscription revenues at the AOL segment resulted from decreases in the number of AOL
brand domestic subscribers and related revenues, as well as the sales of AOL’s European access
businesses in the fourth quarter of 2006 and first quarter of 2007.
The increase in Advertising revenues for the three and nine months ended September 30, 2007
was primarily due to growth at the AOL and Cable segments, offset partially by a decline at the
Networks segment. The increase at the AOL segment was due to growth in Advertising revenues
generated on both the AOL Network and on Partner Sites. The increase at the Cable segment was
primarily attributable to the impact of the Acquired Systems and, to a lesser extent, growth in the
Legacy Systems and the consolidation of the Kansas City Pool. The decline at the Networks segment
was primarily driven by the impact of the shutdown of The WB Network on September 17, 2006,
partially offset by higher Advertising revenues across Turner’s primary networks.
The increase in Content revenues for the three and nine months ended September 30, 2007 was
primarily related to increases at the Filmed Entertainment and Networks segments. The increase at
the Filmed Entertainment segment was primarily driven by an increase in theatrical and television
product revenues. The increase at the Networks segment was primarily due to higher ancillary sales
of HBO’s original programming.
Each of the revenue categories is discussed in greater detail by segment in “Business Segment
Results.”
Costs of Revenues. For the three months ended September 30, 2007 and 2006, costs of revenues
totaled $6.961 billion and $6.155 billion, respectively, and, as a percentage of revenues, were 60%
and 57%, respectively. For the nine months ended September 30, 2007 and 2006, costs of revenues
totaled $19.874 billion and $17.646 billion, respectively, and, as a percentage of revenues, were
59% and 56%, respectively. The increase in costs of revenues (inclusive of depreciation expense) as
a percentage of revenues for the three and nine months ended September 30, 2007 was primarily
attributable to lower margins at the Cable segment, primarily related to the Acquired Systems and
the consolidation of the Kansas City Pool. In addition, the increase in costs of revenues as a
percentage of revenues for the nine months ended September 30, 2007 was attributable to an increase
at the Filmed Entertainment segment, primarily reflecting the change in quantity and mix of
products released, partially offset by a decline at the AOL segment. The segment variations are
discussed in detail in “Business Segment Results.”
Selling, General and Administrative Expenses. For the three months ended September 30, 2007,
selling, general and administrative expenses decreased 3% to $2.407 billion in 2007 from $2.483
billion in 2006. For the nine months ended September 30, 2007, selling, general and administrative
expenses decreased 5% to $7.213 billion in 2007 from $7.593 billion in 2006. The decrease in
selling, general and administrative expenses for the three and nine months ended September 30, 2007
related primarily to a significant decline at the AOL segment, substantially due to reduced
subscriber
13
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
acquisition marketing as part of AOL’s revised strategy, partially offset by an increase
at the Cable segment primarily
related to the impact of the Acquired Systems and the consolidation of the Kansas City Pool.
The segment variations are discussed in detail in “Business Segment Results.”
Included in costs of revenues and selling, general and administrative expenses is depreciation
expense, which increased to $943 million and $2.772 billion for the three and nine months ended
September 30, 2007, respectively, from $783 million and $2.085 billion for the three and nine
months ended September 30, 2006, respectively. These increases primarily related to an increase at
the Cable segment, reflecting the impact of the Acquired Systems, the consolidation of the Kansas
City Pool and demand-driven increases in recent years of purchases of customer premise equipment.
Amortization Expense. Amortization expense increased to $167 million and $502 million for the
three and nine months ended September 30, 2007, respectively, from $163 million and $419 million
for the three and nine months ended September 30, 2006, respectively. The increase in amortization
expense for the three and nine months ended September 30, 2007 primarily related to the Cable
segment and was driven by the amortization of intangible assets related to customer relationships
associated with the Acquired Systems. This was partially offset by a decrease due to the absence
during the second and third quarters of 2007 of amortization expense associated with customer
relationships recorded in connection with the restructuring of TWE in 2003 that were fully
amortized at the end of the first quarter of 2007.
Amounts Related to Securities Litigation. As previously noted in “Recent Developments,” the
Company recognized legal reserves as well as legal and other professional fees related to the
defense of various shareholder lawsuits, totaling $2 million and $178 million for the three and
nine months ended September 30, 2007, respectively, and $33 million and $147 million for the three
and nine months ended September 30, 2006, respectively. In addition, the Company recognized related
insurance recoveries of $9 million for the nine months ended September 30, 2007 and $4 million and
$57 million for the three and nine months ended September 30, 2006, respectively.
Merger-related, Restructuring and Shutdown Costs. The Company incurred net restructuring
costs for the three and nine months ended September 30, 2007 of approximately $9 million and $103
million, respectively, primarily related to various employee terminations and other exit
activities, including $1 million and $10 million, respectively, at the Cable segment for the three
and nine months ended September 30, 2007, $4 million and $20 million, respectively, at the Networks
segment for the three and nine months ended September 30, 2007, $4 million and $46 million,
respectively, at the Publishing segment for the three and nine months ended September 30, 2007 and
$27 million at the AOL segment for the nine months ended September 30, 2007. In addition, for the
three and nine months ended September 30, 2007, the Cable segment also expensed approximately $3
million and $10 million, respectively, of non-capitalizable merger-related and restructuring costs
associated with the Adelphia/Comcast Transactions.
During the three and nine months ended September 30, 2006, the Company incurred net
restructuring costs, primarily related to various employee terminations and other exit activities,
totaling approximately $35 million and $104 million, respectively, including $27 million and $43
million, respectively, at the AOL segment for the three and nine months ended September 30, 2006,
$4 million and $14 million, respectively, at the Cable segment for the three and nine months ended
September 30, 2006, $1 million and $5 million, respectively, at the Filmed Entertainment segment
for the three and nine months ended September 30, 2006, $3 million and $37 million, respectively,
at the Publishing segment for the three and nine months ended September 30, 2006 and $5 million at
the Corporate segment for the nine months ended September 30, 2006. In addition, during the three
and nine months ended September 30, 2006, the Cable segment expensed approximately $18 million and
$29 million, respectively, of non-capitalizable merger-related costs associated with the Adelphia
Acquisition. The results for the three and nine months ended September 30, 2006 also included
shutdown costs of $38 million and $119 million, respectively, at The WB Network in connection with
the agreement between Warner Bros. and CBS to form the new fully-distributed national broadcast
network, The CW. Included in the shutdown costs for the three and nine months ended September 30,
2006 were termination charges related to terminating intercompany programming arrangements with
other Time Warner divisions, of which $18 million and $47 million, respectively, has been
eliminated in consolidation, resulting in a net pretax charge of $20 million and $72 million,
respectively.
Operating Income. Operating Income increased to $2.130 billion for the three months ended
September 30, 2007 from $1.647 billion for the three months ended September 30, 2006. Excluding the
items previously noted under “Significant Transactions and Other Items Affecting Comparability”
totaling $1 million of income, net and $229 million of expense, net
14
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
for 2007 and 2006,
respectively, Operating Income increased $253 million, primarily reflecting growth at the Cable,
Filmed Entertainment and Networks segments, partially offset by a decline at the AOL segment.
Operating Income increased to $6.606 billion for the nine months ended September 30, 2007 from
$5.218 billion for the nine months ended September 30, 2006. Excluding the items previously noted
under “Significant Transactions and Other Items Affecting Comparability” totaling $468 million of
income, net and $268 million of expense, net for 2007 and 2006, respectively, Operating Income
increased $652 million, primarily reflecting growth at the AOL, Cable and Networks segments,
partially offset by a decline at the Filmed Entertainment segment.
The segment variations are discussed under “Business Segment Results.”
Interest Expense, Net. Interest expense, net, increased to $589 million and $1.714 billion
for the three and nine months ended September 30, 2007, respectively, from $479 million and $1.114
billion for the three and nine months ended September 30, 2006, respectively. The increase in
interest expense, net is primarily due to higher average outstanding balances of borrowings as a
result of the Company’s stock repurchase program and the Adelphia/Comcast Transactions, higher
interest rates on borrowings and lower interest income related primarily to a smaller amount of
short-term investments.
Other Income (Loss), Net. Other income (loss), net, detail is shown in the table below
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Investment gains, net |
|
$ |
14 |
|
|
$ |
727 |
|
|
$ |
288 |
|
|
$ |
1,042 |
|
Income (loss) from equity investees |
|
|
(18 |
) |
|
|
12 |
|
|
|
(21 |
) |
|
|
54 |
|
Other |
|
|
2 |
|
|
|
(28 |
) |
|
|
(36 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss), net |
|
$ |
(2 |
) |
|
$ |
711 |
|
|
$ |
231 |
|
|
$ |
1,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in investment gains, net are discussed under “Significant Transactions and Other
Items Affecting Comparability.” Excluding the impact of investment gains, other income (loss), net,
remained flat for the three months ended September 30, 2007, primarily due to losses from equity
method investees, offset by other income, including foreign exchange gains, and decreased for the
nine months ended September 30, 2007, primarily due to losses from equity method investees and
higher foreign exchange losses. For the three and nine months ended September 30, 2007, the change
in income (loss) from equity investees primarily reflects the absence of equity income during these
periods due to the Company no longer treating TKCCP as an equity method investment.
Minority Interest Expense, Net. Time Warner had $84 million and $305 million of minority
interest expense, net for the three and nine months ended September 30, 2007, respectively,
compared to $89 million and $265 million for the three and nine months ended September 30, 2006,
respectively. The decrease for the three months ended September 30, 2007 primarily related to lower
profits recorded at the AOL segment. The increase for the nine months ended September 30, 2007
related primarily to the impact of the 5% minority interest in AOL issued to Google in the second
quarter of 2006 and the gain recognized by AOL on the sale of its German access business in the
first quarter of 2007. This increase was partially offset by lower minority interest expense
related to the Cable segment due in part to the change in the ownership structure at the Cable
segment. Comcast held an effective 21% minority interest in TWC until the closing of the
Adelphia/Comcast Transactions on July 31, 2006, upon which Comcast’s interest in TWC was redeemed
and Adelphia received an approximate 16% minority interest in TWC.
Income Tax Provision. Income tax expense from continuing operations was $555 million for the
three months ended September 30, 2007 compared to $443 million for the three months ended September
30, 2006 and was $1.786 billion for the nine months ended September 30, 2007 compared to $1.546
billion for the nine months ended September 30, 2006. The Company’s effective tax rate for
continuing operations was 38% and 37% for the three and nine months ended September 30, 2007,
respectively, compared to 25% and 31% for the three and nine months ended September 30, 2006,
respectively. The increase for the three and nine months ended September 30, 2007 is primarily
attributable to the higher tax attribute carryforwards recognized in the third quarter of 2006. The
income tax provisions for the three and nine months ended September 30, 2007 also reflect a charge
of approximately $47 million relating to an adjustment to tax benefits recognized
15
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
in prior periods
associated with certain foreign source income, partially offset by a tax benefit of approximately
$24 million associated with domestic research and development tax credits.
Income before Discontinued Operations and Cumulative Effect of Accounting Change. Income
before discontinued operations and cumulative effect of accounting change was $900 million for the
three months ended September 30, 2007
compared to $1.347 billion for the three months ended September 30, 2006. Basic and diluted
net income per share before discontinued operations and cumulative effect of accounting change were
both $0.24 in 2007 compared to $0.33 for both in 2006. Excluding the items previously noted under
“Significant Transactions and Other Items Affecting Comparability” totaling $18 million and $589
million of income, net for the three months ended September 30, 2007 and 2006, respectively, income
before discontinued operations and cumulative effect of accounting change increased by $124
million, primarily reflecting higher Operating Income, as noted above, partially offset by (i) the
dilutive effect of the Adelphia/Comcast Transactions, which resulted in higher depreciation,
amortization and interest expense, (ii) increased interest expense, due in part to the Company’s
common stock repurchase programs, which has resulted in higher debt levels, and (iii) lower other
income (loss), net, as noted above. Basic and diluted net income per share before discontinued
operations and cumulative effect of accounting change for the three months ended September 30, 2007
reflect the favorable impact of repurchases of shares under the Company’s stock repurchase
programs.
Income before discontinued operations and cumulative effect of accounting change was $3.032
billion for the nine months ended September 30, 2007 compared to $3.362 billion for the nine months
ended September 30, 2006. Basic and diluted net income per share before discontinued operations and
cumulative effect of accounting change were $0.81 and $0.80, respectively, in 2007 compared to
$0.79 and $0.78, respectively, in 2006. Excluding the items previously noted under “Significant
Transactions and Other Items Affecting Comparability” totaling $461 million and $868 million of
income, net for the nine months ended September 30, 2007 and 2006, respectively, income before
discontinued operations and cumulative effect of accounting change increased by $77 million,
primarily reflecting higher Operating Income, as noted above, partially offset by (i) the dilutive
effect of the Adelphia/Comcast Transactions, which resulted in higher depreciation, amortization
and interest expense, (ii) increased interest expense, due in part to the impact of the Company’s
common stock repurchase programs, which has resulted in higher debt levels, and (iii) lower other
income (loss), net, as noted above. Basic and diluted net income per share before discontinued
operations and cumulative effect of accounting change for the nine months ended September 30, 2007
reflect the favorable impact of repurchases of shares under the Company’s stock repurchase
programs.
Discontinued Operations. Discontinued operations for the three and nine months ended
September 30, 2007 and 2006 reflect certain businesses sold, which included Tegic and Wildseed and,
for the nine months ended September 30, 2007, included the Parenting Group, most of the Time4 Media
magazine titles, The Progressive Farmer magazine, Leisure Arts and the Braves. Discontinued
operations for the three and nine months ended September 30, 2006 also included the operations of
the systems transferred to Comcast in connection with the Redemptions and the Exchange and, for the
nine months ended September 30, 2006, included the Turner South network (“Turner South”) and Time
Warner Book Group (“TWBG”).
Included in discontinued operations for the three and nine months ended September 30, 2007
were a pretax gain of approximately $200 million and a related tax provision of approximately $15
million on the sale of Tegic. The tax provision on the sale of Tegic included a tax benefit
associated with the use of tax attribute carryforwards, partially offset by a tax charge
attributable to the reversal of a deferred tax asset. In addition, discontinued operations for the
nine months ended September 30, 2007 included a pretax gain of approximately $71 million and a
related tax benefit of approximately $82 million on the sale of the Braves, a pretax gain of
approximately $54 million and a related tax benefit of approximately $6 million on the sale of the
Parenting Group and most of the Time4 Media magazine titles, an impairment of approximately $18
million on AOL’s long-lived assets associated with Wildseed and an impairment of approximately $13
million on the Company’s investment in Leisure Arts. The tax benefit recognized for the Braves
transaction resulted primarily from the reversal of certain deferred tax liabilities in connection
with the Liberty Transaction. The Liberty Transaction was designed to qualify as a tax-free
split-off under Section 355 of the Internal Revenue Code of 1986, as amended, and, as a result, the
historical deferred tax liabilities associated with the Braves were no longer required. The tax
benefit recognized for the magazine sale transaction resulted primarily from the recognition of
deferred tax assets associated with the sale of the magazine titles. In addition, for the three and
nine months ended September 30, 2007, respectively, the Company incurred an additional $1 million
and $18 million accrual related to changes in estimates of Warner Music Group indemnification
liabilities and for the nine months ended September 30, 2007, the Company made
16
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
payments of $26
million related to Warner Music Group indemnification liabilities established in prior years, which
are disclosed on the Company’s accompanying consolidated statement of cash flows as Investment
activities of discontinued operations.
Included in discontinued operations for the three and nine months ended September 30, 2006
were a pretax gain of approximately $145 million on the systems transferred to Comcast in
connection with the Redemptions and the Exchange
(the “Transferred Systems”) and a tax benefit of approximately $810 million, comprised of a
tax benefit of $817 million on the Redemptions, partially offset by a provision of $7 million on
the Exchange. The tax benefit of $817 million resulted primarily from the reversal of historical
deferred tax liabilities that had existed on systems transferred to Comcast in the TWC Redemption.
The TWC Redemption was designed to qualify as a tax-free split-off under Section 355 of the
Internal Revenue Code of 1986, as amended, and, as a result, such liabilities were no longer
required. However, if the IRS were successful in challenging the tax-free characterization of the
TWC Redemption, an additional cash liability on account of taxes of up to an estimated $900 million
could become payable by the Company. The results for the nine months ended September 30, 2006 also
included a pretax gain of approximately $129 million and a related tax benefit of approximately $21
million on the sale of Turner South and a pretax gain of approximately $194 million and a related
tax benefit of approximately $28 million on the sale of TWBG. The tax benefits on the sales of
Turner South and TWBG resulted primarily from the release of a valuation allowance associated with
tax attribute carryforwards offsetting the gains on these transactions.
Cumulative Effect of Accounting Change, Net of Tax. For the nine months ended September 30,
2006, the Company recorded a benefit of $25 million, net of tax, as the cumulative effect of a
change in accounting principle upon the adoption of FASB Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (“FAS 123R”), in 2006, to recognize the
effect of estimating the number of awards granted prior to January 1, 2006 that are not ultimately
expected to vest.
Net Income and Net Income Per Common Share. Net income was $1.086 billion for the three
months ended September 30, 2007 compared to $2.322 billion for the three months ended September 30,
2006. Basic and diluted net income per common share were $0.30 and $0.29, respectively, in 2007
compared to $0.57 for both in 2006. Net income was $3.356 billion for the nine months ended
September 30, 2007 compared to $4.799 billion for the nine months ended September 30, 2006. Basic
and diluted net income per common share were $0.89 and $0.88, respectively, in 2007 compared to
$1.13 and $1.12, respectively, in 2006. Net income per common share for the nine months ended
September 30, 2007 and the three and nine months ended September 30, 2006 reflect the favorable
impact of repurchases of shares under the Company’s stock repurchase programs.
17
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Business Segment Results
AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of
the AOL segment for the three and nine months ended September 30, 2007 and 2006 are as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
635 |
|
|
$ |
1,455 |
|
|
|
(56 |
% |
) |
|
$ |
2,199 |
|
|
$ |
4,539 |
|
|
|
(52 |
% |
) |
Advertising |
|
|
540 |
|
|
|
479 |
|
|
|
13 |
% |
|
|
|
1,611 |
|
|
|
1,320 |
|
|
|
22 |
% |
|
Other |
|
|
44 |
|
|
|
30 |
|
|
|
47 |
% |
|
|
|
120 |
|
|
|
89 |
|
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,219 |
|
|
|
1,964 |
|
|
|
(38 |
% |
) |
|
|
3,930 |
|
|
|
5,948 |
|
|
|
(34 |
% |
) |
Costs of revenues(a) |
|
|
(562 |
) |
|
|
(916 |
) |
|
|
(39 |
% |
) |
|
|
(1,722 |
) |
|
|
(2,805 |
) |
|
|
(39 |
% |
) |
Selling, general and administrative(a) |
|
|
(229 |
) |
|
|
(467 |
) |
|
|
(51 |
% |
) |
|
|
(726 |
) |
|
|
(1,625 |
) |
|
|
(55 |
% |
) |
Gain (loss) on disposal of consolidated
businesses |
|
|
(2 |
) |
|
|
— |
|
|
NM |
|
| |
667 |
|
|
|
2 |
|
|
NM |
|
Asset impairments |
|
|
(1 |
) |
|
|
— |
|
|
NM |
|
| |
(2 |
) |
|
|
— |
|
|
NM |
|
Restructuring costs |
|
|
— |
|
|
|
(27 |
) |
|
NM |
|
|
|
(27 |
) |
|
|
(43 |
) |
|
|
(37 |
% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
425 |
|
|
|
554 |
|
|
|
(23 |
% |
) |
|
|
2,120 |
|
|
|
1,477 |
|
|
|
44 |
% |
|
Depreciation |
|
|
(103 |
) |
|
|
(129 |
) |
|
|
(20 |
% |
) |
|
|
(312 |
) |
|
|
(382 |
) |
|
|
(18 |
% |
) |
Amortization |
|
|
(27 |
) |
|
|
(35 |
) |
|
|
(23 |
% |
) |
|
|
(69 |
) |
|
|
(111 |
) |
|
|
(38 |
% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
295 |
|
|
$ |
390 |
|
|
|
(24 |
% |
) |
|
$ |
1,739 |
|
|
$ |
984 |
|
|
|
77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The decline in Subscription revenues for the three and nine months ended September 30, 2007
compared to the three and nine months ended September 30, 2006 was due to decreases in the number
of AOL brand domestic subscribers and related revenues, as well as the sales of AOL’s European
access businesses (for which Subscription revenues declined by approximately $410 million and
$1.110 billion for the three and nine months, respectively) in the fourth quarter of 2006 and first
quarter of 2007.
The number of AOL brand domestic subscribers was 10.1 million, 10.9 million, and 15.2 million
as of September 30, 2007, June 30, 2007 and September 30, 2006, respectively. The AOL brand
domestic average revenue per subscriber (“ARPU”) was $18.50 and $19.30 for the three months ended
September 30, 2007 and 2006, respectively, and $18.69 and $19.05 for the nine months ended
September 30, 2007 and 2006, respectively. AOL includes in its subscriber numbers individuals,
households and entities that have provided billing information and completed the registration
process sufficiently to allow for an initial log-on to the AOL service. Subscribers to the AOL
brand service include subscribers participating in introductory free-trial periods and subscribers
that are paying no or reduced monthly fees through member service and retention programs. Total AOL
brand subscribers include free-trial and retention members of approximately 3% at both September
30, 2007 and June 30, 2007 and 6% at September 30, 2006. Individuals who have registered for the
free AOL service, including subscribers who have migrated from paid subscription plans, are not
included in the AOL brand subscriber numbers presented above. As previously noted, due to the sales
of AOL’s access businesses in the U.K., Germany and France, AOL no longer has AOL brand Internet
access subscribers in Europe, although the purchasers of AOL’s European access businesses have
certain rights to use specified AOL brands for a period of time.
The decreases in subscribers are the result of a number of factors, including the effects of
AOL’s strategy, which has resulted in the migration of subscribers to the free AOL service
offering, declining registrations for the paid service in response to AOL’s significantly reduced
marketing and retention campaigns, and competition from broadband access providers. The decreases
in ARPU for the three and nine months ended September 30, 2007 compared to the similar periods in
the prior year were due primarily to a shift in the subscriber mix to lower-priced subscriber price
plans, partially offset by an increase in the percentage of revenue generating customers and, for
the nine months ended September 30, 2007, due to a price increase implemented late in the first
quarter of 2006.
18
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
In addition to the AOL brand service, AOL has subscribers to other services, both domestically
and internationally, including the Netscape and CompuServe brands. These other brand services are
not significant sources of revenues.
Advertising services include display advertising (which includes certain types of
impression-based and performance-driven advertising) and paid-search advertising, both domestically
and internationally, which are provided on both the AOL Network and on Partner Sites. Total
Advertising revenues improved for the three and nine months ended September 30, 2007 compared to
the three and nine months ended September 30, 2006 due to increased Advertising revenues generated
on both the AOL Network and on Partner Sites as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
AOL Network: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Display |
|
$ |
214 |
|
|
$ |
202 |
|
|
|
6% |
|
|
$ |
667 |
|
|
$ |
570 |
|
|
|
17% |
|
Paid-search |
|
|
163 |
|
|
|
142 |
|
|
|
15% |
|
|
|
486 |
|
|
|
422 |
|
|
|
15% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AOL Network |
|
|
377 |
|
|
|
344 |
|
|
|
10% |
|
|
|
1,153 |
|
|
|
992 |
|
|
|
16% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partner Sites |
|
|
163 |
|
|
|
135 |
|
|
|
21% |
|
|
|
458 |
|
|
|
328 |
|
|
|
40% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Advertising revenues |
|
$ |
540 |
|
|
$ |
479 |
|
|
|
13% |
|
|
$ |
1,611 |
|
|
$ |
1,320 |
|
|
|
22% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in AOL Network display Advertising revenues were primarily attributable to
increased inventory sold, offset partially by pricing declines and shifts in the mix of inventory
sold to lower-priced inventory. In addition, AOL Network display Advertising revenues for the nine
months ended September 30, 2007 included a benefit of approximately $19 million related to a change
in an accounting estimate resulting from more timely system data. The increases in AOL Network
paid-search Advertising revenues, which are generated primarily through AOL’s strategic
relationship with Google, were attributable primarily to higher revenues per search query on
certain AOL Network properties.
The increase in Advertising revenues on Partner Sites for the three and nine months ended
September 30, 2007 is primarily attributable to the growth in sales of advertising run on Partner
Sites generated by Advertising.com. In addition, for the nine months ended September 30, 2007, the
increase in Advertising revenues on Partner Sites is also attributable to the expansion of a
relationship with a major customer, which began contributing increased revenues beginning in the
second quarter of 2006. The revenues associated with this relationship increased $60 million to
$162 million for the nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006. As noted in the AOL “Overview” section, the contract with this customer was
amended during the fourth quarter of 2007. The Company does not expect a significant decline in
AOL’s Advertising revenues from this relationship in the fourth quarter of 2007 as a result of this
amendment. However, beginning January 1, 2008, the customer is under no obligation to continue to
do business with Advertising.com. Accordingly, while the Company is unable to estimate the overall
impact of the amendment after January 1, 2008, it anticipates a significant decline in Advertising
revenues from this customer.
Total Advertising revenues for the three months ended September 30, 2007 increased $18 million
from the three months ended June 30, 2007, due entirely to revenues generated on Partner Sites, as
revenues from the AOL Network did not change.
AOL expects Advertising revenues to continue to increase during the fourth quarter of 2007 as
compared to the fourth quarter of 2006 due to expected increases in sales of advertising run on
Partner Sites and, to a lesser extent, paid-search advertising on the AOL Network. However, total
Advertising revenues for the fourth quarter are expected to increase at a rate less than that experienced during the third
quarter of 2007, reflecting lower expected year-over-year growth rates for both display and
paid-search Advertising revenue on the AOL Network, primarily as a result of expected continued
pricing pressure on display advertising and lower expected search performance. Because of the uncertainty associated
with these trends coupled with the end of commitments from a major customer of Advertising.com and the impact of the $19 million
benefit recognized in the first quarter of 2007, AOL expects
continued downward pressure on year-over-year growth in Advertising revenues
in the first quarter of 2008.
For both the three and nine months ended September 30, 2007, costs of revenues decreased 39%,
and, as a percentage of revenues, were 46% and 44% for the three and nine months ended September
30, 2007, respectively, compared to 47% for the three and nine months ended September 30, 2006. For
the three and nine months ended September 30, 2007, approximately $290 million and $760 million,
respectively, of the decrease in costs of revenues were attributable to the sales of AOL’s European
access businesses. The remaining decreases for the three and nine months ended September 30,
19
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
2007
were attributable to lower network-related expenses and lower customer service expenses associated
with the closure of customer support call centers, partially offset by increases in traffic
acquisition costs associated with advertising run on Partner Sites. Network-related expenses
decreased 80% to $58 million for the three months ended September 30, 2007 from $286 million for the three months ended September 30, 2006 and decreased 76% to $223 million
for the nine months ended September 30, 2007 from $919 million for the nine months ended September
30, 2006. For the three and nine months ended September 30, 2007, approximately $180 million and
$510 million, respectively, of the decreases were attributable to the sales of AOL’s European
access businesses. The remaining declines in network-related expenses for the three and nine months
ended September 30, 2007 were principally attributable to lower usage of AOL’s dial-up network
associated with the declining AOL brand domestic dial-up subscriber base, improved pricing and
network utilization and decreased levels of long-term fixed commitments.
Selling, general and administrative expenses decreased 51% to $229 million and 55% to $726
million for the three and nine months ended September 30, 2007, respectively, of which
approximately $80 million and $270 million, respectively, were attributable to the sales of AOL’s
European access businesses. The remaining decreases in selling, general and administrative expenses
for the three and nine months ended September 30, 2007 reflect a significant reduction in direct
marketing costs of approximately $80 million and $460 million, respectively, primarily due to
reduced subscriber acquisition marketing as part of AOL’s revised strategy, and other cost savings
initiatives, partially offset by a $13 million charge related to a patent infringement litigation
settlement. The nine months ended September 30, 2006 included an approximate $14 million benefit
related to the favorable resolution of certain tax matters.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the three and nine months ended September 30, 2007 included noncash asset
impairment charges of $1 million and $2 million, respectively, related to asset write-offs in
connection with facility closures and a $2 million reduction and a net pretax gain of $668 million
on the sale of AOL’s German access business, and the results for the nine months ended September
30, 2007 included a $1 million reduction to the gain on the sale of AOL’s U.K. access business. In
addition, the results for three and the nine months ended September 30, 2007 included restructuring
charges of $4 million and $42 million, respectively, primarily related to involuntary employee
terminations, asset write-offs and facility closures, partially offset by the reversal of $4
million and $15 million, respectively, of restructuring charges that were no longer needed due to
changes in estimates for the nine months ended September 30, 2007. As AOL continues to transition
into a global web services business, in the fourth quarter of 2007, AOL has taken and will take
further restructuring actions, which will result in additional restructuring and related charges
during the fourth quarter of 2007 and the first quarter of 2008 ranging from $90 million to $130
million. The majority of these charges are expected to be incurred in the fourth quarter of 2007.
The results for the three and nine months ended September 30, 2006 included $27 million and $43
million of restructuring charges, respectively, primarily related to headcount reductions and asset
write-offs. In addition, the results for the nine months ended September 30, 2006 included a $2
million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS.
For the three months ended September 30, 2007, Operating Income before Depreciation and
Amortization and Operating Income decreased compared to the three months ended September 30, 2006,
due primarily to a decline in Subscription revenues, partially offset by lower costs of revenues,
lower selling, general and administrative expenses, and higher Advertising revenues. For the nine
months ended September 30, 2007, Operating Income before Depreciation and Amortization and
Operating Income increased compared to the nine months ended September 30, 2006, due primarily to
the $668 million gain on the sale of the German access business, higher Advertising revenues and
lower costs of revenues and selling, general and administrative expenses, partially offset by lower
Subscription revenues. For the three and nine months ended September 30, 2007, depreciation expense
decreased as a result of a decline in network assets due to subscriber declines.
In connection with AOL’s strategy, including its reduction of subscriber acquisition efforts,
AOL expects to experience a continued decline in its subscribers and related Subscription revenues,
and, for the fourth quarter of 2007, a decline in subscriber ARPU as compared to the fourth quarter
of 2006. In addition, during the fourth quarter of 2007, AOL expects to continue to reduce costs of
revenues, including dial-up network and customer service expenses, and selling, general and
administrative expenses.
The Company expects AOL’s Operating Income before Depreciation and Amortization and Operating
Income to increase in the fourth quarter of 2007 compared to the fourth quarter of 2006, excluding
the gains on the sales of AOL’s
20
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
European access businesses, primarily as a result of decreases in
marketing and other expenses (including restructuring charges) and an increase in Advertising
revenues that in the aggregate are expected to more than offset declines in Subscription revenues,
including the impact on Subscription revenues of the divestiture of AOL’s European access
businesses.
As previously noted under “Recent Developments,” on February 28, 2007, the Company completed
the sale of AOL’s German access business to Telecom Italia S.p.A. for $850 million in cash,
resulting in a net pretax gain of approximately $668 million. In connection with this sale, the
Company entered into a separate agreement to provide ongoing web services, including content,
e-mail and other online tools and services to Telecom Italia S.p.A. As a result of the historical
interdependency of AOL’s European access and audience businesses, the historical cash flows and
operations of the access and audience businesses were not clearly distinguishable. Accordingly,
AOL’s German access business and its other European access businesses, which were sold in 2006,
have not been reflected as discontinued operations in the accompanying consolidated financial
statements.
Cable. As previously noted under “Recent Developments,” on July 31, 2006, the Company
completed the Adelphia/Comcast Transactions and began consolidating the results of the Acquired
Systems. Additionally, on January 1, 2007, the Company began consolidating the results of the
Kansas City Pool. Accordingly, the operating results for the three and nine months ended September
30, 2007 include the results for the Legacy Systems, the Acquired Systems and the Kansas City Pool
for the full three- and nine-month periods, and the operating results for the three and nine months
ended September 30, 2006 include the results of the Legacy Systems for the full three- and
nine-month periods and the Acquired Systems for only the two months following the closing of the
Adelphia/Comcast Transactions and do not include the results of the Kansas City Pool. The impact of
the incremental one month and seven months of revenues and expenses of the Acquired Systems on the
results for the three and nine months ended September 30, 2007, respectively, is referred to as the
“impact of the Acquired Systems” in this report. Revenues, Operating Income before Depreciation and
Amortization and Operating Income of the Cable segment for the three and nine months ended
September 30, 2007 and 2006 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
3,780 |
|
|
$ |
3,031 |
|
|
|
25% |
|
|
$ |
11,230 |
|
|
$ |
7,696 |
|
|
|
46% |
|
Advertising |
|
|
221 |
|
|
|
178 |
|
|
|
24% |
|
|
|
636 |
|
|
|
420 |
|
|
|
51% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
4,001 |
|
|
|
3,209 |
|
|
|
25% |
|
|
|
11,866 |
|
|
|
8,116 |
|
|
|
46% |
|
Costs of revenues(a) |
|
|
(1,890 |
) |
|
|
(1,495 |
) |
|
|
26% |
|
|
|
(5,645 |
) |
|
|
(3,697 |
) |
|
|
53% |
|
Selling, general and administrative(a) |
|
|
(679 |
) |
|
|
(573 |
) |
|
|
18% |
|
|
|
(2,022 |
) |
|
|
(1,456 |
) |
|
|
39% |
|
Merger-related and restructuring costs |
|
|
(4 |
) |
|
|
(22 |
) |
|
|
(82% |
) |
|
|
(20 |
) |
|
|
(43 |
) |
|
|
(53% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
1,428 |
|
|
|
1,119 |
|
|
|
28% |
|
|
|
4,179 |
|
|
|
2,920 |
|
|
|
43% |
|
Depreciation |
|
|
(683 |
) |
|
|
(513 |
) |
|
|
33% |
|
|
|
(2,001 |
) |
|
|
(1,281 |
) |
|
|
56% |
|
Amortization |
|
|
(64 |
) |
|
|
(56 |
) |
|
|
14% |
|
|
|
(207 |
) |
|
|
(93 |
) |
|
|
123% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
681 |
|
|
$ |
550 |
|
|
|
24% |
|
|
$ |
1,971 |
|
|
$ |
1,546 |
|
|
|
27% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude depreciation. |
21
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Revenues, including the components of Subscription revenues, for the Legacy Systems, the
Acquired Systems, the Kansas City Pool and Total Systems are as follows for the three and nine
months ended September 30, 2007 and 2006 (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
|
|
| |
|
Legacy |
|
|
Acquired |
|
|
Kansas |
|
|
Total |
|
|
Legacy |
|
|
Acquired |
|
|
Total |
|
|
Total Systems |
|
| |
|
Systems |
|
|
Systems |
|
|
City Pool |
|
|
Systems |
|
|
Systems |
|
|
Systems(a) |
|
|
Systems |
|
|
% Change |
|
Subscription revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video |
|
$ |
1,705 |
|
|
$ |
689 |
|
|
$ |
136 |
|
|
$ |
2,530 |
|
|
$ |
1,623 |
|
|
$ |
467 |
|
|
$ |
2,090 |
|
|
|
21% |
|
High-speed data |
|
|
679 |
|
|
|
212 |
|
|
|
51 |
|
|
|
942 |
|
|
|
616 |
|
|
|
129 |
|
|
|
745 |
|
|
|
26% |
|
Voice(b) |
|
|
260 |
|
|
|
26 |
|
|
|
22 |
|
|
|
308 |
|
|
|
184 |
|
|
|
12 |
|
|
|
196 |
|
|
|
57% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Subscription revenues |
|
|
2,644 |
|
|
|
927 |
|
|
|
209 |
|
|
|
3,780 |
|
|
|
2,423 |
|
|
|
608 |
|
|
|
3,031 |
|
|
|
25% |
|
Advertising revenues |
|
|
144 |
|
|
|
71 |
|
|
|
6 |
|
|
|
221 |
|
|
|
132 |
|
|
|
46 |
|
|
|
178 |
|
|
|
24% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,788 |
|
|
$ |
998 |
|
|
$ |
215 |
|
|
$ |
4,001 |
|
|
$ |
2,555 |
|
|
$ |
654 |
|
|
$ |
3,209 |
|
|
|
25% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
|
|
| |
|
Legacy |
|
|
Acquired |
|
|
Kansas |
|
|
Total |
|
|
Legacy |
|
|
Acquired |
|
|
Total |
|
|
Total Systems |
|
| |
|
Systems |
|
|
Systems |
|
|
City Pool |
|
|
Systems |
|
|
Systems |
|
|
Systems(a) |
|
|
Systems |
|
|
% Change |
|
Subscription revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video |
|
$ |
5,108 |
|
|
$ |
2,096 |
|
|
$ |
409 |
|
|
$ |
7,613 |
|
|
$ |
4,822 |
|
|
$ |
467 |
|
|
$ |
5,289 |
|
|
|
44% |
|
High-speed data |
|
|
1,993 |
|
|
|
616 |
|
|
|
151 |
|
|
|
2,760 |
|
|
|
1,785 |
|
|
|
129 |
|
|
|
1,914 |
|
|
|
44% |
|
Voice(b) |
|
|
735 |
|
|
|
60 |
|
|
|
62 |
|
|
|
857 |
|
|
|
481 |
|
|
|
12 |
|
|
|
493 |
|
|
|
74% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Subscription revenues |
|
|
7,836 |
|
|
|
2,772 |
|
|
|
622 |
|
|
|
11,230 |
|
|
|
7,088 |
|
|
|
608 |
|
|
|
7,696 |
|
|
|
46% |
|
Advertising revenues |
|
|
401 |
|
|
|
211 |
|
|
|
24 |
|
|
|
636 |
|
|
|
374 |
|
|
|
46 |
|
|
|
420 |
|
|
|
51% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
8,237 |
|
|
$ |
2,983 |
|
|
$ |
646 |
|
|
$ |
11,866 |
|
|
$ |
7,462 |
|
|
$ |
654 |
|
|
$ |
8,116 |
|
|
|
46% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Amounts reflect revenues for the Acquired Systems for the two months following the
closing of the Adelphia/Comcast Transactions. |
| |
| (b) |
|
Voice revenues include revenues primarily associated with Digital Phone, TWC’s voice
service, as well as revenues associated with subscribers acquired from Comcast who received
traditional, circuit-switched telephone service, which were $8 million and $33 million for the
three and nine months ended September 30, 2007, respectively, and $12 million for both the
three and nine months ended September 30, 2006. TWC continues to provide traditional,
circuit-switched services to some of those subscribers, but is in the process of discontinuing
the circuit-switched offering in accordance with regulatory requirements. In those areas where
the circuit-switched offering is discontinued, Digital Phone is the only voice service TWC
provides. |
Subscriber numbers are as follows (thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Consolidated Subscribers(a)
as of |
|
|
Managed Subscribers(a)
as of |
|
| |
|
|
9/30/07 |
|
|
|
9/30/06 |
|
|
% Change |
|
|
9/30/07 |
|
|
|
9/30/06 |
|
|
% Change |
|
Subscribers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic video(b) |
|
|
13,308 |
|
|
|
12,643 |
|
|
|
|
5% |
|
|
13,308 |
|
|
|
13,425 |
|
|
|
(1 |
% |
) |
Digital video(c) |
|
|
7,860 |
|
|
|
6,700 |
|
|
|
|
17% |
|
|
7,860 |
|
|
|
7,024 |
|
|
|
12 |
% |
|
Residential high-speed data(d) |
|
|
7,412 |
|
|
|
6,041 |
|
|
|
|
23% |
|
|
7,412 |
|
|
|
6,398 |
|
|
|
16 |
% |
|
Commercial high-speed data(d) |
|
|
272 |
|
|
|
218 |
|
|
|
|
25% |
|
|
272 |
|
|
|
234 |
|
|
|
16 |
% |
|
Digital Phone(e) |
|
|
2,610 |
|
|
|
1,524 |
|
|
|
|
71% |
|
|
2,610 |
|
|
|
1,649 |
|
|
|
58 |
% |
|
|
|
|
| (a) |
|
Historically, managed subscribers included TWC’s consolidated subscribers and
subscribers in the Kansas City Pool of TKCCP, which TWC received on January 1, 2007 in the
TKCCP asset distribution. Beginning January 1, 2007, subscribers in the Kansas City Pool are
included in both managed and consolidated subscriber results as a result of the consolidation
of the Kansas City Pool. |
| |
| (b) |
|
Basic video subscriber numbers reflect billable subscribers who receive basic video
service. |
| |
| (c) |
|
Digital video subscriber numbers reflect billable subscribers who receive any level
of video service via digital technology. |
| |
| (d) |
|
High-speed data subscriber numbers reflect billable subscribers who receive TWC’s
Road Runner high-speed data service or any of the other high-speed data services offered by
TWC. |
| |
| (e) |
|
Digital Phone subscriber numbers reflect billable subscribers who receive IP-based
telephony service. Digital Phone subscribers exclude subscribers acquired from Comcast in the
Exchange who receive traditional, circuit-switched telephone service (which totaled
approximately 43,000 and 122,000 subscribers as of September 30, 2007 and 2006, respectively). |
For the three and nine months ended September 30, 2007, Subscription revenues increased driven
by the impact of the Acquired Systems, the consolidation of the Kansas City Pool, the continued
penetration of digital video services, video
price increases and growth in high-speed data and Digital Phone subscriber levels. Aggregate
revenues associated with
22
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
TWC’s digital video services, including digital tiers, digital pay
channels, pay-per-view, video-on-demand, subscription-video-on-demand and digital video recorders,
increased 27% to $587 million for the three months ended September 30, 2007 from $464 million for
the three months ended September 30, 2006, and increased 53% to $1.759 billion for the nine months
ended September 30, 2007 from $1.153 billion for the nine months ended September 30, 2006. Strong
growth rates for Subscription revenues associated with high-speed data and voice services are
expected to continue during the fourth quarter of 2007.
For the three and nine months ended September 30, 2007, Advertising revenues increased due to
an increase in local and national advertising, primarily due to the impact of the Acquired Systems
and, to a lesser extent, growth in the Legacy Systems and the consolidation of the Kansas City
Pool.
For the three and nine months ended September 30, 2007, costs of revenues increased 26% and
53%, respectively, and, as a percentage of revenues, were 47% and 48% for the three and nine months
ended September 30, 2007, respectively, compared to 47% and 46% for the three and nine months ended
September 30, 2006, respectively. The increases in costs of revenues were primarily related to the
impact of the Acquired Systems and the consolidation of the Kansas City Pool, as well as increases
in video programming, employee, voice and other costs. The increase in costs of revenues as a
percentage of revenues for the nine months ended September 30, 2007 reflects lower margins in the
Acquired Systems.
Video programming costs for the Legacy Systems, the Acquired Systems, the Kansas City Pool and
Total Systems were as follows for the three and nine months ended September 30, 2007 and 2006
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
Video programming costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy Systems |
|
$ |
576 |
|
|
$ |
540 |
|
|
|
7% |
|
|
$ |
1,724 |
|
|
$ |
1,581 |
|
|
|
9% |
|
Acquired Systems(a) |
|
|
254 |
|
|
|
168 |
|
|
|
51% |
|
|
|
767 |
|
|
|
168 |
|
|
|
357% |
|
Kansas City Pool |
|
|
51 |
|
|
|
— |
|
|
NM |
|
|
|
152 |
|
|
|
— |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Systems |
|
$ |
881 |
|
|
$ |
708 |
|
|
|
24% |
|
|
$ |
2,643 |
|
|
$ |
1,749 |
|
|
|
51% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
2006 amounts reflect video programming costs for the Acquired Systems for the two
months following the closing of the Adelphia/Comcast Transactions. |
Video programming costs increased due primarily to the impact of the Acquired Systems and the
consolidation of the Kansas City Pool, as well as contractual rate increases and the expansion of
service offerings. For the three and nine months ended September 30, 2007, employee costs increased
primarily due to the impact of the Acquired Systems, the consolidation of the Kansas City Pool,
higher headcount resulting from the continued roll-out of advanced services and salary increases.
Additionally, employee costs for the nine months ended September 30, 2006 included a benefit of
approximately $16 million (with an additional benefit of approximately $5 million included in
selling, general and administrative expenses) due to changes in estimates related to prior period
medical benefit accruals. For the three and nine months ended September 30, 2007, voice costs
increased $29 million to $115 million and $121 million to $338 million, respectively, primarily due
to growth in Digital Phone subscribers and the consolidation of the Kansas City Pool, offset
partially by a decline in per subscriber connectivity costs. Other costs increased 31% to $306
million and 56% to $915 million, respectively, for the three and nine months ended September 30,
2007 primarily due to the impact of the Acquired Systems and the consolidation of the Kansas City
Pool, as well as certain other increases in costs associated with the continued roll-out of
advanced services. In addition, other costs for the nine months ended September 30, 2006 included a
benefit of $10 million related to third-party maintenance support payment fees, reflecting the
resolution of terms with an equipment vendor.
The increase in selling, general and administrative expenses for the three and nine months
ended September 30, 2007 is primarily the result of higher employee, marketing and other costs due
to the impact of the Acquired Systems and the consolidation of the Kansas City Pool, increased
headcount and higher costs resulting from the continued roll-out of advanced services and salary
increases. The nine months ended September 30, 2006 also included an $11 million charge (with an
additional $2 million charge included in costs of revenues) reflecting an adjustment to prior
period facility rent expense.
23
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the Cable segment expensed non-capitalizable merger-related and restructuring costs associated with
the Adelphia/Comcast Transactions of $3 million and $10 million for the three and nine months ended
September 30, 2007, respectively, and $18 million and $29 million for the three and nine months
ended September 30, 2006, respectively. In addition, the results included other restructuring costs
of $1 million and $10 million for the three and nine months ended September 30, 2007, respectively,
and $4 million and $14 million for the three and nine months ended September 30, 2006,
respectively.
Operating Income before Depreciation and Amortization increased for the three and nine months
ended September 30, 2007 principally as a result of revenue growth, partially offset by higher
costs of revenues and selling, general and administrative expenses, as discussed above.
Operating Income increased for the three and nine months ended September 30, 2007 primarily
due to the increase in Operating Income before Depreciation and Amortization described above,
partially offset by increases in both depreciation and amortization expense. Depreciation expense
increased primarily due to the impact of the Acquired Systems, the consolidation of the Kansas City
Pool and demand-driven increases in recent years of purchases of customer premise equipment.
Amortization expense increased primarily as a result of the amortization of intangible assets
related to customer relationships associated with the Acquired Systems. This was partially offset
by a decrease due to the absence during the second and third quarters of 2007 of amortization
expense associated with customer relationships recorded in connection with the restructuring of TWE
in 2003 that were fully amortized at the end of the first quarter of 2007.
The Company anticipates that Operating Income before Depreciation and Amortization and
Operating Income will continue to increase during the fourth quarter of 2007 as compared to the
fourth quarter of 2006, although the full year rate of growth is expected to be lower than that
experienced during the nine months ended September 30, 2007 because the last five months of 2006
included contributions from the Acquired Systems.
Filmed Entertainment. Revenues, Operating Income before Depreciation and Amortization and
Operating Income of the Filmed Entertainment segment for the three and nine months ended September
30, 2007 and 2006 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
8 |
|
|
$ |
— |
|
|
NM |
|
$ |
22 |
|
|
$ |
— |
|
|
NM |
Advertising |
|
|
12 |
|
|
|
10 |
|
|
|
20% |
|
|
|
30 |
|
|
|
11 |
|
|
NM |
Content |
|
|
3,100 |
|
|
|
2,311 |
|
|
|
34% |
|
|
|
7,942 |
|
|
|
7,316 |
|
|
|
9% |
|
Other |
|
|
58 |
|
|
|
69 |
|
|
|
(16% |
) |
|
|
180 |
|
|
|
205 |
|
|
|
(12% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
3,178 |
|
|
|
2,390 |
|
|
|
33% |
|
|
|
8,174 |
|
|
|
7,532 |
|
|
|
9% |
|
Costs of revenues(a) |
|
|
(2,407 |
) |
|
|
(1,808 |
) |
|
|
33% |
|
|
|
(6,124 |
) |
|
|
(5,493 |
) |
|
|
11% |
|
Selling, general and administrative(a) |
|
|
(412 |
) |
|
|
(371 |
) |
|
|
11% |
|
|
|
(1,185 |
) |
|
|
(1,138 |
) |
|
|
4% |
|
Restructuring costs |
|
|
— |
|
|
|
(1 |
) |
|
NM |
|
|
— |
|
|
|
(5 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income before Depreciation and Amortization |
|
|
359 |
|
|
|
210 |
|
|
|
71% |
|
|
|
865 |
|
|
|
896 |
|
|
|
(3% |
) |
Depreciation |
|
|
(37 |
) |
|
|
(35 |
) |
|
|
6% |
|
|
|
(112 |
) |
|
|
(103 |
) |
|
|
9% |
|
Amortization |
|
|
(54 |
) |
|
|
(55 |
) |
|
|
(2% |
) |
|
|
(161 |
) |
|
|
(164 |
) |
|
|
(2% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
268 |
|
|
$ |
120 |
|
|
|
123% |
|
|
$ |
592 |
|
|
$ |
629 |
|
|
|
(6% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
24
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Content revenues include theatrical product (which is content made available for initial
exhibition in theaters), television product (which is content made available for initial airing on
television), and consumer product and other. The components of Content revenues for the three and
nine months ended September 30, 2007 and 2006 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
Theatrical product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical film |
|
$ |
800 |
|
|
$ |
356 |
|
|
|
125 |
% |
|
$ |
1,587 |
|
|
$ |
882 |
|
|
|
80 |
% |
Television licensing |
|
|
378 |
|
|
|
422 |
|
|
|
(10 |
%) |
|
|
1,214 |
|
|
|
1,211 |
|
|
|
— |
|
Home video |
|
|
777 |
|
|
|
603 |
|
|
|
29 |
% |
|
|
2,087 |
|
|
|
2,208 |
|
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total theatrical product |
|
|
1,955 |
|
|
|
1,381 |
|
|
|
42 |
% |
|
|
4,888 |
|
|
|
4,301 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television licensing |
|
|
822 |
|
|
|
594 |
|
|
|
38 |
% |
|
|
2,187 |
|
|
|
2,083 |
|
|
|
5 |
% |
Home video |
|
|
201 |
|
|
|
228 |
|
|
|
(12 |
%) |
|
|
528 |
|
|
|
585 |
|
|
|
(10 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total television product |
|
|
1,023 |
|
|
|
822 |
|
|
|
24 |
% |
|
|
2,715 |
|
|
|
2,668 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer product and other |
|
|
122 |
|
|
|
108 |
|
|
|
13 |
% |
|
|
339 |
|
|
|
347 |
|
|
|
(2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Content revenues |
|
$ |
3,100 |
|
|
$ |
2,311 |
|
|
|
34 |
% |
|
$ |
7,942 |
|
|
$ |
7,316 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in theatrical film revenues for the three and nine months ended September 30,
2007 was due primarily to the success of certain key releases in 2007, which compared favorably to
2006. Revenues for the three and nine months ended September 30, 2007 included the releases of
Harry Potter and the Order of the Phoenix, Rush Hour 3, Hairspray and Ocean’s 13 and for the nine
months ended September 30, 2007 also included the release of 300. The three and nine months ended
September 30, 2006 included worldwide revenues associated with Superman Returns and for the nine
months ended September 30, 2006 also included the international carryover of Harry Potter and the
Goblet of Fire. Theatrical product revenues from television licensing declined for the three months
ended September 30, 2007, as the three months ended September 30, 2006 included availabilities of
more significant titles. For the nine months ended September 30, 2007, this decline was offset by a
greater number of significant titles in the first quarter of 2007. Home video sales of theatrical
product increased for the three months ended September 30, 2007 primarily due to the success of the
release of 300. For the nine months ended September 30, 2007, this increase was more than offset by
a decline in home video sales of theatrical product primarily due to difficult comparisons as the
similar period in the prior year included revenues from the release of Harry Potter and the Goblet
of Fire and Wedding Crashers compared to the release of 300 and Happy Feet for the nine months
ended September 30, 2007.
The increase in license fees from television product for the three and nine months ended
September 30, 2007 was primarily related to the initial off-network availabilities of Two and a
Half Men, Cold Case and The George Lopez Show, partially offset for the nine months ended September
30, 2007 by license fees in the prior year from the initial off-network availability of Without a
Trace and second cycle off-network non-continuance license arrangements for Friends. The decline in
home video sales of television product for the three and nine months ended September 30, 2007
reflects difficult comparisons to the prior year period, which included higher revenues
attributable to Seinfeld, Friends and other long-running series.
The increase in costs of revenues for the three and nine months ended September 30, 2007
resulted primarily from higher film costs ($1.454 billion and $3.540 billion for the three and nine
months ended September 30, 2007, respectively, compared to $1.055 billion and $3.223 billion for
the three and nine months ended September 30, 2006, respectively), and higher theatrical
advertising and print costs resulting from the timing, quantity and mix of films released. Included
in film costs are net pre-release theatrical film valuation adjustments, which increased to $100
million for the three months ended September 30, 2007 from $51 million for the three months ended
September 30, 2006, and increased to $204 million for the nine months ended September 30, 2007
compared to $156 million for the nine months ended September 30, 2006. Costs of revenues as a
percentage of revenues were 76% for the three months ended September 30, 2007 and 2006, and
increased to 75% for the nine months ended September 30, 2007 from 73% for the nine months ended
September 30, 2006, reflecting the quantity and mix of products released.
The increase in selling, general and administrative expenses for the three and nine months
ended September 30, 2007 is primarily the result of higher employee costs and higher distribution
costs attributable to the increase in revenues, partially offset for the nine months ended
September 30, 2007 by higher distribution fees earned.
25
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the three and nine months ended September 30, 2006 included $1 million and $5
million, respectively, of restructuring charges as a result of changes in estimates of previously
established restructuring accruals.
Operating Income before Depreciation and Amortization and Operating Income increased for the
three months ended September 30, 2007 primarily related to the increase in revenues, partially
offset by the increase in costs of revenues and selling, general and administrative expenses. For
the nine months ended September 30, 2007, Operating Income before Depreciation and Amortization and
Operating Income decreased primarily due to higher costs of revenues, partially offset by the
increase in revenues. Operating Income before Depreciation and Amortization and Operating Income
for the three and nine months ended September 30, 2006 reflects a benefit of approximately $10
million related to an adjustment made to reduce certain legal reserves and for the nine months
ended September 30, 2006 also included a benefit of $42 million from the sale of certain
international film rights.
The Company anticipates that both Operating Income before Depreciation and Amortization and
Operating Income at the Filmed Entertainment segment will increase during the fourth quarter of
2007 compared to the fourth quarter of 2006 due primarily to expectations of improved theatrical
distribution and home video performance resulting from the current year’s theatrical release slate.
Networks. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Networks segment for the three and nine months ended September 30, 2007 and 2006 are
as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
1,566 |
|
|
$ |
1,460 |
|
|
|
7 |
% |
|
$ |
4,672 |
|
|
$ |
4,412 |
|
|
|
6 |
% |
Advertising |
|
|
709 |
|
|
|
731 |
|
|
|
(3 |
%) |
|
|
2,181 |
|
|
|
2,389 |
|
|
|
(9 |
%) |
Content |
|
|
270 |
|
|
|
204 |
|
|
|
32 |
% |
|
|
682 |
|
|
|
604 |
|
|
|
13 |
% |
Other |
|
|
10 |
|
|
|
14 |
|
|
|
(29 |
%) |
|
|
31 |
|
|
|
39 |
|
|
|
(21 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,555 |
|
|
|
2,409 |
|
|
|
6 |
% |
|
|
7,566 |
|
|
|
7,444 |
|
|
|
2 |
% |
Costs of revenues(a) |
|
|
(1,253 |
) |
|
|
(1,158 |
) |
|
|
8 |
% |
|
|
(3,693 |
) |
|
|
(3,606 |
) |
|
|
2 |
% |
Selling, general and administrative(a) |
|
|
(468 |
) |
|
|
(428 |
) |
|
|
9 |
% |
|
|
(1,340 |
) |
|
|
(1,371 |
) |
|
|
(2 |
%) |
Asset impairments |
|
|
— |
|
|
|
(200 |
) |
|
NM |
|
|
|
(34 |
) |
|
|
(200 |
) |
|
|
(83 |
%) |
Restructuring and shutdown costs |
|
|
(4 |
) |
|
|
(38 |
) |
|
|
(89 |
%) |
|
|
(20 |
) |
|
|
(119 |
) |
|
|
(83 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
830 |
|
|
|
585 |
|
|
|
42 |
% |
|
|
2,479 |
|
|
|
2,148 |
|
|
|
15 |
% |
Depreciation |
|
|
(75 |
) |
|
|
(68 |
) |
|
|
10 |
% |
|
|
(222 |
) |
|
|
(203 |
) |
|
|
9 |
% |
Amortization |
|
|
(4 |
) |
|
|
— |
|
|
NM |
|
|
|
(12 |
) |
|
|
(5 |
) |
|
|
140 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
751 |
|
|
$ |
517 |
|
|
|
45 |
% |
|
$ |
2,245 |
|
|
$ |
1,940 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
On September 17, 2006, Warner Bros. and CBS ended the stand-alone operations of The WB Network
and UPN, respectively, and formed The CW, an equity method investee of the Company. The Networks
segment results included the operations of The WB Network through the date of its shutdown on
September 17, 2006. For the three and nine months ended September 30, 2006, the Networks segment
operating results included revenues of $94 million and $393 million, respectively, and an Operating
Loss of $242 million and $352 million, respectively, from The WB Network.
The increase in Subscription revenues for the three and nine months ended September 30, 2007
was due primarily to higher subscription rates at both Turner and HBO and, to a lesser extent, an
increase in the number of subscribers at Turner.
The decrease in Advertising revenues for the three and nine months ended September 30, 2007
was driven primarily by the impact of the shutdown of The WB Network on September 17, 2006,
partially offset by higher Advertising revenues across Turner’s primary networks.
26
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
The increase in Content revenues for the three and nine months ended September 30, 2007 was
primarily due to higher ancillary sales of HBO’s original programming.
For the three and nine months ended September 30, 2007, costs of revenues increased due
primarily to an increase in programming costs, distribution costs and costs related to digital
initiatives. For the three months ended September 30, 2007, programming costs increased 8% to $888
million from $821 million for the three months ended September 30, 2006 and for the nine months
ended September 30, 2007 increased slightly to $2.656 billion from $2.645 billion for the nine
months ended September 30, 2006. These increases were due primarily to higher acquired theatrical
and original programming costs at HBO and an increase in sports programming costs at Turner,
particularly related to NASCAR programming for the three months ended September 30, 2007, and to
both NASCAR and NBA programming for the nine months ended September 30, 2007. These increases were
partially offset by the impact of the shutdown of The WB Network on September 17, 2006. In
addition, programming costs for the three and nine months ended September 30, 2006 included a
write-off of approximately $17 million associated with certain programming arrangements at Turner.
Costs of revenues as a percentage of revenues were 49% for the three and nine months ended
September 30, 2007 compared to 48% for the three and nine months ended September 30, 2006.
For the three months ended September 30, 2007, selling, general and administrative expenses
increased due primarily to higher marketing expenses relating to the promotion of new original
programming at Turner and HBO and higher selling expenses at Turner. For the nine months ended
September 30, 2007, selling, general and administrative expenses decreased due primarily to the
shutdown of The WB Network on September 17, 2006.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the three and nine months ended September 30, 2007 included approximately $4
million and $20 million, respectively, of restructuring charges and severance related to recent
senior management changes at HBO and for the nine months ended September 30, 2007 included a $34
million noncash charge related to the impairment of the Court TV tradename as a result of
rebranding the Court TV network name to truTV, effective January 1, 2008. The results for the three
and nine months ended September 30, 2006 included shutdown costs at The WB Network of $38 million
and $119 million, respectively, including $33 million and $87 million, respectively, related to the
termination of certain programming arrangements (primarily licensed movie rights). Included in the
costs to terminate programming arrangements is $18 million and $47 million for the three and nine
months ended September 30, 2006, respectively, of costs related to terminating intercompany
programming arrangements with other Time Warner divisions (e.g., New Line) that have been
eliminated in consolidation, resulting in a net charge related to programming arrangements of $15
million and $40 million for the three and nine months ended September 30, 2006, respectively. In
addition, shutdown costs at The WB Network for the three and nine months ended September 30, 2006
included a benefit of $2 million and a net charge of $6 million, respectively, related to employee
terminations and $7 million and $26 million, respectively, related to contractual settlements. The
results for the three and nine months ended September 30, 2006, also included a noncash impairment
charge of approximately $200 million to reduce the carrying value of The WB Network’s goodwill.
Operating Income before Depreciation and Amortization and Operating Income increased for the
three and nine months ended September 30, 2007 primarily due to the absence of the noncash asset
impairment charge to reduce the carrying value of The WB Network’s goodwill and the shutdown costs
of The WB Network incurred in the prior year, as described above.
27
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Publishing segment for the three and nine months ended September 30, 2007 and 2006
are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
385 |
|
|
$ |
393 |
|
|
|
(2 |
%) |
|
$ |
1,124 |
|
|
$ |
1,139 |
|
|
|
(1 |
%) |
Advertising |
|
|
636 |
|
|
|
635 |
|
|
|
— |
|
|
|
1,904 |
|
|
|
1,881 |
|
|
|
1 |
% |
Content |
|
|
13 |
|
|
|
14 |
|
|
|
(7 |
%) |
|
|
39 |
|
|
|
35 |
|
|
|
11 |
% |
Other |
|
|
165 |
|
|
|
153 |
|
|
|
8 |
% |
|
|
433 |
|
|
|
455 |
|
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,199 |
|
|
|
1,195 |
|
|
|
— |
|
|
|
3,500 |
|
|
|
3,510 |
|
|
|
— |
|
Costs of revenues(a) |
|
|
(456 |
) |
|
|
(474 |
) |
|
|
(4 |
%) |
|
|
(1,367 |
) |
|
|
(1,401 |
) |
|
|
(2 |
%) |
Selling, general and administrative(a) |
|
|
(441 |
) |
|
|
(453 |
) |
|
|
(3 |
%) |
|
|
(1,403 |
) |
|
|
(1,421 |
) |
|
|
(1 |
%) |
Gain on sale of assets |
|
|
6 |
|
|
|
— |
|
|
NM |
|
|
|
6 |
|
|
|
— |
|
|
NM |
|
Restructuring costs |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
33 |
% |
|
|
(46 |
) |
|
|
(37 |
) |
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
304 |
|
|
|
265 |
|
|
|
15 |
% |
|
|
690 |
|
|
|
651 |
|
|
|
6 |
% |
Depreciation |
|
|
(35 |
) |
|
|
(26 |
) |
|
|
35 |
% |
|
|
(92 |
) |
|
|
(82 |
) |
|
|
12 |
% |
Amortization |
|
|
(18 |
) |
|
|
(17 |
) |
|
|
6 |
% |
|
|
(53 |
) |
|
|
(46 |
) |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
251 |
|
|
$ |
222 |
|
|
|
13 |
% |
|
$ |
545 |
|
|
$ |
523 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
For the three and nine months ended September 30, 2007, Subscription revenues declined
primarily as a result of lower Subscription revenues for several domestic titles, the closure of
Teen People magazine in September 2006 and the sale of four non-strategic magazine titles in July
2007, partially offset by the favorable effects of foreign currency exchange rates at IPC. In
addition, the nine months ended September 30, 2007 also reflected a decline in newsstand sales.
For the three and nine months ended September 30, 2007, Advertising revenues remained
essentially flat due primarily to growth in digital revenues, reflecting contributions from
People.com and CNNMoney.com, and the favorable effects of foreign currency exchange rates at IPC,
partially offset by a decrease in domestic print Advertising revenues, including the impact of the
closures of Teen People and LIFE magazines.
For the three months ended September 30, 2007, Other revenues increased due primarily to
increases at Synapse, a subscription marketing business, and Southern Living at Home. However,
Other revenues for the nine months ended September 30, 2007 decreased because the increase for the
three months ended September 30, 2007 was more than offset by declines at Southern Living at Home
and Synapse through the six months ended June 30, 2007.
Costs of revenues decreased 4% for the three months ended September 30, 2007 and, as a
percentage of revenues, were 38% and 40% for the three months ended September 30, 2007 and 2006,
respectively. Costs of revenues decreased 2% for the nine months ended September 30, 2007 and, as a
percentage of revenues, were 39% and 40% for the nine months ended September 30, 2007 and 2006,
respectively. Costs of revenues for the magazine publishing business include manufacturing costs
(paper, printing and distribution) and editorial-related costs, which together decreased 8% to $387
million for the three months ended September 30, 2007 and decreased 6% to $1.185 billion for the
nine months ended September 30, 2007, primarily due to editorial-related and manufacturing cost
savings, including cost savings related to the closures of Teen People and LIFE magazines. These
decreases at the magazine publishing business were offset by increased costs associated with
investments in digital properties, including incremental editorial costs and the unfavorable
effects of foreign currency exchange rates at IPC.
Selling, general and administrative expenses decreased for the three and nine months ended
September 30, 2007 primarily due to recent cost savings initiatives and the closures of Teen People
and LIFE magazines, partially offset by costs associated with the investment in digital properties
and the unfavorable effects of foreign currency exchange rates at IPC.
28
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the three and nine months ended September 30, 2007 included $4 million and $46
million, respectively, of restructuring costs,
primarily severance associated with continuing efforts to streamline operations and costs
related to the shutdown of LIFE magazine in the first quarter of 2007, and a $6 million gain on the
sale of four non-strategic magazine titles. The results for the three and nine months ended
September 30, 2006 included $3 million and $37 million, respectively, of restructuring costs,
primarily associated with continuing efforts to streamline operations.
Operating Income before Depreciation and Amortization and Operating Income increased for the
three and nine months ended September 30, 2007 due primarily to a decrease in costs of revenues and
selling, general and administrative expenses. In addition, the increase in Operating Income before
Depreciation and Amortization and Operating Income for the nine months ended September 30, 2007 was
partially offset by an increase in restructuring charges of $9 million.
Corporate. Operating Loss before Depreciation and Amortization and Operating Loss of the
Corporate segment for the three and nine months ended September 30, 2007 and 2006 are as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
|
9/30/07 |
|
|
9/30/06 |
|
|
% Change |
Amounts related to securities litigation and
government investigations |
|
$ |
(2 |
) |
|
$ |
(29 |
) |
|
|
(93 |
%) |
|
$ |
(169 |
) |
|
$ |
(90 |
) |
|
|
88 |
% |
Selling, general and administrative(a) |
|
|
(87 |
) |
|
|
(97 |
) |
|
|
(10 |
%) |
|
|
(281 |
) |
|
|
(303 |
) |
|
|
(7 |
%) |
Gain on sale of assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20 |
|
|
NM |
|
Restructuring costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss before Depreciation and
Amortization |
|
|
(89 |
) |
|
|
(126 |
) |
|
|
(29 |
%) |
|
|
(450 |
) |
|
|
(378 |
) |
|
|
19 |
% |
Depreciation |
|
|
(10 |
) |
|
|
(12 |
) |
|
|
(17 |
%) |
|
|
(33 |
) |
|
|
(34 |
) |
|
|
(3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
$ |
(99 |
) |
|
$ |
(138 |
) |
|
|
(28 |
%) |
|
$ |
(483 |
) |
|
$ |
(412 |
) |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Selling, general and administrative expenses exclude depreciation. |
As previously noted, the Company recognized legal reserves as well as legal and other
professional fees related to the defense of various shareholder lawsuits, totaling $2 million and
$178 million for the three and nine months ended September 30, 2007, respectively, and $33 million
and $147 million for the three and nine months ended September 30, 2006, respectively. In addition,
the Company recognized related insurance recoveries of $9 million for the nine months ended
September 30, 2007 and $4 million and $57 million for the three and nine months ended September 30,
2006, respectively. Legal fees are expected to continue to be incurred in future periods, primarily
related to ongoing proceedings with respect to certain former employees of the Company.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the nine months ended September 30, 2006 included approximately $5 million of
restructuring costs and a gain of approximately $20 million on the sale of two aircraft.
Excluding the items noted above, for the three and nine months ended September 30, 2007,
Operating Loss before Depreciation and Amortization and Operating Loss decreased due primarily to
lower financial advisory costs. In addition, for the nine months ended September 30, 2007, the
decline was also due to lower professional fees.
29
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
FINANCIAL CONDITION AND LIQUIDITY
Management believes that cash generated by or available to Time Warner should be sufficient to
fund its capital and liquidity needs for the foreseeable future, including the quarterly dividend
payments and its new $5 billion common stock repurchase program. Time Warner’s sources of cash
include cash provided by operations, expected proceeds from sales of assets, cash and equivalents
on hand, available borrowing capacity under its committed credit facilities and commercial paper
programs of $1.627 billion at Time Warner and $3.046 billion at TWC, in each case as of September
30, 2007, and access to the capital markets.
Current Financial Condition
At September 30, 2007, Time Warner had $37.129 billion of debt, $1.873 billion of cash and
equivalents (net debt of $35.256 billion, defined as total debt less cash and equivalents), $300
million of mandatorily redeemable preferred membership units at a subsidiary and $58.146 billion of
shareholders’ equity, compared to $34.997 billion of debt, $1.549 billion of cash and equivalents
(net debt of $33.448 billion), $300 million of mandatorily redeemable preferred membership units at
a subsidiary and $60.389 billion of shareholders’ equity at December 31, 2006.
The following table shows the significant items contributing to the increase in net debt from
December 31, 2006 to September 30, 2007 (millions):
| |
|
|
|
|
Balance at December 31, 2006 |
|
$ |
33,448 |
|
Cash provided by operations |
|
|
(6,156 |
) |
Proceeds from exercise of stock options |
|
|
(484 |
) |
Capital expenditures and product development costs from continuing operations |
|
|
3,100 |
|
Dividends paid to common stockholders |
|
|
645 |
|
Repurchases of common stock |
|
|
5,714 |
|
Acquisition of TACODA |
|
|
274 |
|
Acquisition of Third Screen Media |
|
|
104 |
|
Proceeds from sale of AOL’s German access business |
|
|
(850 |
) |
Proceeds from sale of the Parenting Group and most of the Time4 Media magazine titles |
|
|
(220 |
) |
Proceeds from sale of Tegic |
|
|
(265 |
) |
Proceeds from sale of the Company’s 50% interest in Bookspan |
|
|
(145 |
) |
All other, net |
|
|
91 |
|
|
|
|
|
Balance at September 30, 2007(a) |
|
$ |
35,256 |
|
|
|
|
|
|
|
|
| (a) |
|
Included in the net debt balance is approximately $194 million that represents the
net unamortized fair value adjustment recognized as a result of the merger of AOL and Historic
TW Inc. |
As noted under “Recent Developments,” in July 2005, Time Warner’s Board of Directors
authorized a common stock repurchase program that, as amended over time, allowed the Company to
purchase up to an aggregate of $20 billion of common stock during the period from July 29, 2005
through December 31, 2007. As of June 30, 2007, the Company completed this common stock repurchase
program, having repurchased approximately 1.1 billion shares of common stock from the program’s
inception through such date (Note 6).
As noted under “Recent Developments,” on July 26, 2007, Time Warner’s Board of Directors
authorized a new common stock repurchase program that allows the Company to purchase up to an
aggregate of $5 billion of common stock. Purchases under this new stock repurchase program may be
made from time to time on the open market and in privately negotiated transactions. The size and
timing of these purchases are based on a number of factors, including price and business and market
conditions. From the program’s inception through November 6, 2007, the Company has repurchased
approximately 119 million shares of common stock for approximately $2.2 billion pursuant to trading
programs under Rule 10b5-1 of the Exchange Act (Note 6).
30
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
As noted under “Recent Developments,” on October 3, 2007, the Company completed the purchase
of seven pay television networks and the sales representation rights for eight third-party owned
networks operating principally in Latin America from Claxson for $234 million in cash (Note 3).
On December 29, 2006, the Company completed the sale of AOL’s U.K. access business for $712
million, $476 million of which was paid at closing and the remainder of which is payable over the
eighteen months following the closing. As of September 30, 2007, the Company expects to receive the
remaining approximately $185 million over the nine months ending June 30, 2008. The receivable due
from the purchaser of the U.K. access business is non-interest bearing, and was recorded at its
discounted present value upon the closing of the sale transaction. In addition, the receivable is
denominated in British pounds, and the U.S. dollar amount presented is subject to change based on
fluctuations in the exchange rate between the U.S. dollar and the British pound.
Time Warner’s 6.15% notes due May 1, 2007 (aggregate principal amount of $1.0 billion) and
Time Warner’s 8.18% notes due August 15, 2007 (aggregate principal amount of $546 million) matured
and were retired on May 1, 2007 and August 15, 2007, respectively.
Cash Flows
Cash and equivalents increased by $324 million for the nine months ended September 30, 2007
and decreased by $3.042 billion for the nine months ended September 30, 2006. Components of these
changes are discussed below in more detail.
Operating Activities
Details of cash provided by operations are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
Operating Income |
|
$ |
6,606 |
|
|
$ |
5,218 |
|
Depreciation and amortization |
|
|
3,274 |
|
|
|
2,504 |
|
Amounts related to securities litigation and government investigations: |
|
|
|
|
|
|
|
|
Net expenses |
|
|
169 |
|
|
|
90 |
|
Cash payments, net of recoveries |
|
|
(919 |
) |
|
|
(267 |
) |
Gain on dispositions of assets |
|
|
(673 |
) |
|
|
(22 |
) |
Noncash asset impairments |
|
|
36 |
|
|
|
200 |
|
Net interest payments(a) |
|
|
(1,516 |
) |
|
|
(1,105 |
) |
Net income taxes paid(b) |
|
|
(395 |
) |
|
|
(340 |
) |
Noncash equity-based compensation |
|
|
230 |
|
|
|
212 |
|
Net cash flows from discontinued operations(c) |
|
|
33 |
|
|
|
156 |
|
Merger-related and restructuring payments, net of accruals(d) |
|
|
(103 |
) |
|
|
(2 |
) |
All other, net, including working capital changes |
|
|
(586 |
) |
|
|
(74 |
) |
|
|
|
|
|
|
|
Cash provided by operations |
|
$ |
6,156 |
|
|
$ |
6,570 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Includes interest income received of $77 million and $108 million in 2007 and 2006,
respectively. |
| |
| (b) |
|
Includes income tax refunds received of $84 million and $32 million in 2007 and
2006, respectively. |
| |
| (c) |
|
Reflects net income from discontinued operations of $324 million and $1.412 billion
in 2007 and 2006, respectively, net of noncash gains and expenses and working capital-related
adjustments of $(291) million in 2007 and $(1.256) billion in 2006. |
| |
| (d) |
|
Includes payments for restructuring and merger-related costs and payments for
certain other merger-related liabilities, net of accruals. |
Cash provided by operations decreased to $6.156 billion in 2007 compared to $6.570 billion in
2006. The decrease in cash provided by operations related primarily to increases in payments made
in connection with the settlements in the securities litigation and the government investigations,
interest payments, income taxes paid and cash used for working capital, partially offset by
increases in Operating Income and depreciation and amortization. The changes in components of
working capital are subject to wide fluctuations based on the timing of cash transactions related
to production schedules, the acquisition of programming, collection of accounts receivable and
similar items. The change in working capital between periods was primarily related to higher
payments on accounts payable and lower collections on accounts
receivable.
31
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
The Company’s net income
tax payments benefited from the utilization of certain tax attribute carryforwards (primarily U.S.
federal tax loss carryforwards). Based on current expectations, the Company anticipates that
the U.S. federal tax loss carryforwards will be fully utilized in 2007, resulting in a significant
increase in income tax payments in 2008.
Investing Activities
Details of cash used by investing activities are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
Investments in available-for-sale securities |
|
$ |
(90 |
) |
|
$ |
— |
|
Investments and acquisitions, net of cash acquired: |
|
|
|
|
|
|
|
|
TACODA |
|
|
(274 |
) |
|
|
— |
|
Third Screen Media |
|
|
(104 |
) |
|
|
— |
|
Cash used for the Adelphia Acquisition and the Exchange |
|
|
(25 |
) |
|
|
(9,065 |
) |
Redemption of Comcast’s interests in TWC and TWE |
|
|
— |
|
|
|
(2,004 |
) |
Court TV |
|
|
— |
|
|
|
(697 |
) |
Wireless Joint Venture(a) |
|
|
(30 |
) |
|
|
(182 |
) |
Synapse(b) |
|
|
— |
|
|
|
(140 |
) |
All other |
|
|
(259 |
) |
|
|
(276 |
) |
Investment activities of discontinued operations |
|
|
(26 |
) |
|
|
— |
|
Capital expenditures and product development costs from continuing operations |
|
|
(3,100 |
) |
|
|
(2,670 |
) |
Capital expenditures and product development costs from discontinued operations |
|
|
— |
|
|
|
(63 |
) |
Proceeds from the sale of available-for-sale securities |
|
|
33 |
|
|
|
42 |
|
Proceeds from the sale of AOL’s German access business |
|
|
850 |
|
|
|
— |
|
Proceeds from the sale of Tegic |
|
|
265 |
|
|
|
— |
|
Proceeds from the sale of the Parenting Group and most of the Time4 Media magazine titles |
|
|
220 |
|
|
|
— |
|
Proceeds from the sale of the Company’s 50% interest in Bookspan |
|
|
145 |
|
|
|
— |
|
Proceeds from the issuance of a 5% equity interest by AOL |
|
|
— |
|
|
|
1,000 |
|
Proceeds from the sale of a portion of the Company’s interest in Time Warner Telecom |
|
|
— |
|
|
|
800 |
|
Proceeds from the sale of Time Warner Book Group |
|
|
— |
|
|
|
524 |
|
Proceeds from the sale of Turner South |
|
|
— |
|
|
|
371 |
|
Proceeds from the sale of the Theme Parks |
|
|
— |
|
|
|
191 |
|
All other investment and asset sale proceeds |
|
|
326 |
|
|
|
188 |
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
$ |
(2,069 |
) |
|
$ |
(11,981 |
) |
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Cash used for the Wireless Joint Venture for the nine months ended September 30,
2006 represents a deposit that TWC paid in July 2006 related to TWC’s investment in a wireless
spectrum joint venture with several other cable companies (the “Wireless Joint Venture”).
Included in the cash used for the Wireless Joint Venture for the nine months ended September
30, 2007 is a contribution of $28 million to the Wireless Joint Venture to fund TWC’s share of
a payment to Sprint to purchase Sprint’s interest in the Wireless Joint Venture for an amount
equal to Sprint’s capital contributions. Under certain circumstances, the remaining members
have the ability to exit the Wireless Joint Venture and receive from the Wireless Joint
Venture, subject to certain limitations and adjustments, advanced wireless spectrum licenses
covering their operating areas. |
| |
| (b) |
|
Represents purchase of remaining interest in Synapse Group Inc. |
Cash used by investing activities was $2.069 billion in 2007 compared to $11.981 billion in
2006. The change in cash used by investing activities primarily reflected the decrease in
investments and acquisitions, net of cash acquired, principally related to the Adelphia
Acquisition, the Exchange and the Redemptions, partially offset by a decrease in proceeds from the
sales of assets and an increase in capital expenditures and product development costs. The
increase in capital expenditures was principally associated with the Acquired Systems, as well as
the continued roll-out of TWC’s advanced digital services in the Legacy Systems.
As a result of the Adelphia/Comcast Transactions, the Company has made significant capital
expenditures and anticipates making additional capital expenditures related to the continued
integration of the Acquired Systems, including improvements to plant and technical performance and
upgrading system capacity to allow TWC to offer its advanced services and features in the Acquired
Systems. Through December 31, 2006, the Company incurred approximately $200
32
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
million of such
expenditures, and the Company estimates that it will incur additional expenditures of approximately
$200 million during 2007 (including approximately $140 million incurred during the nine months
ended September 30, 2007).
TWC expects that these upgrades will be substantially complete by the end of 2007. The Company
does not believe that these expenditures will have a material negative impact on its liquidity or
capital resources.
Financing Activities
Details of cash provided (used) by financing activities are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
Borrowings |
|
$ |
12,728 |
|
|
$ |
15,580 |
|
Debt repayments |
|
|
(10,551 |
) |
|
|
(2,551 |
) |
Proceeds from exercise of stock options |
|
|
484 |
|
|
|
378 |
|
Excess tax benefit on stock options |
|
|
74 |
|
|
|
61 |
|
Principal payments on capital leases |
|
|
(45 |
) |
|
|
(64 |
) |
Repurchases of common stock |
|
|
(5,714 |
) |
|
|
(10,659 |
) |
Issuance of mandatorily redeemable preferred membership units by a subsidiary |
|
|
— |
|
|
|
300 |
|
Dividends paid |
|
|
(645 |
) |
|
|
(658 |
) |
Other financing activities |
|
|
(94 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
Cash (used) provided by financing activities |
|
$ |
(3,763 |
) |
|
$ |
2,369 |
|
|
|
|
|
|
|
|
Cash used by financing activities was $3.763 billion in 2007 compared to cash provided by
financing activities of $2.369 billion in 2006. The change in cash (used) provided by financing
activities is primarily due to a decline in net borrowings (i.e., borrowings less repayments),
partially offset by a decline in repurchases of common stock made in connection with the Company’s
common stock repurchase programs.
Cable Debt Securities
On April 9, 2007, TWC issued $5.0 billion in aggregate principal amount of senior unsecured
notes and debentures (the “Cable Bond Offering”) consisting of $1.5 billion principal amount of
5.40% Notes due 2012 (the “2012 Initial Notes”), $2.0 billion principal amount of 5.85% Notes due
2017 (the “2017 Initial Notes”) and $1.5 billion principal amount of 6.55% Debentures due 2037 (the
“2037 Initial Debentures” and, together with the 2012 Initial Notes and the 2017 Initial Notes, the
“Cable Initial Debt Securities”) pursuant to Rule 144A and Regulation S under the Securities Act of
1933, as amended (the “Securities Act”). The Cable Initial Debt Securities are guaranteed by TWE
and TWNYCH (the “Guarantors”). TWC used a portion of the net proceeds of the Cable Bond Offering to
repay all of the outstanding indebtedness under its $4.0 billion three-year term credit facility,
which was terminated on April 13, 2007. The balance of the net proceeds was used to repay a portion
of the outstanding indebtedness under TWC’s $4.0 billion five-year term credit facility on April
27, 2007, which reduced the amounts outstanding under that facility to $3.045 billion as of such
date.
In connection with the issuance of the Cable Initial Debt Securities, on April 9, 2007, TWC,
the Guarantors and the initial purchasers of the Cable Initial Debt Securities entered into a
Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which TWC agreed,
among other things, to use its commercially reasonable efforts to consummate a registered exchange
offer for the Cable Initial Debt Securities within 270 days after the issuance date of the Cable
Initial Debt Securities or cause a shelf registration statement covering the resale of the Cable
Initial Debt Securities to be declared effective within specified
periods. On November 5, 2007, pursuant to a registered exchange offer, TWC and the Guarantors exchanged (i) substantially
all of the 2012 Initial Notes for a like aggregate principal amount of registered debt securities
without transfer restrictions or registration rights (the “2012 Registered Notes,” and, together
with the 2012 Initial Notes, the “2012 Notes”), (ii) all of the 2017 Initial Notes
for a like aggregate principal amount of registered debt securities without transfer restrictions
or registration rights (the “2017 Registered Notes,” and, together with the 2017 Initial Notes, the
“2017 Notes”), and (iii) substantially all of the 2037 Initial Debentures for a like aggregate
principal amount of registered debt securities without transfer restrictions or registration rights
(the “2037 Registered Debentures,” and, together with the 2037 Initial Debentures, the “2037
Debentures”). Collectively, the 2012 Notes, the 2017 Notes and the 2037 Debentures are referred to
as the “Cable Debt Securities.”
The Cable Debt Securities were issued pursuant to an Indenture, dated as of April 9, 2007 (the
“Base Cable Indenture”), by and among TWC, the Guarantors and The Bank of New York, as trustee, as
supplemented by the First Supplemental Indenture, dated as of April 9, 2007 (the “First
Supplemental Cable Indenture” and, together with the Cable Base Indenture, the “Cable Indenture”),
by and among TWC, the Guarantors and The Bank of New York, as trustee.
33
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
The 2012 Notes mature on July 2, 2012, the 2017 Notes mature on May 1, 2017 and the 2037
Debentures mature on May 1, 2037. Interest on the 2012 Notes is payable semi-annually in arrears on
January 2 and July 2 of each year, beginning on July 2, 2007. Interest on the 2017 Notes and the
2037 Debentures is payable semi-annually in arrears on May
1 and November 1 of each year, beginning on November 1, 2007. The Cable Debt Securities are
unsecured senior obligations of TWC and rank equally with its other unsecured and unsubordinated
obligations. The guarantees of the Cable Debt Securities are unsecured senior obligations of the
Guarantors and rank equally in right of payment with all other unsecured and unsubordinated
obligations of the Guarantors.
The Cable Debt Securities may be redeemed in whole or in part at any time at TWC’s option at a
redemption price equal to the greater of (i) 100% of the principal amount of the Cable Debt
Securities being redeemed and (ii) the sum of the present values of the remaining scheduled
payments on the Cable Debt Securities discounted to the redemption date on a semi-annual basis at a
government treasury rate plus 20 basis points for the 2012 Notes, 30 basis points for the 2017
Notes and 35 basis points for the 2037 Debentures as further described in the Cable Indenture,
plus, in each case, accrued but unpaid interest to the redemption date.
The Cable Indenture contains customary covenants relating to restrictions on the ability of
TWC or any material subsidiary of TWC to create liens and on the ability of TWC and the Guarantors
to consolidate, merge or convey or transfer substantially all of their assets. The Cable Indenture
also contains customary events of default.
Bank Credit Agreements and Commercial Paper Programs
On January 25, 2007, Time Warner entered into a $7.0 billion unsecured commercial paper
program (the “TW Program”) that replaced its previous $5.0 billion unsecured commercial paper
program, which was terminated in February 2007 upon repayment of the last amounts issued
thereunder. The obligations of Time Warner under the TW Program are guaranteed by TW AOL Holdings
Inc. (“TW AOL”) and Historic TW Inc. (“Historic TW”). In addition, the obligations of Historic TW
are guaranteed by Turner and Time Warner Companies, Inc. Proceeds from the TW Program may be used
for general corporate purposes, including investments, repayment of debt and acquisitions.
Commercial paper issued by Time Warner is supported by unused committed capacity under the
Company’s $7.0 billion senior unsecured five-year revolving credit facility. As a result of recent
market volatility in the U.S. debt markets, including the dislocation of the overall commercial
paper market, the Company has decreased the amount of commercial paper outstanding under the TW
Program, and has offset this decrease by increasing borrowings outstanding under its $7.0 billion
credit facility. As of September 30, 2007, approximately $1.988 billion of commercial paper was
outstanding under the TW Program, and there were borrowings of $3.300 billion outstanding under the
Company’s $7.0 billion credit facility.
On December 4, 2006, TWC entered into a $6.0 billion unsecured commercial paper program (the
“TWC Program”) that replaced its previous $2.0 billion commercial paper program, which was
terminated on February 14, 2007 upon repayment of the last remaining notes issued under that
program. The TWC Program is guaranteed by TWNYCH and TWE. Commercial paper issued by TWC under the
TWC Program is supported by unused committed capacity under TWC’s $6.0 billion senior unsecured
revolving credit facility and ranks pari passu with other unsecured senior indebtedness of TWC, TWE
and TWNYCH. TWC has also decreased the amount of commercial paper outstanding under its program as
a result of the recent volatility in the U.S. debt markets, and has offset this decrease by
increasing borrowings outstanding under its $6.0 billion credit facility. As of September 30, 2007,
approximately $1.018 billion of commercial paper was outstanding under the TWC Program, and there
were borrowings of $1.800 billion outstanding under TWC’s $6.0 billion credit facility.
Programming Licensing Backlog
Programming licensing backlog represents the amount of future revenues not yet recorded from
cash contracts for the licensing of theatrical and television product for pay cable, basic cable,
network and syndicated television exhibition. Backlog was approximately $3.9 billion and $4.2
billion at September 30, 2007 and December 31, 2006, respectively. Included in these amounts is
licensing of film product from one Time Warner division to another Time Warner division in the
amount of $699 million and $702 million at September 30, 2007 and December 31, 2006, respectively.
34
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in
revenues, Operating Income before Depreciation and Amortization and cash from operations. Words
such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words
and terms of similar substance used in connection with any discussion of future operating or
financial performance identify forward-looking statements. These forward-looking statements are
based on management’s current expectations and beliefs about future events. As with any projection
or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the
Company is under no obligation to, and expressly disclaims any obligation to, update or alter its
forward-looking statements whether as a result of such changes, new information, subsequent events
or otherwise.
Various factors could adversely affect the operations, business or financial results of Time
Warner or its business segments in the future and cause Time Warner’s actual results to differ
materially from those contained in the forward-looking statements, including those factors
discussed in detail in Item 1A, “Risk Factors,” in the 2006 Form 10-K, and in Time Warner’s other
filings made from time to time with the SEC after the date of this report. In addition, Time Warner
operates in highly competitive, consumer and technology-driven and rapidly changing media,
entertainment, interactive services and cable businesses. These businesses are affected by
government regulation, economic, strategic, political and social conditions, consumer response to
new and existing products and services, technological developments and, particularly in view of new
technologies, the continued ability to protect intellectual property rights. Time Warner’s actual
results could differ materially from management’s expectations because of changes in such factors.
Further, for Time Warner generally, lower than expected valuations associated with the cash
flows and revenues at Time Warner’s segments may result in Time Warner’s inability to realize the
value of recorded intangibles and goodwill at those segments. In addition, achieving the Company’s
financial objectives, including growth in operations, maintaining financial ratios and a strong
balance sheet, could be adversely affected by the factors discussed in detail in Item 1A, “Risk
Factors,” in the 2006 Form 10-K, as well as:
| |
• |
|
economic slowdowns; |
| |
| |
• |
|
the impact of terrorist acts and hostilities; |
| |
| |
• |
|
changes in the Company’s plans, strategies and intentions; |
| |
| |
• |
|
the impacts of significant acquisitions, dispositions and other similar transactions; |
| |
| |
• |
|
the failure to meet earnings expectations; and |
| |
| |
• |
|
decreased liquidity in the capital markets, including any reduction in the ability to
access the capital markets for debt securities or bank financings. |
35
TIME WARNER INC.
Item 4. CONTROLS AND PROCEDURES
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including the
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rule
13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the
Company’s disclosure controls and procedures are effective to ensure that information required to
be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms
and that information required to be disclosed by the Company is accumulated and communicated to the
Company’s management to allow timely decisions regarding the required disclosure.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting
during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely
to materially affect, its internal control over financial reporting.
36
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
(recast) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
1,873 |
|
|
$ |
1,549 |
|
Restricted cash |
|
|
3 |
|
|
|
29 |
|
Receivables, less allowances of $1,924 and $2,271 |
|
|
5,869 |
|
|
|
6,064 |
|
Inventories |
|
|
1,996 |
|
|
|
1,907 |
|
Prepaid expenses and other current assets |
|
|
902 |
|
|
|
1,136 |
|
Current assets of discontinued operations |
|
|
— |
|
|
|
166 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
10,643 |
|
|
|
10,851 |
|
Noncurrent inventories and film costs |
|
|
5,487 |
|
|
|
5,394 |
|
Investments, including available-for-sale securities |
|
|
2,051 |
|
|
|
3,426 |
|
Property, plant and equipment, net |
|
|
17,547 |
|
|
|
16,718 |
|
Intangible assets subject to amortization, net |
|
|
4,915 |
|
|
|
5,204 |
|
Intangible assets not subject to amortization |
|
|
47,242 |
|
|
|
46,362 |
|
Goodwill |
|
|
41,274 |
|
|
|
40,749 |
|
Other assets |
|
|
2,148 |
|
|
|
2,389 |
|
Noncurrent assets of discontinued operations |
|
|
— |
|
|
|
576 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
131,307 |
|
|
$ |
131,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,071 |
|
|
$ |
1,357 |
|
Participations payable |
|
|
2,118 |
|
|
|
2,049 |
|
Royalties and programming costs payable |
|
|
1,241 |
|
|
|
1,215 |
|
Deferred revenue |
|
|
1,275 |
|
|
|
1,434 |
|
Debt due within one year |
|
|
73 |
|
|
|
64 |
|
Other current liabilities |
|
|
5,102 |
|
|
|
6,508 |
|
Current liabilities of discontinued operations |
|
|
22 |
|
|
|
153 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
10,902 |
|
|
|
12,780 |
|
Long-term debt |
|
|
37,056 |
|
|
|
34,933 |
|
Mandatorily redeemable preferred membership units issued by a subsidiary |
|
|
300 |
|
|
|
300 |
|
Deferred income taxes |
|
|
12,671 |
|
|
|
13,114 |
|
Deferred revenue |
|
|
497 |
|
|
|
528 |
|
Other liabilities |
|
|
7,468 |
|
|
|
5,462 |
|
Noncurrent liabilities of discontinued operations |
|
|
1 |
|
|
|
124 |
|
Minority interests |
|
|
4,266 |
|
|
|
4,039 |
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Series LMCN-V common stock, $0.01 par value, 18.8 million shares
issued and outstanding at December 31, 2006 |
|
|
— |
|
|
|
— |
|
Time Warner common stock, $0.01 par value, 4.874 and 4.836 billion
shares issued and 3.626 and 3.864 billion shares outstanding |
|
|
49 |
|
|
|
48 |
|
Common stock due from Liberty Media Corporation |
|
|
(83 |
) |
|
|
— |
|
Paid-in-capital |
|
|
172,400 |
|
|
|
172,083 |
|
Treasury stock, at cost (1,248 and 972 million shares) |
|
|
(24,892 |
) |
|
|
(19,140 |
) |
Accumulated other comprehensive income (loss), net |
|
|
56 |
|
|
|
(136 |
) |
Accumulated deficit |
|
|
(89,384 |
) |
|
|
(92,466 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
58,146 |
|
|
|
60,389 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
131,307 |
|
|
$ |
131,669 |
|
|
|
|
|
|
|
|
See accompanying notes.
37
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
6,170 |
|
|
$ |
6,136 |
|
|
$ |
18,638 |
|
|
$ |
17,298 |
|
Advertising |
|
|
2,095 |
|
|
|
2,003 |
|
|
|
6,295 |
|
|
|
5,925 |
|
Content |
|
|
3,141 |
|
|
|
2,349 |
|
|
|
8,163 |
|
|
|
7,364 |
|
Other |
|
|
270 |
|
|
|
262 |
|
|
|
744 |
|
|
|
762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(a) |
|
|
11,676 |
|
|
|
10,750 |
|
|
|
33,840 |
|
|
|
31,349 |
|
Costs of revenues(a) |
|
|
(6,961 |
) |
|
|
(6,155 |
) |
|
|
(19,874 |
) |
|
|
(17,646 |
) |
Selling, general and administrative(a) |
|
|
(2,407 |
) |
|
|
(2,483 |
) |
|
|
(7,213 |
) |
|
|
(7,593 |
) |
Amortization of intangible assets |
|
|
(167 |
) |
|
|
(163 |
) |
|
|
(502 |
) |
|
|
(419 |
) |
Amounts related to securities litigation and government investigations |
|
|
(2 |
) |
|
|
(29 |
) |
|
|
(169 |
) |
|
|
(90 |
) |
Merger-related, restructuring and shutdown costs |
|
|
(12 |
) |
|
|
(73 |
) |
|
|
(113 |
) |
|
|
(205 |
) |
Asset impairments |
|
|
(1 |
) |
|
|
(200 |
) |
|
|
(36 |
) |
|
|
(200 |
) |
Gains on disposal of assets, net |
|
|
4 |
|
|
|
— |
|
|
|
673 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,130 |
|
|
|
1,647 |
|
|
|
6,606 |
|
|
|
5,218 |
|
Interest expense, net(a) |
|
|
(589 |
) |
|
|
(479 |
) |
|
|
(1,714 |
) |
|
|
(1,114 |
) |
Other income (loss), net |
|
|
(2 |
) |
|
|
711 |
|
|
|
231 |
|
|
|
1,069 |
|
Minority interest expense, net |
|
|
(84 |
) |
|
|
(89 |
) |
|
|
(305 |
) |
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, discontinued
operations and cumulative effect of accounting
change |
|
|
1,455 |
|
|
|
1,790 |
|
|
|
4,818 |
|
|
|
4,908 |
|
Income tax provision |
|
|
(555 |
) |
|
|
(443 |
) |
|
|
(1,786 |
) |
|
|
(1,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations and
cumulative effect of accounting change |
|
|
900 |
|
|
|
1,347 |
|
|
|
3,032 |
|
|
|
3,362 |
|
Discontinued operations, net of tax |
|
|
186 |
|
|
|
975 |
|
|
|
324 |
|
|
|
1,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting
change |
|
|
1,086 |
|
|
|
2,322 |
|
|
|
3,356 |
|
|
|
4,774 |
|
Cumulative effect of accounting change, net of
tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,086 |
|
|
$ |
2,322 |
|
|
$ |
3,356 |
|
|
$ |
4,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share before
discontinued operations and cumulative effect of
accounting change |
|
$ |
0.24 |
|
|
$ |
0.33 |
|
|
$ |
0.81 |
|
|
$ |
0.79 |
|
Discontinued operations |
|
|
0.06 |
|
|
|
0.24 |
|
|
|
0.08 |
|
|
|
0.33 |
|
Cumulative effect of accounting change |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.30 |
|
|
$ |
0.57 |
|
|
$ |
0.89 |
|
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic common shares |
|
|
3,673.7 |
|
|
|
4,048.8 |
|
|
|
3,756.6 |
|
|
|
4,258.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share before
discontinued operations and cumulative effect of
accounting change |
|
$ |
0.24 |
|
|
$ |
0.33 |
|
|
$ |
0.80 |
|
|
$ |
0.78 |
|
Discontinued operations |
|
|
0.05 |
|
|
|
0.24 |
|
|
|
0.08 |
|
|
|
0.33 |
|
Cumulative effect of accounting change |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.29 |
|
|
$ |
0.57 |
|
|
$ |
0.88 |
|
|
$ |
1.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted common shares |
|
|
3,714.3 |
|
|
|
4,084.4 |
|
|
|
3,803.8 |
|
|
|
4,296.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share of common stock |
|
$ |
0.0625 |
|
|
$ |
0.0550 |
|
|
$ |
0.1725 |
|
|
$ |
0.1550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes the following income (expenses) resulting from transactions
with related companies: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
44 |
|
|
$ |
91 |
|
|
$ |
233 |
|
|
$ |
239 |
|
Costs of revenues |
|
|
(44 |
) |
|
|
(35 |
) |
|
|
(155 |
) |
|
|
(131 |
) |
Selling, general and administrative |
|
|
(1 |
) |
|
|
2 |
|
|
|
(4 |
) |
|
|
22 |
|
Interest expense, net |
|
|
— |
|
|
|
15 |
|
|
|
— |
|
|
|
39 |
|
See accompanying notes.
38
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited, millions)
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
(recast) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
Net income(a) |
|
$ |
3,356 |
|
|
$ |
4,799 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
Cumulative effect of accounting change, net of tax |
|
|
— |
|
|
|
(25 |
) |
Depreciation and amortization |
|
|
3,274 |
|
|
|
2,504 |
|
Amortization of film and television costs |
|
|
4,497 |
|
|
|
4,449 |
|
Asset impairments |
|
|
36 |
|
|
|
200 |
|
Gain on investments and other assets, net |
|
|
(971 |
) |
|
|
(1,044 |
) |
Equity in (income) losses of investee companies, net of cash distributions |
|
|
53 |
|
|
|
(33 |
) |
Equity-based compensation |
|
|
230 |
|
|
|
212 |
|
Minority interests |
|
|
305 |
|
|
|
265 |
|
Deferred income taxes |
|
|
1,406 |
|
|
|
1,030 |
|
Amounts related to securities litigation and government investigations |
|
|
(750 |
) |
|
|
(177 |
) |
Changes in operating assets and liabilities, net of acquisitions |
|
|
(4,989 |
) |
|
|
(4,354 |
) |
Adjustments relating to discontinued operations(a) |
|
|
(291 |
) |
|
|
(1,256 |
) |
|
|
|
|
|
|
|
Cash provided by operations(b) |
|
|
6,156 |
|
|
|
6,570 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
|
(90 |
) |
|
|
— |
|
Investments and acquisitions, net of cash acquired |
|
|
(662 |
) |
|
|
(12,182 |
) |
Investment in a wireless joint venture |
|
|
(30 |
) |
|
|
(182 |
) |
Investment activities of discontinued operations |
|
|
(26 |
) |
|
|
— |
|
Capital expenditures and product development costs |
|
|
(3,100 |
) |
|
|
(2,670 |
) |
Capital expenditures from discontinued operations |
|
|
— |
|
|
|
(63 |
) |
Investment proceeds from available-for-sale securities |
|
|
33 |
|
|
|
42 |
|
Other investment proceeds |
|
|
1,806 |
|
|
|
3,074 |
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
|
(2,069 |
) |
|
|
(11,981 |
) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Borrowings |
|
|
12,728 |
|
|
|
15,580 |
|
Issuance of mandatorily redeemable preferred membership units by a subsidiary |
|
|
— |
|
|
|
300 |
|
Debt repayments |
|
|
(10,551 |
) |
|
|
(2,551 |
) |
Proceeds from exercise of stock options |
|
|
484 |
|
|
|
378 |
|
Excess tax benefit on stock options |
|
|
74 |
|
|
|
61 |
|
Principal payments on capital leases |
|
|
(45 |
) |
|
|
(64 |
) |
Repurchases of common stock(c) |
|
|
(5,714 |
) |
|
|
(10,659 |
) |
Dividends paid |
|
|
(645 |
) |
|
|
(658 |
) |
Other |
|
|
(94 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
Cash provided (used) by financing activities |
|
|
(3,763 |
) |
|
|
2,369 |
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND EQUIVALENTS |
|
|
324 |
|
|
|
(3,042 |
) |
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
1,549 |
|
|
|
4,220 |
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
1,873 |
|
|
$ |
1,178 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The nine months ended September 30, 2007 and 2006 include net income from
discontinued operations of $324 million and $1.412 billion, respectively. After considering
noncash gains and expenses and working capital-related adjustments relating to discontinued
operations, net operational cash flows from discontinued operations were $33 million and $156
million for the nine months ended September 30, 2007 and 2006, respectively. |
| |
| (b) |
|
The nine months ended September 30, 2007 and 2006 include an approximate $2 million
and $181 million source of cash, respectively, related to changing the fiscal year end of
certain international operations from November 30 to December 31. |
| |
| (c) |
|
The nine months ended September 30, 2007 excludes $440 million of common stock
repurchased or due from Liberty Media Corporation, indirectly attributable to the exchange of
the Atlanta Braves baseball franchise (the “Braves”) and Leisure Arts, Inc. (“Leisure Arts”).
Specifically, the $440 million represents the fair value of the Braves and Leisure Arts of
$473 million, less a $33 million net working capital adjustment (Note 3). |
See accompanying notes.
39
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Nine Months Ended September 30,
(Unaudited; millions,
except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
BALANCE AT BEGINNING OF PERIOD |
|
$ |
60,389 |
|
|
$ |
65,105 |
|
Net income |
|
|
3,356 |
|
|
|
4,799 |
|
Other comprehensive income |
|
|
192 |
|
|
|
234 |
|
|
|
|
|
|
|
|
Comprehensive income(a) |
|
|
3,548 |
|
|
|
5,033 |
|
Cash dividends ($0.1725 and $0.1550 per common share) |
|
|
(645 |
) |
|
|
(658 |
) |
Common stock repurchases(b) |
|
|
(6,033 |
) |
|
|
(10,722 |
) |
Impact of adopting new accounting pronouncements(c). |
|
|
386 |
|
|
|
(40 |
) |
Gain on Time Warner Cable Inc. stock issuance |
|
|
— |
|
|
|
1,771 |
|
Gain on issuance of a 5% equity interest by AOL |
|
|
— |
|
|
|
801 |
|
Amounts related primarily to stock options and restricted stock |
|
|
501 |
|
|
|
490 |
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD |
|
$ |
58,146 |
|
|
$ |
61,780 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The nine months ended September 30, 2007 and 2006 include $187 million and $248
million, respectively, in foreign currency translation adjustments. |
| |
| (b) |
|
The nine months ended September 30, 2007 includes $440 million of common stock
repurchased or due from Liberty Media Corporation, indirectly attributable to the exchange of
the Atlanta Braves baseball franchise (the “Braves”) and Leisure Arts, Inc. (“Leisure Arts”).
Specifically, the $440 million represents the fair value of the Braves and Leisure Arts of
$473 million, less a $33 million working capital adjustment (Note 3). |
| |
| (c) |
|
The nine months ended September 30, 2007 relates to the impact of adopting the
provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), of
$445 million, partially offset by the impact of adopting the provisions of Emerging Issues
Task Force (“EITF”) Issue No. 06-02, Accounting for Sabbatical Leave and Other Similar
Benefits (“EITF 06-02”), of $59 million. See Note 1 of the consolidated financial statements.
The nine months ended September 30, 2006 relates to the impact of adopting the provisions of
FASB Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
(“FAS 123R”). |
See accompanying notes.
40
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Inc. (“Time Warner” or the “Company”) is a leading media and entertainment
company, whose businesses include interactive services, cable systems, filmed entertainment,
television networks and publishing. Time Warner classifies its business interests into five
reportable segments: AOL: consisting principally of interactive services; Cable: consisting
principally of interests in cable systems that provide video, high-speed data and voice services;
Filmed Entertainment: consisting principally of feature film, television and home video production
and distribution; Networks: consisting principally of cable television networks; and Publishing:
consisting principally of magazine publishing. Financial information for Time Warner’s various
reportable segments is presented in Note 10.
Basis of Presentation
Basis of Consolidation
The consolidated financial statements include 100% of the assets, liabilities, revenues,
expenses and cash flows of Time Warner and all entities in which Time Warner has a controlling
voting interest (“subsidiaries”) and variable interest entities (“VIE”) required to be consolidated
in accordance with U.S. generally accepted accounting principles (“GAAP”). Intercompany accounts
and transactions between consolidated companies have been eliminated in consolidation.
The financial position and operating results of substantially all foreign operations are
consolidated using the local currency as the functional currency. Local currency assets and
liabilities are translated at the rates of exchange on the balance sheet date, and local currency
revenues and expenses are translated at average rates of exchange during the period. Resulting
translation gains or losses are included in the consolidated statement of shareholders’ equity as a
component of Accumulated other comprehensive income, net.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements
include reserves established for securities litigation matters, accounting for asset impairments,
allowances for doubtful accounts, depreciation and amortization, film ultimate revenues, home video
and magazine returns, business combinations, pensions and other postretirement benefits,
equity-based compensation, income taxes, contingencies and certain programming arrangements.
Interim Financial Statements
The consolidated financial statements are unaudited; however, in the opinion of management,
they contain all the adjustments (consisting of those of a normal recurring nature) considered
necessary to present fairly the financial position, the results of operations and cash flows for
the periods presented in conformity with GAAP applicable to interim periods. The consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements of Time Warner included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006 (the “2006 Form 10-K”).
41
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income Per Common Share
Basic income per common share is computed by dividing the net income applicable to common
shares after preferred dividend requirements, if any, by the weighted average of common shares
outstanding during the period. Weighted-average common shares include shares of Time Warner’s
common stock and Series LMCN-V common stock. All outstanding shares of Series LMCN-V common stock
were tendered to the Company on May 16, 2007 and were retired in connection with the transaction
with Liberty Media Corporation (“Liberty”) described in Notes 3 and 6. Diluted income per common
share adjusts basic income per common share for the effects of convertible securities, stock
options, restricted stock, restricted stock units, performance stock units and other potentially
dilutive financial instruments, only in the periods in which such effect is dilutive.
Set forth below is a reconciliation of basic and diluted income per common share before
discontinued operations and cumulative effect of accounting change (millions, except per share
amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Income before discontinued
operations and cumulative effect
of accounting change — basic and
diluted |
|
$ |
900 |
|
|
$ |
1,347 |
|
|
$ |
3,032 |
|
|
$ |
3,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares
outstanding — basic |
|
|
3,673.7 |
|
|
|
4,048.8 |
|
|
|
3,756.6 |
|
|
|
4,258.7 |
|
Dilutive effect of equity awards |
|
|
40.6 |
|
|
|
35.6 |
|
|
|
47.2 |
|
|
|
38.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares
outstanding — diluted |
|
|
3,714.3 |
|
|
|
4,084.4 |
|
|
|
3,803.8 |
|
|
|
4,296.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share before
discontinued operations and
cumulative effect of accounting
change: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.24 |
|
|
$ |
0.33 |
|
|
$ |
0.81 |
|
|
$ |
0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.24 |
|
|
$ |
0.33 |
|
|
$ |
0.80 |
|
|
$ |
0.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share for the three months ended September 30, 2007 and 2006 and the
nine months ended September 30, 2007 and 2006 exclude approximately 294 million and 461 million,
respectively, and 291 million and 460 million, respectively, common shares issuable under the
Company’s stock compensation plans because they do not have a dilutive effect.
Changes in Basis of Presentation
The 2006 financial information has been recast so that the basis of presentation is consistent
with that of the 2007 financial information. Specifically, amounts were recast to reflect the
retrospective presentation of certain businesses that were sold as discontinued operations (see
Note 3).
Consolidation of Kansas City Pool
On January 1, 2007, the Company began consolidating the results of the Kansas City, south and
west Texas and New Mexico cable systems (the “Kansas City Pool”) it received upon the distribution
of the assets of Texas and Kansas City Cable Partners, L.P. (“TKCCP”) to Time Warner Cable Inc.
(together with its subsidiaries, “TWC”) and Comcast Corporation (“Comcast”).
Amounts Related to Securities Litigation
During the first and second quarters of 2007, the Company reached agreements to settle
substantially all of the remaining securities litigation claims, a substantial portion of which had
been reserved for at December 31, 2006. For the nine months ended September 30, 2007, the Company
recorded charges of approximately $153 million for these settlements. At September 30, 2007, the
Company’s remaining reserve related to these matters is approximately $10
million, including approximately $8 million that has been reserved for an expected attorneys’
fee award related to a previously settled matter. The Company believes the potential exposure in
the securities litigation matters that remain pending at September 30, 2007 to be de minimis.
42
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company recognizes insurance recoveries when it becomes probable that such amounts will be
received. The Company recognized insurance recoveries related to Employee Retirement Income
Security Act (“ERISA”) matters of approximately $9 million for the nine months ended September 30,
2007 and approximately $4 million and $57 million for the three and nine months ended September 30,
2006, respectively.
Equity-Based Compensation
The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Statement
of Financial Accounting Standards (“Statement”) No. 123 (revised 2004), Share-Based Payment (“FAS
123R”), which require that a company measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award. That cost is
recognized in the statement of operations over the period during which an employee is required to
provide service in exchange for the award. FAS 123R also requires that excess tax benefits, as
defined, realized from the exercise of stock options be reported as a financing cash inflow rather
than as a reduction of taxes paid in cash flow from operations.
The grant-date fair value of a stock option award is estimated using the Black-Scholes
option-pricing model, consistent with the provisions of FAS 123R and the Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment. Because
option-pricing models require the use of subjective assumptions, changes in these assumptions can
materially affect the fair value of the options. The Company determines the volatility assumption
for these stock options using implied volatilities from its traded options as well as quotes from
third-party investment banks. The expected term, which represents the period of time that options
granted are expected to be outstanding, is estimated based on the historical exercise experience of
Time Warner employees. Separate groups of employees that have similar historical exercise behavior
are considered separately for valuation purposes. The risk-free rate assumed in valuing the options
is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of
the option. The Company determines the expected dividend yield percentage by dividing the expected
annual dividend by the market price of Time Warner common stock at the date of grant.
In April 2007, TWC started granting stock options and restricted stock units based on TWC’s
Class A common stock. The valuation of, as well as the expense recognition for, such awards is
generally consistent with the treatment of Time Warner awards as described above. However, because
TWC’s Class A common stock has a limited trading history, the volatility assumption is determined
by reference to historical and implied volatilities of a comparable peer group of publicly traded
companies.
Prior to the adoption of FAS 123R on January 1, 2006, the Company recognized equity-based
compensation expense for awards with graded vesting by treating each vesting tranche as a separate
award and recognizing compensation expense ratably for each tranche. For equity awards granted
subsequent to the adoption of FAS 123R, the Company treats such awards as a single award and
recognizes equity-based compensation expense on a straight-line basis (net of estimated
forfeitures) over the employee service period. Equity-based compensation expense is recorded in
costs of revenues or selling, general and administrative expense depending on the employee’s job
function.
When recording compensation cost for equity awards, FAS 123R requires companies to estimate
the number of equity awards granted that are expected to be forfeited. Prior to the adoption of FAS
123R, the Company recognized forfeitures when they occurred, rather than using an estimate at the
grant date and subsequently adjusting the estimated forfeitures to reflect actual forfeitures. The
Company recorded a benefit of $25 million, net of tax, as the cumulative effect of a change in
accounting principle upon the adoption of FAS 123R in the first quarter of 2006, to recognize the
effect of estimating the number of awards granted prior to January 1, 2006 that are not ultimately
expected to vest.
43
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Standards
Accounting for Sabbatical Leave and Other Similar Benefits
On January 1, 2007, the Company adopted the provisions of Emerging Issues Task Force (“EITF”)
Issue No. 06-02, Accounting for Sabbatical Leave and Other Similar Benefits (“EITF 06-02”), related
to certain sabbatical leave and other employment arrangements that are similar to a sabbatical
leave. EITF 06-02 provides that an employee’s right to a compensated absence under a sabbatical
leave or similar benefit arrangement in which the employee is not required to perform any duties
during the absence is an accumulating benefit. Therefore, such arrangements should be accounted for
as a liability with the cost recognized over the service period during which the employee earns the
benefit. Adoption of this guidance resulted in an increase to accumulated deficit of approximately
$97 million (approximately $59 million, net of tax) on January 1, 2007. The resulting change in the
accrual for the nine months ended September 30, 2007 was not material.
Accounting for Uncertainty in Income Taxes
On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN
48”), which clarifies the accounting for uncertainty in income tax positions. This interpretation
requires the Company to recognize in the consolidated financial statements those tax positions
determined to be more likely than not of being sustained upon examination, based on the technical
merits of the positions. Upon adoption, the Company recognized approximately $445 million of tax
benefits for positions that were previously unrecognized, of which approximately $433 million was
accounted for as a reduction to the accumulated deficit balance and approximately $12 million was
accounted for as an increase to the paid-in-capital balance as of January 1, 2007. Additionally,
the adoption of FIN 48 resulted in the recognition of additional tax reserves for positions where
there is uncertainty about the timing or character of such deductibility. These additional reserves
were largely offset by increased deferred tax assets. After considering the impact of adopting FIN
48, the Company had a $1.6 billion reserve for uncertain income tax positions as of January 1,
2007.
During the three months ended September 30, 2007, the Company recorded additional reserves,
including a reserve of approximately $330 million attributable to uncertainties associated with
certain tax attributes utilized by the Company that was offset by a decrease to current taxes
payable.
The
Company does not presently anticipate that its existing reserves
related to uncertain tax positions as of September 30, 2007 will
significantly increase or decrease during the twelve month period
ended September 30, 2008; however, various events could cause
the Company’s current expectations to change in the future. The majority of these
uncertain tax positions, if ever recognized in the financial statements, would be recorded in the
statement of operations as part of the income tax provision.
The income tax reserve as of January 1, 2007 included an accrual for interest and penalties of
approximately $117 million. The impact of timing differences and tax attributes are considered when
calculating interest and penalty accruals associated with the tax reserve. The change in the
accrual for interest and penalties for the nine months ended September 30, 2007 was not material.
The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions as
part of income tax expense.
The Company and its subsidiaries file income tax returns in the U.S. and various state and
local and foreign jurisdictions. The Internal Revenue Service (IRS) has commenced an examination of
the Company’s U.S. income tax returns for the 2002 through 2004 period. The tax years that remain
subject to examination by significant jurisdiction are as follows:
| |
|
|
| U.S. federal
|
|
2002 through the current period |
| California
|
|
2002 through the current period |
| New York State
|
|
1997 through the current period |
| New York City
|
|
1997 through the current period |
44
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. TIME WARNER CABLE INC.
Interest in TW NY Cable Holding Inc.
In September 2007, the Company proposed to TWC that it enter into discussions regarding a
transaction pursuant to which TWC’s subsidiary, TW NY Cable Holding Inc. (“TWNYCH”), would redeem a
significant portion of the Company’s 12.43% non-voting, equity interest in it. TWC’s Board of
Directors has appointed a special committee of independent directors and authorized it to consider
any proposal made by the Company and to negotiate with the Company regarding the terms of such a
transaction. No assurance can be given that any proposal will result in an agreement for TWNYCH to
redeem a portion of the Company’s interest in it or, if an agreement is reached, that a redemption
transaction will be consummated. In April 2005, in connection with the announcement of the
Adelphia/Comcast Transactions (as defined below), TWC valued the Company’s 12.43% interest (as if
the Adelphia/Comcast Transactions had occurred at that time) at approximately $2.9 billion. This
2005 valuation is not necessarily indicative of the fair value of the interest as of the date of
this report. If a redemption transaction takes place, the Company expects that TWC would finance
the transaction through available borrowing capacity under TWC’s existing committed revolving
credit facility or by accessing the bank credit or debt capital markets. If a redemption
transaction is completed, it will not change the 84% ownership interest the Company has in TWC’s
common stock.
Transactions with Adelphia and Comcast
On July 31, 2006, a subsidiary of TWC, Time Warner NY Cable LLC (“TW NY”), and Comcast
completed their respective acquisitions of assets comprising in the aggregate substantially all of
the cable assets of Adelphia Communications Corporation (“Adelphia”) (the “Adelphia Acquisition”).
Additionally, on July 31, 2006, immediately before the closing of the Adelphia Acquisition,
Comcast’s interests in TWC and Time Warner Entertainment Company, L.P. (“TWE”), a subsidiary of
TWC, were redeemed (the “TWC Redemption” and the “TWE Redemption,” respectively, and, collectively,
the “Redemptions”). Following the Redemptions and the Adelphia Acquisition, on July 31, 2006, TW NY
and Comcast swapped certain cable systems, most of which were acquired from Adelphia, in order to
enhance TWC’s and Comcast’s respective geographic clusters of subscribers (the “Exchange” and,
together with the Adelphia Acquisition and the Redemptions, the “Adelphia/Comcast Transactions”).
The results of the systems acquired in connection with the Adelphia/Comcast Transactions have been
included in the consolidated statement of operations since the closing of the transactions. As a
result of the closing of the Adelphia/Comcast Transactions, TWC acquired systems with approximately
4.0 million basic video subscribers and disposed of systems with approximately 0.8 million basic
video subscribers previously owned by TWC that were transferred to Comcast in connection with the
Redemptions and the Exchange for a net gain of approximately 3.2 million basic video subscribers.
On February 13, 2007, Adelphia’s Chapter 11 reorganization plan became effective and, under
applicable securities law regulations and provisions of the U.S. bankruptcy code, TWC became a
public company subject to the requirements of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Under the terms of the reorganization plan, the shares of TWC’s Class A common
stock that Adelphia received in the Adelphia Acquisition (representing approximately 16% of TWC’s
outstanding common stock) are being distributed to Adelphia’s creditors. On March 1, 2007, TWC’s
Class A common stock began trading on the New York Stock Exchange under the symbol “TWC.” As of
September 30, 2007, Time Warner owned approximately 84% of TWC’s outstanding common stock.
Texas/Kansas City Cable Joint Venture
TKCCP was a 50-50 joint venture between a consolidated subsidiary of TWC (Time Warner
Entertainment-Advance/Newhouse Partnership (“TWE-A/N”)) and Comcast. On January 1, 2007, TKCCP
distributed its assets to TWC and Comcast. TWC received the Kansas City Pool, which served
approximately 788,000 basic video subscribers as of December 31, 2006, and Comcast received the
pool of assets consisting of the Houston cable systems (the “Houston Pool”), which served
approximately 795,000 basic video subscribers as of December 31, 2006. TWC began consolidating the
results of the Kansas City Pool on January 1, 2007. TKCCP was formally dissolved on May 15, 2007.
For accounting purposes, the Company has treated the distribution of TKCCP’s assets as a sale of
the Company’s 50% equity interest in the Houston Pool and as an acquisition of Comcast’s 50% equity
interest in the Kansas City Pool. As a result of the sale of
the Company’s 50% equity interest in the Houston Pool, the Company recorded a pretax gain of
approximately $146
45
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
million in the first quarter of 2007,
which is included as a component of other
income (loss), net in the consolidated statement of operations for the nine months ended September
30, 2007.
The
acquisition of Comcast’s 50% equity interest in the Kansas City Pool on January 1, 2007
was treated as a step-acquisition and accounted for as a purchase business combination. The
consideration paid to acquire the 50% equity interest in the Kansas City Pool was the fair value of
the 50% equity interest in the Houston Pool transferred to Comcast. The estimated fair value of
TWC’s 50% interest in the Houston Pool (approximately $880 million) was determined using a
discounted cash flow analysis and was reduced by debt assumed by Comcast. Approximately $612
million of the purchase price has been allocated to intangible assets not subject to amortization
and $183 million has been allocated to property, plant and equipment with the remainder of $85
million allocated to other assets and liabilities.
Supplemental
Unaudited Pro Forma Information for Significant Acquisitions
The following
schedule presents supplemental unaudited pro forma information for the three and
nine months ended September 30, 2006 as if the Adelphia/Comcast Transactions and the consolidation
of the Kansas City Pool had occurred on January 1, 2006. The unaudited pro forma information is
presented based on information available, is intended for informational purposes only and is not
necessarily indicative of and does not purport to represent what Time Warner’s future financial
condition or operating results will be after giving effect to the Adelphia/Comcast Transactions and
the consolidation of the Kansas City Pool, and does not reflect actions that may be undertaken by
management in integrating these businesses (e.g., the cost of incremental capital expenditures). In
addition, this supplemental information does not reflect financial and operating benefits TWC
expects to realize as a result of the Adelphia/Comcast Transactions and the consolidation of the
Kansas City Pool (millions, except per share amounts).
| |
|
|
|
|
|
|
|
|
| |
|
Pro Forma |
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/06 |
|
|
9/30/06 |
|
Revenues |
|
$ |
11,225 |
|
|
$ |
33,984 |
|
Costs of revenues(a) |
|
|
(5,745 |
) |
|
|
(17,238 |
) |
Selling, general and
administrative expenses(a) |
|
|
(2,431 |
) |
|
|
(7,689 |
) |
Other, net |
|
|
(302 |
) |
|
|
(484 |
) |
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
2,747 |
|
|
|
8,573 |
|
Depreciation |
|
|
(862 |
) |
|
|
(2,540 |
) |
Amortization |
|
|
(189 |
) |
|
|
(565 |
) |
|
|
|
|
|
|
|
Operating Income |
|
|
1,696 |
|
|
|
5,468 |
|
Interest expense, net |
|
|
(532 |
) |
|
|
(1,490 |
) |
Other income, net |
|
|
596 |
|
|
|
772 |
|
|
|
|
|
|
|
|
Income before income taxes, discontinued operations and
cumulative effect of accounting change |
|
|
1,760 |
|
|
|
4,750 |
|
Income tax provision |
|
|
(433 |
) |
|
|
(1,492 |
) |
|
|
|
|
|
|
|
Income before discontinued operations and cumulative
effect of accounting change |
|
$ |
1,327 |
|
|
$ |
3,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share before discontinued
operations and cumulative effect of accounting change |
|
$ |
0.33 |
|
|
$ |
0.77 |
|
Diluted net income per common share before discontinued
operations and cumulative effect of accounting change |
|
$ |
0.32 |
|
|
$ |
0.76 |
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
46
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. BUSINESS ACQUISITIONS AND DISPOSITIONS
Claxson
On October 3, 2007, the Company completed the purchase of seven pay television networks and
the sales representation rights for eight third-party-owned networks operating principally in Latin
America from Claxson Interactive Group, Inc. (“Claxson”) for $234 million in cash.
TACODA
On September 6, 2007, the Company completed the acquisition of TACODA, Inc. (“TACODA”), an
online behavioral targeting advertising network, for $274 million in cash, net of cash acquired.
The TACODA acquisition did not significantly impact the Company’s consolidated financial results
for the three and nine months ended September 30, 2007.
Divestitures of Certain Non-Core AOL Wireless Businesses
On August 24, 2007, the Company completed the sale of Tegic Communications, Inc. (“Tegic”), a
wholly owned subsidiary of AOL, to Nuance Communications, Inc. (“Nuance”) for $265 million in cash.
In the third quarter of 2007, the Company recorded a pretax gain on this sale of approximately $200
million. In addition, in the third quarter of 2007, the Company transferred the assets of Wildseed
LLC (“Wildseed”), a wholly owned subsidiary of AOL, to a third-party. The Company recorded a pretax
charge of approximately $7 million related to this divestiture in the second quarter of 2007 and an
impairment charge of approximately $18 million on the long-lived assets of Wildseed in the first
quarter of 2007. All amounts related to both Tegic and Wildseed have been reflected as discontinued
operations for all periods presented.
Transaction with Liberty
On May 16, 2007, the Company completed a transaction in which Liberty exchanged 68.5 million
shares of Time Warner common stock for the stock of a subsidiary of Time Warner that owned assets
including the Atlanta Braves baseball franchise (the “Braves”) and Leisure Arts, Inc. (“Leisure
Arts”) (at a fair value of $473 million) and $960 million of cash (collectively, the “Liberty
Transaction”). Included in the 68.5 million shares of Time Warner common stock are 4 million shares
expected to be delivered to the Company upon the resolution of a working capital adjustment that is
expected to be completed in the fourth quarter of 2007. The 4 million shares have been reflected as
common stock due from Liberty in the consolidated balance sheet at September 30, 2007. The Company
recorded a pretax gain of $71 million on the sale of the Braves, which is net of indemnification
obligations valued at $60 million. The Company has agreed to indemnify Liberty for, among other
things, increases in the amount due by the Braves under Major League Baseball’s revenue sharing
rules from expected amounts for fiscal years 2007 to 2027, to the extent attributable to local
broadcast and other contracts in place prior to the Liberty Transaction. The Liberty Transaction
was designed to qualify as a tax-free split-off under Section 355 of the Internal Revenue Code of
1986, as amended, and, as a result, the historical deferred tax liabilities of $83 million
associated with the Braves were no longer required. In the first quarter of 2007, the Company
recorded an impairment charge of $13 million on its investment in Leisure Arts. The results of
operations of the Braves and Leisure Arts have been reflected as discontinued operations for all
periods presented.
Bookspan
On April 9, 2007, the Company sold its 50% interest in Bookspan, a joint venture accounted for
as an equity method investment that primarily owns and operates book clubs via direct mail and
e-commerce, to a subsidiary of Bertelsmann AG (“Bertelsmann”) for a purchase price of $145 million,
which resulted in a pretax gain of approximately $100 million.
47
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Parenting and Time4 Media
On March 3, 2007, the Company sold its Parenting Group and most of the Time4 Media magazine
titles, consisting of 18 of Time Inc.’s smaller niche magazines, to a subsidiary of Bonnier AB, a
Swedish media company (“Bonnier”), for approximately $220 million, which resulted in a pretax gain
of approximately $54 million. The results of operations of the Parenting Group and Time4 Media
magazine titles that were sold have been reflected as discontinued operations for all periods
presented.
Sales of AOL’s European Access Businesses
On February 28, 2007, the Company completed the sale of AOL’s German access business to
Telecom Italia S.p.A. for $850 million in cash, resulting in a net pretax gain of approximately
$668 million. In connection with this sale, the Company entered into a separate agreement to
provide ongoing web services, including content, e-mail and other online tools and services to
Telecom Italia S.p.A. As a result of the historical interdependency of AOL’s European access and
audience businesses, the historical cash flows and operations of the access and audience businesses
were not clearly distinguishable. Accordingly, AOL’s German access business and its other European
access businesses, which were sold in 2006, have not been reflected as discontinued operations in
the consolidated financial statements.
Summary of Discontinued Operations
Discontinued operations for the three and nine months ended September 30, 2007 and 2006
reflect certain businesses sold, which included Tegic and Wildseed and, for the nine months ended
September 30, 2007, included the Parenting Group, most of the Time4 Media magazine titles, The
Progressive Farmer magazine, Leisure Arts and the Braves. Discontinued operations for the three and
nine months ended September 30, 2006 also included the operations of the systems transferred to
Comcast in connection with the Redemptions and the Exchange and, for the nine months ended
September 30, 2006, included the Turner South network (“Turner South”) and Time Warner Book Group
(“TWBG”). The financial data for the discontinued operations for the three and nine months ended
September 30, 2007 and 2006 is as follows (millions, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
Total revenues |
|
$ |
10 |
|
|
$ |
222 |
|
|
$ |
133 |
|
|
$ |
973 |
|
|
Pretax income |
|
$ |
194 |
|
|
$ |
173 |
|
|
$ |
225 |
|
|
$ |
602 |
|
Income tax benefit (provision) |
|
|
(8 |
) |
|
|
802 |
|
|
|
99 |
|
|
|
810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
186 |
|
|
$ |
975 |
|
|
$ |
324 |
|
|
$ |
1,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.06 |
|
|
$ |
0.24 |
|
|
$ |
0.08 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic common shares |
|
|
3,673.7 |
|
|
|
4,048.8 |
|
|
|
3,756.6 |
|
|
|
4,258.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.05 |
|
|
$ |
0.24 |
|
|
$ |
0.08 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted common shares |
|
|
3,714.3 |
|
|
|
4,084.4 |
|
|
|
3,803.8 |
|
|
|
4,296.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in discontinued operations for the three and nine months ended September 30, 2007
were a pretax gain of approximately $200 million and a related tax provision of approximately $15
million on the sale of Tegic. The tax provision on the sale of Tegic included a tax benefit
associated with the use of tax attribute carryforwards, partially offset by a tax charge
attributable to the reversal of a deferred tax asset. In addition, discontinued operations for the
nine months ended September 30, 2007 included a pretax gain of approximately $71 million and a
related tax benefit of approximately $82 million on the sale of the Braves, a pretax gain of
approximately $54 million and a related tax benefit of approximately $6 million on the sale of the
Parenting Group and most of the Time4 Media magazine titles, an impairment of approximately $18
million on AOL’s long-lived assets associated with Wildseed and an impairment of approximately $13
million on the Company’s investment in Leisure Arts. The tax benefit recognized for the Braves
transaction resulted primarily from the reversal of certain deferred tax liabilities in connection
with the Liberty Transaction. The Liberty Transaction was designed to qualify as a tax-free
split-off under Section 355 of the Internal Revenue Code of 1986, as
amended, and, as a result, the historical deferred tax liabilities associated with the Braves
were no longer required. The tax benefit recognized for the magazine sale transaction resulted
primarily from the recognition of deferred tax assets associated with the sale of the magazine
titles. In addition, for the three and nine months ended September 30, 2007,
48
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
respectively, the
Company incurred an additional $1 million and $18 million accrual related to changes in estimates
of Warner Music Group indemnification liabilities, and for the nine months ended September 30,
2007, the Company made payments of $26 million related to Warner Music Group indemnification
liabilities established in prior years, which are disclosed on the Company’s consolidated statement
of cash flows as Investment activities of discontinued operations.
Included in discontinued operations for the three and nine months ended September 30, 2006
were a pretax gain of approximately $145 million on the systems transferred to Comcast in
connection with the Redemptions and the Exchange and a tax benefit of approximately $810 million,
comprised of a tax benefit of $817 million on the Redemptions, partially offset by a provision of
$7 million on the Exchange. The tax benefit of $817 million resulted primarily from the reversal of
historical deferred tax liabilities (included in noncurrent liabilities of discontinued operations)
that had existed on systems transferred to Comcast in the TWC Redemption. The TWC Redemption was
designed to qualify as a tax-free split-off under Section 355 of the Internal Revenue Code of 1986,
as amended, and, as a result, such liabilities were no longer required. However, if the IRS were
successful in challenging the tax-free characterization of the TWC Redemption, an additional cash
liability on account of taxes of up to an estimated $900 million could become payable by the
Company. The results for the nine months ended September 30, 2006 also included a pretax gain of
approximately $129 million and a related tax benefit of approximately $21 million on the sale of
Turner South and a pretax gain of approximately $194 million and a related tax benefit of
approximately $28 million on the sale of TWBG. The tax benefits on the sales of Turner South and
TWBG resulted primarily from the release of a valuation allowance associated with tax attribute
carryforwards offsetting the gains on these transactions.
4. INVENTORIES AND FILM COSTS
Inventories and film costs consist of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
(recast) |
|
Programming costs, less amortization |
|
$ |
3,401 |
|
|
$ |
3,287 |
|
DVDs, books, paper and other merchandise |
|
|
372 |
|
|
|
347 |
|
Film costs — Theatrical: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
749 |
|
|
|
682 |
|
Completed and not released |
|
|
301 |
|
|
|
205 |
|
In production |
|
|
1,234 |
|
|
|
1,392 |
|
Development and pre-production |
|
|
69 |
|
|
|
50 |
|
Film costs — Television: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
720 |
|
|
|
704 |
|
Completed and not released |
|
|
198 |
|
|
|
158 |
|
In production |
|
|
436 |
|
|
|
473 |
|
Development and pre-production |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total inventories and film costs(a) |
|
|
7,483 |
|
|
|
7,301 |
|
Less: current portion of inventory(b) |
|
|
(1,996 |
) |
|
|
(1,907 |
) |
|
|
|
|
|
|
|
Total noncurrent inventories and film costs |
|
$ |
5,487 |
|
|
$ |
5,394 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Does not include $2.532 billion and $2.691 billion of net film library costs as of
September 30, 2007 and December 31, 2006, respectively, which are included in intangible
assets subject to amortization on the consolidated balance sheet. |
| |
| (b) |
|
Current inventory as of September 30, 2007 and December 31, 2006 is comprised
primarily of programming inventory at the Networks segment ($1.619 billion and $1.557 billion,
respectively), magazines, paper and other merchandise at the Publishing segment ($124 million
and $140 million, respectively), and DVDs and videocassettes at the Filmed Entertainment
segment ($253 million and $210 million, respectively). |
49
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Committed financing capacity and long-term debt consists of (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized |
|
|
|
|
|
|
|
| |
|
Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount |
|
|
2007 |
|
|
|
|
| |
|
Rate at |
|
|
|
|
|
2007 |
|
|
Letters |
|
|
on |
|
|
Unused |
|
|
Outstanding Debt |
|
| |
|
September 30, |
|
|
|
|
|
Committed |
|
|
of |
|
|
Commercial |
|
|
Committed |
|
|
September 30, |
|
|
December 31, |
|
| |
|
2007 |
|
Maturities |
|
|
Capacity |
|
|
Credit(a) |
|
|
Paper |
|
|
Capacity(f) |
|
|
2007 |
|
|
2006 |
|
Cash and equivalents |
|
|
|
|
|
|
|
|
|
$ |
1,873 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,873 |
|
|
|
|
|
|
|
|
|
Bank credit agreement debt
and
commercial
paper
programs(b) |
|
|
5.70 |
% |
|
|
2011 |
|
|
|
16,045 |
|
|
|
220 |
|
|
|
18 |
|
|
|
4,673 |
|
|
$ |
11,134 |
|
|
$ |
12,381 |
|
Floating-rate public debt(b) |
|
|
5.73 |
% |
|
|
2009 |
|
|
|
2,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,000 |
|
|
|
2,000 |
|
Fixed-rate public debt(b)(c) |
|
|
6.96 |
% |
|
|
2008-2037 |
|
|
|
23,708 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23,708 |
|
|
|
20,285 |
|
Other fixed-rate obligations(d) |
|
|
8.00 |
% |
|
|
— |
|
|
|
287 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
287 |
|
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
43,913 |
|
|
|
220 |
|
|
|
18 |
|
|
|
6,546 |
|
|
|
37,129 |
|
|
|
34,997 |
|
Debt due within one year(e) |
|
|
|
|
|
|
|
|
|
|
(73 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(73 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
43,840 |
|
|
$ |
220 |
|
|
$ |
18 |
|
|
$ |
6,546 |
|
|
$ |
37,056 |
|
|
$ |
34,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Represents the portion of committed capacity reserved for outstanding and undrawn
letters of credit. |
| |
| (b) |
|
The bank credit agreements, commercial paper programs and public debt of the Company
rank pari passu with senior debt of the respective obligors thereon. The Company’s maturity
profile of its outstanding debt and other financing arrangements is relatively long-term, with
a weighted maturity of approximately 10 years. |
| |
| (c) |
|
As of September 30, 2007, the Company has classified $766 million of debt due within
the next twelve months as long-term in the consolidated balance sheet to reflect management’s
intent and ability to refinance the obligation on a long-term basis, through the utilization
of the unused committed capacity under the Company’s bank credit agreements, if necessary. |
| |
| (d) |
|
Includes capital lease obligations. |
| |
| (e) |
|
Debt due within one year primarily relates to capital lease obligations. |
| |
| (f) |
|
Includes $3.557 billion of unused committed capacity at TWC. |
Cable Debt Securities
On April 9, 2007, TWC issued $5.0 billion in aggregate principal amount of senior unsecured
notes and debentures (the “Cable Bond Offering”) consisting of $1.5 billion principal amount of
5.40% Notes due 2012 (the “2012 Initial Notes”), $2.0 billion principal amount of 5.85% Notes due
2017 (the “2017 Initial Notes”) and $1.5 billion principal amount of 6.55% Debentures due 2037 (the
“2037 Initial Debentures” and, together with the 2012 Initial Notes and the 2017 Initial Notes, the
“Cable Initial Debt Securities”) pursuant to Rule 144A and Regulation S under the Securities Act of
1933, as amended (the “Securities Act”). The Cable Initial Debt Securities are guaranteed by TWE
and TWNYCH (the “Guarantors”). TWC used a portion of the net proceeds of the Cable Bond Offering to
repay all of the outstanding indebtedness under its $4.0 billion three-year term credit facility,
which was terminated on April 13, 2007. The balance of the net proceeds was used to repay a portion
of the outstanding indebtedness under TWC’s $4.0 billion five-year term credit facility on April
27, 2007, which reduced the amounts outstanding under that facility to $3.045 billion as of such
date.
In connection with the issuance of the Cable Initial Debt Securities, on April 9, 2007, TWC,
the Guarantors and the initial purchasers of the Cable Initial Debt Securities entered into a
Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which TWC agreed,
among other things, to use its commercially reasonable efforts to consummate a registered exchange
offer for the Cable Initial Debt Securities within 270 days after the issuance date of the Cable
Initial Debt Securities or cause a shelf registration statement covering the resale of the Cable
Initial Debt Securities to be declared effective within specified
periods. On November 5, 2007, pursuant to a registered exchange
offer, TWC and the Guarantors exchanged (i) substantially
all of the 2012 Initial Notes for a like aggregate principal amount of registered debt securities
without transfer restrictions or registration rights (the “2012 Registered Notes,” and, together
with the 2012 Initial Notes, the “2012 Notes”), (ii) all of the 2017 Initial Notes
for a like aggregate principal amount of registered debt securities without transfer restrictions
or registration rights (the “2017 Registered Notes,” and, together with the 2017 Initial Notes, the
“2017 Notes”), and (iii) substantially all of the 2037 Initial Debentures for a like aggregate
principal amount of registered debt securities without transfer restrictions or registration rights
(the “2037 Registered Debentures,” and, together with the 2037 Initial Debentures, the “2037
Debentures”). Collectively, the 2012 Notes, the 2017 Notes and the 2037 Debentures are referred to
as the “Cable Debt Securities.”
The Cable Debt Securities were issued pursuant to an Indenture, dated as of April 9, 2007 (the
“Base Cable Indenture”), by and among TWC, the Guarantors and The Bank of New York, as trustee, as
supplemented by the First
Supplemental Indenture, dated as of April 9, 2007 (the “First Supplemental Cable Indenture”
and, together with the Cable Base Indenture, the “Cable Indenture”), by and among TWC, the
Guarantors and The Bank of New York, as trustee.
50
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The 2012 Notes mature on July 2, 2012, the 2017 Notes mature on May 1, 2017 and the 2037
Debentures mature on May 1, 2037. Interest on the 2012 Notes is payable semi-annually in arrears on
January 2 and July 2 of each year, beginning on July 2, 2007. Interest on the 2017 Notes and the
2037 Debentures is payable semi-annually in arrears on May 1 and November 1 of each year, beginning
on November 1, 2007. The Cable Debt Securities are unsecured senior obligations of TWC and rank
equally with its other unsecured and unsubordinated obligations. The guarantees of the Cable Debt
Securities are unsecured senior obligations of the Guarantors and rank equally in right of payment
with all other unsecured and unsubordinated obligations of the Guarantors.
The Cable Debt Securities may be redeemed in whole or in part at any time at TWC’s option at a
redemption price equal to the greater of (i) 100% of the principal amount of the Cable Debt
Securities being redeemed and (ii) the sum of the present values of the remaining scheduled
payments on the Cable Debt Securities discounted to the redemption date on a semi-annual basis at a
government treasury rate plus 20 basis points for the 2012 Notes, 30 basis points for the 2017
Notes and 35 basis points for the 2037 Debentures as further described in the Cable Indenture,
plus, in each case, accrued but unpaid interest to the redemption date.
The Cable Indenture contains customary covenants relating to restrictions on the ability of
TWC or any material subsidiary of TWC to create liens and on the ability of TWC and the Guarantors
to consolidate, merge or convey or transfer substantially all of their assets. The Cable Indenture
also contains customary events of default.
Bank Credit Agreements and Commercial Paper Programs
On January 25, 2007, Time Warner entered into a $7.0 billion unsecured commercial paper
program (the “TW Program”) that replaced its previous $5.0 billion unsecured commercial paper
program, which was terminated in February 2007 upon repayment of the last amounts issued
thereunder. The obligations of Time Warner under the TW Program are guaranteed by TW AOL Holdings
Inc. (“TW AOL”) and Historic TW Inc. (“Historic TW”). In addition, the obligations of Historic TW
are guaranteed by Turner and Time Warner Companies, Inc. Proceeds from the TW Program may be used
for general corporate purposes, including investments, repayment of debt and acquisitions.
Commercial paper issued by Time Warner is supported by unused committed capacity under the
Company’s $7.0 billion senior unsecured five-year revolving credit facility. As a result of recent
market volatility in the U.S. debt markets, including the dislocation of the overall commercial
paper market, the Company has decreased the amount of commercial paper outstanding under the TW
Program, and has offset this decrease by increasing borrowings outstanding under its $7.0 billion
credit facility. As of September 30, 2007, approximately $1.988 billion of commercial paper was
outstanding under the TW Program, and there were borrowings of $3.300 billion outstanding under the
Company’s $7.0 billion credit facility.
On December 4, 2006, TWC entered into a $6.0 billion unsecured commercial paper program (the
“TWC Program”) that replaced its previous $2.0 billion commercial paper program, which was
terminated on February 14, 2007 upon repayment of the last remaining notes issued under that
program. The TWC Program is guaranteed by TWNYCH and TWE. Commercial paper issued by TWC under the
TWC Program is supported by unused committed capacity under TWC’s $6.0 billion senior unsecured
revolving credit facility and ranks pari passu with other unsecured senior indebtedness of TWC, TWE
and TWNYCH. TWC has also decreased the amount of commercial paper outstanding under its program as
a result of the recent volatility in the U.S. debt markets, and has offset this decrease by
increasing borrowings outstanding under its $6.0 billion credit facility. As of September 30, 2007,
approximately $1.018 billion of commercial paper was outstanding under the TWC Program, and there
were borrowings of $1.800 billion outstanding under TWC’s $6.0 billion credit facility.
51
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. SHAREHOLDERS’ EQUITY
Common Stock Repurchase Program
In July 2005, Time Warner’s Board of Directors authorized a common stock repurchase program
that, as amended over time, allowed the Company to purchase up to an aggregate of $20 billion of
common stock during the period from July 29, 2005 through December 31, 2007. As of June 30, 2007,
the Company completed its $20 billion common stock repurchase program, and, from the program’s
inception through June 30, 2007 the Company repurchased approximately 1.1 billion shares of common
stock. All outstanding shares of Series LMCN-V common stock were tendered to the Company in
connection with the Liberty Transaction and this stock repurchase program and were retired.
On July 26, 2007, Time Warner’s Board of Directors authorized a new common stock repurchase
program that allows the Company to purchase up to an aggregate of $5 billion of common stock.
Purchases under this new stock repurchase program may be made from time to time on the open market
and in privately negotiated transactions. The size and timing of these purchases are based on a
number of factors, including price and business and market conditions. From the program’s inception
through September 30, 2007, the Company repurchased approximately 107 million shares of common
stock for approximately $2 billion pursuant to trading programs under Rule 10b5-1 of the Exchange
Act.
7. EQUITY-BASED COMPENSATION
Time Warner Inc. Equity Plans
The Company has three active equity plans under which it is authorized to grant options to
purchase up to an aggregate of 450 million shares of Time Warner common stock. Options have been
granted to employees and non-employee directors of Time Warner with exercise prices equal to, or in
excess of, the fair market value at the date of grant. Generally, the options vest ratably over a
four-year vesting period and expire ten years from the date of grant. Certain option awards provide
for accelerated vesting upon an election to retire pursuant to the Company’s defined benefit
retirement plans or after reaching a specified age and years of service, as well as certain
additional circumstances for non-employee directors. For the nine months ended September 30, 2007,
the Company granted approximately 28 million options at a weighted-average grant date fair value
per option of $5.17 ($3.21, net of tax). For the nine months ended September 30, 2006, the Company
granted approximately 54 million options at a weighted-average grant date fair value per option of
$4.46 ($2.77, net of tax). The assumptions presented in the table below represent the
weighted-average value of the applicable assumption used to value stock options at their grant
date.
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
| |
|
9/30/07 |
|
9/30/06 |
Expected volatility |
|
|
22.1 |
% |
|
|
22.2 |
% |
Expected term to exercise from grant date |
|
5.32 years |
|
5.07 years |
Risk-free rate |
|
|
4.4 |
% |
|
|
4.6 |
% |
Expected dividend yield |
|
|
1.1 |
% |
|
|
1.1 |
% |
Time Warner may also grant shares of common stock or restricted stock units (“RSUs”), which
generally vest between three to five years from the date of grant, to its employees and its
non-employee directors pursuant to these equity plans, including an additional plan limited to
non-employee directors. Certain RSU awards provide for accelerated vesting upon an election to
retire pursuant to the Company’s defined benefit retirement plans or after reaching a specified age
and years of service, as well as certain additional circumstances for non-employee directors. For
the nine months ended September 30, 2007, the Company granted approximately 8.5 million RSUs at a
weighted-average grant date fair value per RSU of $19.99. For the nine months ended September 30,
2006, the Company granted approximately 3.9 million RSUs at a weighted-average grant date fair
value per RSU of $17.39.
Time Warner also has a performance share program for senior level executives. Under this
program, recipients of performance share units (“PSUs”) are awarded a target number of PSUs that
represent the contingent (unfunded and unsecured) right to receive shares of Company stock at the
end of a three-year performance period based on the actual
performance level achieved by the Company. Depending on the Company’s total shareholder return
relative to the other companies in the S&P 500 Index on the date of the grant, as well as a
requirement of continued employment, the recipient
52
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of a PSU may receive 0% to 200% of the target
PSUs granted based on a sliding scale where a relative ranking of less than the 25th
percentile will pay 0% and a ranking at the 100th percentile will pay 200% of the target
number of shares. PSU holders do not receive payments or accruals of dividends or dividend
equivalents for regular cash dividends paid by the Company while the PSU is outstanding.
Participants who are terminated by the Company other than for cause or who terminate their own
employment for good reason or due to retirement or disability are generally entitled to a pro rata
portion of the PSUs that would otherwise vest at the end of the performance period. For accounting
purposes, the PSU is considered to have a market condition. The effect of a market condition is
reflected in the grant date fair value of the award and, thus, compensation expense is recognized
on this type of award provided that the requisite service is rendered (regardless of whether the
market condition is achieved). The fair value of a PSU is estimated by using a Monte Carlo analysis
to estimate the total return ranking of Time Warner among the S&P 500 Index companies on the date
of the grant over the performance period. For the nine months ended September 30, 2007, the Company
granted approximately 1.1 million target PSUs at a weighted-average grant date fair value per PSU
of $19.47. There were no PSUs granted in 2006.
TWC Equity Plan
On June 8, 2006, TWC’s board of directors approved the Time Warner Cable Inc. 2006 Stock
Incentive Plan (the “TWC 2006 Plan”) under which awards covering the issuance of up to 100,000,000
shares of TWC Class A common stock may be granted to directors, employees and certain non-employee
advisors of TWC. TWC made its first grant of equity awards based on TWC Class A common stock in
April 2007. Stock options have been granted under the TWC 2006 Plan with exercise prices equal to
the fair market value at the date of grant. Generally, the stock options vest ratably over a
four-year vesting period and expire ten years from the date of grant. Certain stock option awards
provide for accelerated vesting upon an election to retire pursuant to TWC’s defined benefit
retirement plans or after reaching a specified age and years of service.
For the nine months ended September 30, 2007, TWC granted approximately 2.9 million options to
employees under the TWC 2006 Plan at a weighted-average grant date fair value per option of $13.33
($8.26, net of tax). The assumptions presented in the table below represent the weighted-average
value of the applicable assumption used to value TWC stock options at their grant date.
| |
|
|
|
|
| |
|
Nine Months Ended |
| |
|
9/30/07 |
Expected volatility |
|
|
24.1% |
Expected term to exercise from grant date |
|
6.59 years |
Risk-free rate |
|
|
4.7% |
Expected dividend yield |
|
|
0% |
Under the TWC 2006 Plan, TWC also granted RSUs, which generally vest over a four-year period
from the date of grant. Certain RSU awards provide for accelerated vesting upon an election to
retire pursuant to TWC’s defined benefit retirement plans or after reaching a specified age and
years of service. Shares of TWC Class A common stock will generally be issued in connection with
the vesting of an RSU. RSUs awarded to non-employee directors are not subject to vesting
restrictions and the shares underlying the RSUs will be issued in connection with a director’s
termination of service as a director. For the nine months ended September 30, 2007, TWC granted
approximately 2.1 million RSUs at a weighted-average grant date fair value per RSU of $37.07.
Since April 2007, grants of equity awards to TWC employees have been and will continue to be
made by TWC under TWC’s equity plans.
53
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Equity-Based Compensation Expense
Compensation
expense recognized for equity-based compensation plans, including the TWC 2006
Plan beginning in the second quarter of 2007, for the three and nine months ended September 30,
2007 and 2006 is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
Stock options |
|
$ |
33 |
|
|
$ |
40 |
|
|
$ |
125 |
|
|
$ |
161 |
|
Restricted stock, restricted stock units and
performance share units |
|
|
24 |
|
|
|
11 |
|
|
|
105 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact on Operating Income |
|
$ |
57 |
|
|
$ |
51 |
|
|
$ |
230 |
|
|
$ |
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit recognized |
|
$ |
21 |
|
|
$ |
19 |
|
|
$ |
84 |
|
|
$ |
79 |
|
8. BENEFIT PLANS
Time Warner
and certain of its subsidiaries have both funded and unfunded noncontributory
defined benefit pension plans covering a majority of domestic employees and, to a lesser extent,
have various defined benefit plans covering international employees. Pension benefits are
determined based on formulas that reflect the employees’ years of service and compensation during
their employment period and participation in the plans. Time Warner uses a December 31 measurement
date for the majority of its plans. A summary of the components of the net periodic benefit cost
from continuing operations recognized by substantially all of Time Warner’s domestic and
international defined benefit pension plans for the three and nine months ended September 30, 2007
and 2006 is as follows (millions):
Components of Net Periodic
Benefit Costs(a)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Domestic |
|
|
International |
|
|
Domestic |
|
|
International |
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
39 |
|
|
$ |
36 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
114 |
|
|
$ |
110 |
|
|
$ |
17 |
|
|
$ |
18 |
|
Interest cost |
|
|
50 |
|
|
|
45 |
|
|
|
10 |
|
|
|
9 |
|
|
|
150 |
|
|
|
137 |
|
|
|
32 |
|
|
|
27 |
|
Expected return on plan
assets |
|
|
(64 |
) |
|
|
(56 |
) |
|
|
(16 |
) |
|
|
(12 |
) |
|
|
(193 |
) |
|
|
(169 |
) |
|
|
(47 |
) |
|
|
(37 |
) |
Amounts amortized |
|
|
8 |
|
|
|
19 |
|
|
|
1 |
|
|
|
2 |
|
|
|
25 |
|
|
|
57 |
|
|
|
3 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs |
|
$ |
33 |
|
|
$ |
44 |
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
96 |
|
|
$ |
135 |
|
|
$ |
5 |
|
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions |
|
$ |
4 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
— |
|
|
$ |
13 |
|
|
$ |
15 |
|
|
$ |
15 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
On August 1, 2007, the former employees of Adelphia and Comcast who became
employees of TWC became eligible to participate in the TWC pension plans, which resulted in a
new measurement of those plans as of that date. The impact of the new measurement on these
plans as of August 1, 2007 will result in an increase in pension expense of $4 million over
the last five months of 2007. |
Expected Cash Flows
After considering the funded status of the Company’s defined benefit pension plans, movements
in the discount rate, investment performance and related tax consequences, the Company may choose
to make contributions to its pension plans in any given year. There currently are no minimum
required contributions for domestic funded plans and no discretionary or noncash contributions are
currently planned. For domestic unfunded plans, contributions will continue to be made to the
extent benefits are paid.
54
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. MERGER, RESTRUCTURING AND SHUTDOWN COSTS
In accordance with GAAP, Time Warner generally treats merger costs relating to business
acquisitions as additional purchase price paid. However, certain merger costs do not meet the
criteria for capitalization and are expensed as incurred as they either relate to the operations of
the acquirer or otherwise do not qualify as a liability or cost assumed in an acquisition. In
addition, the Company has incurred restructuring and shutdown costs unrelated to business
acquisitions which are expensed as incurred.
Merger Costs Capitalized as a Cost of Acquisition
During 2006, the Company acquired the remaining 50% interest in Courtroom Television Network
LLC (“Court TV”) that it did not already own from Liberty. In connection with the 2006 acquisition
of the additional Court TV interest, the Company incurred approximately $58 million in
capitalizable merger costs (of which $6 million was incurred for the nine months ended September
30, 2007, as other exit costs were higher than originally estimated (the $6 million includes a $1
million reversal for the three months ended September 30, 2007 which resulted in a corresponding
decrease in goodwill)). These costs included approximately $36 million related to employee
termination costs and approximately $22 million for various exit costs, including lease
terminations. Employee termination costs ranged from senior executive to line personnel. Payments
of $41 million ($34 million were paid in 2006) have been made against this accrual as of September
30, 2007 ($1 million and $7 million was paid against this liability for the three and nine months
ended September 30, 2007, respectively, and, of the $34 million paid in 2006, $15 million and $26
million were paid for the three and nine months ended September 30, 2006, respectively).
As of September 30, 2007, there was also a remaining liability of approximately $22 million
related to the AOL-Historic TW merger.
As of September 30, 2007, out of the remaining liability of $39 million for all capitalized
merger costs, $6 million was classified as a current liability, with the remaining $33 million
classified as a long-term liability in the consolidated balance sheet. Amounts relating to these
liabilities are expected to be paid through 2014.
Merger, Restructuring and Shutdown Costs Expensed as Incurred
Merger, restructuring and shutdown costs that were expensed as incurred for the three and nine
months ended September 30, 2007 and 2006 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
Adelphia/Comcast Transactions merger-related costs |
|
$ |
3 |
|
|
$ |
18 |
|
|
$ |
10 |
|
|
$ |
29 |
|
2007 restructuring costs |
|
|
11 |
|
|
|
— |
|
|
|
99 |
|
|
|
— |
|
Changes in
estimates for 2006 and prior restructuring and shutdown costs |
|
|
(2 |
) |
|
|
55 |
|
|
|
4 |
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger, restructuring and shutdown costs expensed
as incurred |
|
$ |
12 |
|
|
$ |
73 |
|
|
$ |
113 |
|
|
$ |
205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger, restructuring and shutdown costs expensed as incurred by segment for the three and
nine months ended September 30, 2007 and 2006 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
AOL |
|
$ |
— |
|
|
$ |
27 |
|
|
$ |
27 |
|
|
$ |
43 |
|
Cable |
|
|
4 |
|
|
|
22 |
|
|
|
20 |
|
|
|
43 |
|
Filmed Entertainment |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
5 |
|
Networks |
|
|
4 |
|
|
|
38 |
|
|
|
20 |
|
|
|
119 |
|
Publishing |
|
|
4 |
|
|
|
3 |
|
|
|
46 |
|
|
|
37 |
|
Corporate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
Eliminations |
|
|
— |
|
|
|
(18 |
) |
|
|
— |
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger, restructuring and shutdown costs by segment |
|
$ |
12 |
|
|
$ |
73 |
|
|
$ |
113 |
|
|
$ |
205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Adelphia/Comcast Transactions Merger-Related Costs
Through the end of 2006, the Company incurred non-capitalizable merger-related costs at the
Cable segment related to the Adelphia/Comcast Transactions of $46 million. These expenses primarily
relate to consulting fees concerning integration planning as well as employee terminations. For the
three and nine months ended September 30, 2007, the Company incurred an additional $3 million and
$10 million, respectively, in non-capitalizable merger-related costs. Of the $46 million incurred
through the end of 2006, $18 million and $29 million were incurred during the three and nine months
ended September 30, 2006, respectively (see Note 2).
2007 Restructuring Costs
The Company incurred restructuring costs of approximately $11 million and $99 million for the
three and nine months ended September 30, 2007, respectively, primarily related to various employee
terminations and other exit activities, including $2 million and $23 million for the three and nine
months ended September 30, 2007, respectively, at the AOL segment, $1 million and $10 million for
the three and nine months ended September 30, 2007, respectively, at the Cable segment and $4
million and $46 million for the three and nine months ended September 30, 2007, respectively, at
the Publishing segment, which includes $9 million of shutdown costs related to the shutdown of LIFE
magazine. Employee termination costs occurred across each of the segments and ranged from senior
executive to line personnel. Restructuring costs also included $4 million and $20 million,
respectively, for the three and nine months ended September 30, 2007 at the Networks segment for
restructuring charges and severance related to recent senior management changes at HBO.
Changes
in Estimates for 2006 and Prior Restructuring and Shutdown Costs
During the years ended 2006, 2005 and 2004, the Company incurred restructuring and shutdown
costs related to various employee and contractual terminations totaling $521 million. In connection
with the 2006 and prior restructuring and shutdown costs, employee termination costs occurred
across each of the segments and ranged from senior executives to line personnel. For the three and
nine months ended September 30, 2007, the Company incurred a $2 million reduction and a $4 million
charge, respectively, at the AOL segment as a result of changes in estimates of previously
established restructuring accruals. For the three and nine months ended September 30, 2006, the
Company incurred restructuring costs of $55 million and $176 million, respectively. The 2006
initiatives primarily related to various employee terminations totaling approximately $34 million
and $98 million, respectively, for the three and nine months ended September 30, 2006, including
$27 million and $42 million, respectively, at the AOL segment for the three and nine months ended
September 30, 2006, $4 million and $14 million, respectively, at the Cable segment for the three
and nine months ended September 30, 2006, $3 million and $37 million, respectively, at the
Publishing segment for the three and nine months ended September 30, 2006 and $5 million at the
Corporate segment for the nine months ended September 30, 2006. In addition, for the three and nine
months ended September 30, 2006, the Company incurred $1 million and $6 million, respectively, of
additional restructuring charges ($1 million and $5 million, respectively, at the Filmed
Entertainment segment and $1 million for the nine months ended September 30, 2006 at the AOL
segment) as a result of changes in estimates of previously established restructuring accruals.
The results for the three and nine months ended September 30, 2006 include shutdown costs of
$38 million and $119 million, respectively, at The WB Network in connection with the agreement
between Warner Bros. and CBS to form The CW. Included in the shutdown costs are termination charges
related to terminating intercompany programming arrangements with other Time Warner divisions, of
which $18 million and $47 million, respectively, has been eliminated in consolidation, resulting in
a net pretax charge of $20 million and $72 million, respectively, for the three and nine months
ended September 30, 2006.
56
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Selected Information
Selected information relating to the Adelphia/Comcast Transactions Merger-Related Costs, 2007
Restructuring Costs, 2006 and Prior Restructuring and Shutdown Costs is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee |
|
|
Other |
|
|
|
|
| |
|
Terminations |
|
|
Exit Costs |
|
|
Total |
|
Remaining liability as of December 31, 2006 |
|
$ |
162 |
|
|
$ |
52 |
|
|
$ |
214 |
|
Net accruals |
|
|
91 |
|
|
|
22 |
|
|
|
113 |
|
Cash paid(a) |
|
|
(166 |
) |
|
|
(41 |
) |
|
|
(207 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of September 30, 2007 |
|
$ |
87 |
|
|
$ |
33 |
|
|
$ |
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Of the $207 million paid in 2007, $30 million was paid during the three months ended
September 30, 2007. Of this $30 million, $3 million relates to Adelphia/Comcast Transactions
Merger-Related Costs, $13 million relates to 2007 Restructuring
Costs and $14 million relates
to 2006 and Prior Restructuring Costs and Shutdown Costs. |
As of September 30, 2007, out of the remaining liability of $120 million, $68 million was
classified as a current liability, with the remaining $52 million classified as a long-term
liability in the consolidated balance sheet. Amounts are expected to be paid through 2013.
10. SEGMENT INFORMATION
Time Warner classifies its operations into five reportable segments: AOL, consisting
principally of interactive services; Cable, consisting principally of interests in cable systems
that provide video, high-speed data and voice services; Filmed Entertainment, consisting
principally of feature film, television and home video production and distribution; Networks,
consisting principally of cable television networks; and Publishing, consisting principally of
magazine publishing.
Information as to the operations of Time Warner in each of its business segments is set forth
below based on the nature of the products and services offered. Time Warner evaluates performance
based on several factors, of which the primary financial measure is operating income before
depreciation of tangible assets and amortization of intangible assets (“Operating Income before
Depreciation and Amortization”). Additionally, the Company has provided a summary of Operating
Income by segment.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, 2007 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
635 |
|
|
$ |
540 |
|
|
$ |
— |
|
|
$ |
44 |
|
|
$ |
1,219 |
|
Cable |
|
|
3,780 |
|
|
|
221 |
|
|
|
— |
|
|
|
— |
|
|
|
4,001 |
|
Filmed Entertainment |
|
|
8 |
|
|
|
12 |
|
|
|
3,100 |
|
|
|
58 |
|
|
|
3,178 |
|
Networks |
|
|
1,566 |
|
|
|
709 |
|
|
|
270 |
|
|
|
10 |
|
|
|
2,555 |
|
Publishing |
|
|
385 |
|
|
|
636 |
|
|
|
13 |
|
|
|
165 |
|
|
|
1,199 |
|
Intersegment elimination |
|
|
(204 |
) |
|
|
(23 |
) |
|
|
(242 |
) |
|
|
(7 |
) |
|
|
(476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
6,170 |
|
|
$ |
2,095 |
|
|
$ |
3,141 |
|
|
$ |
270 |
|
|
$ |
11,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, 2006 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(recast, millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
1,455 |
|
|
$ |
479 |
|
|
$ |
— |
|
|
$ |
30 |
|
|
$ |
1,964 |
|
Cable |
|
|
3,031 |
|
|
|
178 |
|
|
|
— |
|
|
|
— |
|
|
|
3,209 |
|
Filmed Entertainment |
|
|
— |
|
|
|
10 |
|
|
|
2,311 |
|
|
|
69 |
|
|
|
2,390 |
|
Networks |
|
|
1,460 |
|
|
|
731 |
|
|
|
204 |
|
|
|
14 |
|
|
|
2,409 |
|
Publishing |
|
|
393 |
|
|
|
635 |
|
|
|
14 |
|
|
|
153 |
|
|
|
1,195 |
|
Intersegment elimination |
|
|
(203 |
) |
|
|
(30 |
) |
|
|
(180 |
) |
|
|
(4 |
) |
|
|
(417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
6,136 |
|
|
$ |
2,003 |
|
|
$ |
2,349 |
|
|
$ |
262 |
|
|
$ |
10,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, 2007 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
2,199 |
|
|
$ |
1,611 |
|
|
$ |
— |
|
|
$ |
120 |
|
|
$ |
3,930 |
|
Cable |
|
|
11,230 |
|
|
|
636 |
|
|
|
— |
|
|
|
— |
|
|
|
11,866 |
|
Filmed Entertainment |
|
|
22 |
|
|
|
30 |
|
|
|
7,942 |
|
|
|
180 |
|
|
|
8,174 |
|
Networks |
|
|
4,672 |
|
|
|
2,181 |
|
|
|
682 |
|
|
|
31 |
|
|
|
7,566 |
|
Publishing |
|
|
1,124 |
|
|
|
1,904 |
|
|
|
39 |
|
|
|
433 |
|
|
|
3,500 |
|
Intersegment elimination |
|
|
(609 |
) |
|
|
(67 |
) |
|
|
(500 |
) |
|
|
(20 |
) |
|
|
(1,196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
18,638 |
|
|
$ |
6,295 |
|
|
$ |
8,163 |
|
|
$ |
744 |
|
|
$ |
33,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, 2006 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(recast, millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
4,539 |
|
|
$ |
1,320 |
|
|
$ |
— |
|
|
$ |
89 |
|
|
$ |
5,948 |
|
Cable |
|
|
7,696 |
|
|
|
420 |
|
|
|
— |
|
|
|
— |
|
|
|
8,116 |
|
Filmed Entertainment |
|
|
— |
|
|
|
11 |
|
|
|
7,316 |
|
|
|
205 |
|
|
|
7,532 |
|
Networks |
|
|
4,412 |
|
|
|
2,389 |
|
|
|
604 |
|
|
|
39 |
|
|
|
7,444 |
|
Publishing |
|
|
1,139 |
|
|
|
1,881 |
|
|
|
35 |
|
|
|
455 |
|
|
|
3,510 |
|
Intersegment elimination |
|
|
(488 |
) |
|
|
(96 |
) |
|
|
(591 |
) |
|
|
(26 |
) |
|
|
(1,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
17,298 |
|
|
$ |
5,925 |
|
|
$ |
7,364 |
|
|
$ |
762 |
|
|
$ |
31,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment Revenues
In the normal course of business, the Time Warner segments enter into transactions with one
another. The most common types of intersegment transactions include:
| |
• |
|
The Filmed Entertainment segment generating Content revenues by licensing television and
theatrical programming to the Networks segment; |
| |
| |
• |
|
The Networks segment generating Subscription revenues by selling cable network
programming to the Cable segment; and |
| |
| |
• |
|
The AOL, Cable, Networks and Publishing segments generating Advertising revenues by
promoting the products and services of other Time Warner segments. |
58
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
These intersegment transactions are recorded by each segment at estimated fair value as if the
transactions were with third parties and, therefore, impact segment performance. While intersegment
transactions are treated like third-party transactions to determine segment performance, the
revenues (and corresponding expenses or assets recognized by the segment that is counterparty to
the transaction) are eliminated in consolidation and, therefore, do not themselves impact
consolidated results. Additionally, transactions between divisions within the same reporting
segment (e.g., a transaction between HBO and Turner within the Networks segment) are eliminated in
arriving at segment performance and, therefore, do not themselves impact segment results. Revenues
recognized by Time Warner’s segments on intersegment transactions are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
|
(millions) |
|
Intersegment Revenues(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
5 |
|
|
$ |
12 |
|
|
$ |
16 |
|
|
$ |
39 |
|
Cable |
|
|
2 |
|
|
|
7 |
|
|
|
10 |
|
|
|
21 |
|
Filmed Entertainment(b) |
|
|
230 |
|
|
|
174 |
|
|
|
469 |
|
|
|
567 |
|
Networks(c) |
|
|
233 |
|
|
|
215 |
|
|
|
681 |
|
|
|
536 |
|
Publishing |
|
|
6 |
|
|
|
9 |
|
|
|
20 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intersegment revenues |
|
$ |
476 |
|
|
$ |
417 |
|
|
$ |
1,196 |
|
|
$ |
1,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Intersegment revenues include intercompany Advertising revenues of $23 million and
$30 million for the three months ended September 30, 2007 and 2006, respectively, and $67
million and $96 million for the nine months ended September 30, 2007 and 2006,
respectively. |
| |
| (b) |
|
Intersegment revenues at the Filmed Entertainment segment include sales to The WB
Network through its shutdown on September 17, 2006. |
| |
| (c) |
|
Intersegment revenues at the Networks segment include the impact of the systems
acquired in the Adelphia/Comcast Transactions and the consolidation of the Kansas City Pool. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
|
(millions) |
|
Operating Income (Loss) before Depreciation and Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL(a) |
|
$ |
425 |
|
|
$ |
554 |
|
|
$ |
2,120 |
|
|
$ |
1,477 |
|
Cable |
|
|
1,428 |
|
|
|
1,119 |
|
|
|
4,179 |
|
|
|
2,920 |
|
Filmed Entertainment |
|
|
359 |
|
|
|
210 |
|
|
|
865 |
|
|
|
896 |
|
Networks(b) |
|
|
830 |
|
|
|
585 |
|
|
|
2,479 |
|
|
|
2,148 |
|
Publishing(c) |
|
|
304 |
|
|
|
265 |
|
|
|
690 |
|
|
|
651 |
|
Corporate(d) |
|
|
(89 |
) |
|
|
(126 |
) |
|
|
(450 |
) |
|
|
(378 |
) |
Intersegment elimination |
|
|
(17 |
) |
|
|
(14 |
) |
|
|
(3 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income (Loss) before Depreciation
and Amortization |
|
$ |
3,240 |
|
|
$ |
2,593 |
|
|
$ |
9,880 |
|
|
$ |
7,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the three and nine months ended September 30, 2007, includes a $2 million
reduction and a net pretax gain of approximately $668 million on the sale of AOL’s German
access business and, for the nine months ended September 30, 2007, includes a net $1 million
reduction to the gain on the sale of AOL’s U.K. access business. For the three and nine months
ended September 30, 2007, also includes noncash asset impairment charges of $1 million and $2
million, respectively. For the nine months ended September 30, 2006, includes a $2 million
gain related to the 2004 sale of Netscape Security Solutions (“NSS”). |
| |
| (b) |
|
For the nine months ended September 30, 2007, includes a $34 million noncash charge
related to the impairment of the Court TV tradename as a result of rebranding the Court TV
network name to truTV, effective January 1, 2008. For the three and nine months ended
September 30, 2006, includes a $200 million noncash goodwill impairment charge related to The
WB Network. |
| |
| (c) |
|
For the three and nine months ended September 30, 2007, includes a $6 million gain
on the sale of four non-strategic magazine titles. |
| |
| (d) |
|
For the three and nine months ended September 30, 2007, includes $2 million and $16
million, respectively, in net expenses related to securities litigation and government
investigations. For the nine months ended September 30, 2007, includes $153 million in legal
reserves related to securities litigation. For the nine months ended September 30, 2006,
includes $50 million in legal reserves related to securities litigation. For the three and
nine months ended September 30, 2006, includes $29 million and $40 million, respectively, in
net expenses related to securities litigation and government investigations. For the nine
months ended September 30, 2006, also includes a $20 million gain on the sale of two aircraft. |
59
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
|
(millions) |
|
Depreciation of Property, Plant and Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
(103 |
) |
|
$ |
(129 |
) |
|
$ |
(312 |
) |
|
$ |
(382 |
) |
Cable |
|
|
(683 |
) |
|
|
(513 |
) |
|
|
(2,001 |
) |
|
|
(1,281 |
) |
Filmed Entertainment |
|
|
(37 |
) |
|
|
(35 |
) |
|
|
(112 |
) |
|
|
(103 |
) |
Networks |
|
|
(75 |
) |
|
|
(68 |
) |
|
|
(222 |
) |
|
|
(203 |
) |
Publishing |
|
|
(35 |
) |
|
|
(26 |
) |
|
|
(92 |
) |
|
|
(82 |
) |
Corporate |
|
|
(10 |
) |
|
|
(12 |
) |
|
|
(33 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation of property, plant and equipment |
|
$ |
(943 |
) |
|
$ |
(783 |
) |
|
$ |
(2,772 |
) |
|
$ |
(2,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
|
(millions) |
|
Amortization of Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
(27 |
) |
|
$ |
(35 |
) |
|
$ |
(69 |
) |
|
$ |
(111 |
) |
Cable |
|
|
(64 |
) |
|
|
(56 |
) |
|
|
(207 |
) |
|
|
(93 |
) |
Filmed Entertainment |
|
|
(54 |
) |
|
|
(55 |
) |
|
|
(161 |
) |
|
|
(164 |
) |
Networks |
|
|
(4 |
) |
|
|
— |
|
|
|
(12 |
) |
|
|
(5 |
) |
Publishing |
|
|
(18 |
) |
|
|
(17 |
) |
|
|
(53 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization of intangible assets |
|
$ |
(167 |
) |
|
$ |
(163 |
) |
|
$ |
(502 |
) |
|
$ |
(419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
|
(millions) |
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL(a) |
|
$ |
295 |
|
|
$ |
390 |
|
|
$ |
1,739 |
|
|
$ |
984 |
|
Cable |
|
|
681 |
|
|
|
550 |
|
|
|
1,971 |
|
|
|
1,546 |
|
Filmed Entertainment |
|
|
268 |
|
|
|
120 |
|
|
|
592 |
|
|
|
629 |
|
Networks(b) |
|
|
751 |
|
|
|
517 |
|
|
|
2,245 |
|
|
|
1,940 |
|
Publishing(c) |
|
|
251 |
|
|
|
222 |
|
|
|
545 |
|
|
|
523 |
|
Corporate(d) |
|
|
(99 |
) |
|
|
(138 |
) |
|
|
(483 |
) |
|
|
(412 |
) |
Intersegment elimination |
|
|
(17 |
) |
|
|
(14 |
) |
|
|
(3 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) |
|
$ |
2,130 |
|
|
$ |
1,647 |
|
|
$ |
6,606 |
|
|
$ |
5,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the three and nine months ended September 30, 2007, includes a $2 million
reduction and a net pretax gain of approximately $668 million on the sale of AOL’s German
access business and, for the nine months ended September 30, 2007, includes a net $1 million
reduction to the gain on the sale of AOL’s U.K. access business. For the three and nine
months ended September 30, 2007, also includes noncash asset impairment charges of $1 million
and $2 million, respectively. For the nine months ended September 30, 2006, includes a $2
million gain related to the 2004 sale of NSS. |
| |
| (b) |
|
For the nine months ended September 30, 2007, includes a $34 million noncash charge
related to the impairment of the Court TV tradename as a result of rebranding the Court TV
network name to truTV, effective January 1, 2008. For the three and nine months ended
September 30, 2006, includes a $200 million noncash goodwill impairment charge related to The
WB Network. |
| |
| (c) |
|
For the three and nine months ended September 30, 2007, includes a $6 million gain
on the sale of four non-strategic magazine titles. |
| |
| (d) |
|
For the three and nine months ended September 30, 2007, includes $2 million and $16
million, respectively, in net expenses related to securities litigation and government
investigations. For the nine months ended September 30, 2007, includes $153 million in legal
reserves related to securities litigation. For the nine months ended September 30, 2006,
includes $50 million in legal reserves related to securities litigation. For the three and
nine months ended September 30, 2006, includes $29 million and $40 million, respectively, in
net expenses related to securities litigation and government investigations. For the nine
months ended September 30, 2006, also includes a $20 million gain on the sale of two
aircraft. |
60
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of total assets by operating segment is set forth below:
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(millions) |
|
Assets |
|
|
|
|
|
|
|
|
AOL |
|
$ |
5,434 |
|
|
$ |
5,762 |
|
Cable |
|
|
56,592 |
|
|
|
55,736 |
|
Filmed Entertainment |
|
|
17,735 |
|
|
|
18,354 |
|
Networks |
|
|
34,825 |
|
|
|
34,952 |
|
Publishing |
|
|
14,577 |
|
|
|
14,900 |
|
Corporate |
|
|
2,144 |
|
|
|
1,965 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
131,307 |
|
|
$ |
131,669 |
|
|
|
|
|
|
|
|
11. COMMITMENTS AND CONTINGENCIES
Contingencies
Securities Matters
Consolidated Securities Class Action
During
the Summer and Fall of 2002, 30 shareholder class action lawsuits
were filed in various U.S. District Courts naming as
defendants the Company, certain current and former executives of the Company and, in several
instances, AOL. The complaints purported
to be made on behalf of certain shareholders of the Company and alleged that the Company made
material misrepresentations and/or omissions of material fact in violation of Section 10(b) of the
Exchange Act, Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. Plaintiffs
claimed that the Company failed to disclose AOL’s declining advertising revenues and that the
Company and AOL inappropriately inflated advertising revenues in a series of transactions. Certain
of the lawsuits also alleged that certain of the individual defendants and other insiders at the
Company improperly sold their personal holdings of Time Warner stock, that the Company failed to
disclose that the January 2001 merger of America Online, Inc. (now AOL LLC) and Time Warner Inc.,
now known as Historic TW (the “Merger” or the “AOL-Historic TW Merger”), was not generating the
synergies anticipated at the time of the announcement of the merger and, further, that the Company
inappropriately delayed writing down more than $50 billion of goodwill. The lawsuits sought an
unspecified amount in compensatory damages. All of these lawsuits were centralized in the U.S.
District Court for the Southern District of New York for coordinated or consolidated pre-trial
proceedings (along with the federal derivative lawsuits and certain lawsuits brought under ERISA
described below) under the caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation.
The Minnesota State Board of Investment (“MSBI”) was designated lead plaintiff for the
consolidated securities actions and filed a consolidated amended complaint on April 15, 2003,
adding additional defendants including additional officers and directors of the Company, Morgan
Stanley & Co., Salomon Smith Barney Inc., Citigroup Inc., Banc of America Securities LLC and JP
Morgan Chase & Co. Plaintiffs also added additional allegations, including that the Company made
material misrepresentations in its registration statements and joint proxy statement-prospectus
related to the AOL-Historic TW Merger and in its registration statements pursuant to which debt
securities were issued in April 2001 and April 2002, allegedly in violation of Section 11 and
Section 12 of the Securities Act of 1933. On May 5, 2004, the district court granted in part the
defendants’ motion to dismiss the consolidated amended
complaint. The court dismissed all claims with respect to the registration statements pursuant to
which debt securities were issued in April 2001 and April 2002 and certain other claims against
other defendants, but otherwise allowed the remaining claims against the Company and certain other
defendants to proceed. On August 11, 2004, the court granted MSBI’s motion to file a second amended
complaint. On July 30, 2004, defendants filed a motion for summary judgment on the basis that
plaintiffs could not establish loss causation for any of their claims, and thus plaintiffs did not
have any recoverable damages. On April 8, 2005, MSBI moved for leave to file a third amended
complaint to add certain new factual allegations and four additional individual defendants.
61
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In July 2005, the Company reached an agreement in principle with MSBI for the settlement of
the consolidated securities actions. The settlement is reflected in a written agreement between the
lead plaintiff and the Company. On September 30, 2005, the court issued an order granting
preliminary approval of the settlement and certified the settlement class. The court issued an
order dated April 6, 2006 granting final approval of the settlement, and the time to appeal that
decision has expired. In connection with reaching the agreement in principle on the securities
class action, the Company established a reserve of $3 billion during the second quarter of 2005
reflecting the MSBI settlement and other pending related shareholder and ERISA litigation. Pursuant
to the MSBI settlement, in October 2005, Time Warner paid $2.4 billion into a settlement fund (the
“MSBI Settlement Fund”) for the members of the class represented in the action, and Ernst & Young
LLP paid $100 million. In connection with the settlement, the $150 million previously paid by Time
Warner into a fund in connection with the settlement of the investigation by the DOJ was
transferred to the MSBI Settlement Fund. In addition, the $300 million the Company previously paid
in connection with the settlement of its SEC investigation will be distributed to investors through
the MSBI settlement process pursuant to an order issued by the U.S. District Court for the District
of Columbia on July 11, 2006. On October 27, 2006, the court awarded to plaintiffs’ counsel fees in
the amount of $147.5 million and reimbursement for expenses in the amount of $3.4 million, plus
interest accrued on such amounts since October 7, 2005, the date the Company paid $2.4 billion into
the MSBI Settlement Fund; these amounts are to be paid from the MSBI Settlement Fund. On May 2,
2007, the court entered an order directing an initial distribution of these funds. Administration
of the MSBI settlement is ongoing. Settlements also have been reached in substantially all of the
additional related cases, including the ERISA and derivative actions, as described below.
Other Related Securities Litigation Matters
During the Fall of 2002 and Winter of 2003, three putative class action lawsuits were filed
alleging violations of ERISA in the U.S. District Court for the Southern District of New York on
behalf of current and former participants in the Time Warner Savings Plan, the Time Warner Thrift
Plan and/or the TWC Savings Plan (the “Plans”). Collectively, these lawsuits named as defendants
the Company, certain current and former directors and officers of the Company and members of the
Administrative Committees of the Plans. The lawsuits alleged that the Company and other defendants
breached certain fiduciary duties to plan participants by, inter alia, continuing to offer Time
Warner stock as an investment under the Plans, and by failing to disclose, among other things, that
the Company was experiencing declining advertising revenues and that the Company was
inappropriately inflating advertising revenues through various transactions. The complaints sought
unspecified damages and unspecified equitable relief. The ERISA actions were consolidated as part
of the In re AOL Time Warner Inc. Securities and “ERISA” Litigation described above. On July 3,
2003, plaintiffs filed a consolidated amended complaint naming additional defendants, including
TWE, certain current and former officers, directors and employees of the Company and Fidelity
Management Trust Company. On March 9, 2005, the court granted in part and denied in part the
Company’s motion to dismiss the consolidated ERISA complaint. The court dismissed two individual defendants and TWE for all
purposes, dismissed other individuals with respect to claims plaintiffs had asserted involving the
TWC Savings Plan, and dismissed all individuals who were named in a claim asserting that their
stock sales had constituted a breach of fiduciary duty to the Plans. The parties reached an
agreement to resolve this matter in 2006. The aggregate amount for which the Company settled
this lawsuit as well as the related
lawsuits is described below. The court granted preliminary approval of the
settlement in an opinion dated May 1, 2006 and final approval in an opinion dated September 27, 2006. On
October 25, 2006, one of the objectors to this settlement filed a notice of appeal of this
decision; pursuant to a settlement agreement between the parties in a related securities matter,
that objector subsequently withdrew his notice of appeal, and the time to appeal has expired. On October 26, 2007, the court
issued an order approving certain attorneys’ fees and expenses
requested by plaintiffs’ counsel, as well as approving certain
incentive awards to the lead plaintiffs. The time to appeal this
decision has not yet expired.
During the Summer and Fall of 2002, 11 shareholder derivative lawsuits were filed naming as
defendants certain current and former directors and officers of the Company, as well as the Company
as a nominal defendant. Three were filed in New York State Supreme Court for the County of New
York, four were filed in the U.S. District Court for the Southern District of New York and four
were filed in the Court of Chancery of the State of Delaware for New Castle County. The complaints
alleged that defendants breached their fiduciary duties by causing the Company to issue corporate
statements that did not accurately represent that AOL had declining advertising revenues and by
failing to conduct adequate due diligence in connection with the AOL-Historic TW Merger, that the
AOL-Historic TW Merger was not generating the synergies anticipated at the time of the announcement
of the merger, and that the Company inappropriately delayed writing down more than $50 billion of
goodwill, thereby exposing the Company to potential liability for alleged violations of federal
securities laws. The lawsuits further alleged that certain of the defendants improperly sold their
personal holdings of Time Warner securities. The lawsuits requested that (i) all proceeds from
defendants’ sales of Time Warner common stock, (ii)
62
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
all expenses incurred by the Company as a result of the defense of the shareholder class
actions discussed above, and (iii) any improper salaries or payments be returned to the Company.
The four lawsuits filed in the Court of Chancery for the State of Delaware for New Castle County
were consolidated under the caption, In re AOL Time Warner Inc. Derivative Litigation. A
consolidated complaint was filed on March 7, 2003 in that action, and on June 9, 2003, the Company
filed a notice of motion to dismiss the consolidated complaint. On May 2, 2003, the three lawsuits
filed in New York State Supreme Court for the County of New York were dismissed on forum non
conveniens grounds, and plaintiffs’ time to appeal has expired. The four lawsuits pending in the
U.S. District Court for the Southern District of New York were centralized for coordinated or
consolidated pre-trial proceedings with the securities and ERISA lawsuits described above under the
caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation. On October 6, 2004,
plaintiffs filed an amended consolidated complaint in three of these four cases. On April 20, 2006,
plaintiffs in the four lawsuits filed in the Court of Chancery of the State of Delaware for New
Castle County filed a new complaint in the U.S. District Court for the Southern District of New
York. The parties to all of these actions subsequently reached an agreement to resolve all
remaining matters in 2006, and the federal district court in New York granted preliminary approval
of the settlement in an opinion dated May 10, 2006. A final approval hearing was held on June 28,
2006, and the court granted final approval of the settlement in an opinion dated September 6, 2006.
The time to appeal that decision has expired. The court has yet to rule on plaintiffs’ petition for
attorneys’ fees and expenses.
During the Summer and Fall of 2002, several lawsuits brought by individual shareholders were
filed in various federal jurisdictions, and in late 2005 and early 2006, numerous additional
shareholders determined to “opt-out” of the settlement reached in the consolidated federal
securities class action described above, and thereafter many filed federal lawsuits. All of these
matters have now been settled. The aggregate amount for which the Company has settled these
lawsuits as well as related lawsuits is described below.
On November 11, 2002, Staro Asset Management, LLC filed a putative class action complaint in
the U.S. District Court for the Southern District of New York on behalf of certain purchasers of
Reliant 2.0% Zero-Premium Exchangeable Subordinated Notes for alleged violations of the federal
securities laws. Plaintiff is a purchaser of subordinated notes, the price of which was purportedly
tied to the market value of Time Warner stock. Plaintiff alleges that the Company made
misstatements and/or omissions of material fact that artificially inflated the value of Time Warner
stock and directly affected the price of the notes. Plaintiff seeks compensatory damages and/or
rescission. This lawsuit has been consolidated for coordinated pretrial proceedings under the
caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation described above. On September
27, 2007, the Company filed a motion to dismiss this action based on plaintiff’s failure to take
any action to prosecute the case for nearly four years. The Company intends to defend against this
lawsuit vigorously.
On November 15, 2002, the California State Teachers’ Retirement System filed an amended
consolidated complaint in the U.S. District Court for the Central District of California on behalf
of a putative class of purchasers of stock in Homestore.com, Inc. (“Homestore”). Plaintiff alleged
that Homestore engaged in a scheme to defraud its shareholders in violation of Section 10(b) of the
Exchange Act. The Company and two former employees of its AOL division were named as defendants in
the amended consolidated complaint because of their alleged participation in the scheme through
certain advertising transactions entered into with Homestore. Motions to dismiss filed by the
Company and the two former employees were granted on March 7, 2003, and a final judgment of
dismissal was entered on March 8, 2004. On April 7, 2004, plaintiff filed a notice of appeal in the
Ninth Circuit Court of Appeals. The Ninth Circuit heard oral argument on this appeal on February 6,
2006 and issued an opinion on June 30, 2006 affirming the lower court’s decision and remanding the
case to the district court for further proceedings. On September 28, 2006, plaintiff filed a motion
for leave to amend the complaint, and on December 18, 2006, the court held a hearing and denied
plaintiff’s motion. In addition, on October 20, 2006, the Company joined its co-defendants in
filing a petition for certiorari with the Supreme Court of the United States, seeking
reconsideration of the Ninth Circuit’s decision. In December 2006, the Company reached an agreement
with plaintiff to settle its claims against the Company and its former employees. The aggregate
amount for which the Company has agreed to settle this as well as related lawsuits is described
below. The court issued preliminary approval of this settlement on August 6, 2007. The settlement
agreement remains subject to final approval by the district court. There can be no assurance that
the settlement will receive final court approval.
On April 30, 2004, a second amended complaint was filed in the U.S. District Court for the
District of Nevada on behalf of a putative class of purchasers of stock in PurchasePro.com, Inc.
(“PurchasePro”). Plaintiffs alleged that PurchasePro engaged in a scheme to defraud its
shareholders in violation of Section 10(b) of the Exchange Act. The Company and four former
officers and employees were added as defendants in the second amended complaint and were alleged to
have
63
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
participated in the scheme through certain advertising transactions entered into with
PurchasePro. Three similar putative class actions had previously been filed against the Company,
AOL and certain former officers and employees, and were consolidated with the Nevada action. On
February 17, 2005, the judge in the consolidated action granted the Company’s motion to dismiss the
second amended complaint with prejudice. The parties have agreed to settle this matter. The court
granted preliminary approval of the proposed settlement in an order dated July 18, 2006 and granted
final approval of the settlement in an order dated October 10, 2006. The administration of the
settlement is ongoing. The aggregate amount for which the Company has settled this as well as
related lawsuits is described below.
During the fourth quarter of 2006, the Company established an additional reserve of $600
million related to its remaining securities litigation matters described above, bringing the
reserve for unresolved claims to approximately $620 million at December 31, 2006. The prior reserve
aggregating $3.0 billion established in the second quarter of 2005 had been substantially utilized
as a result of the settlements resolving many of the other shareholder lawsuits that had been
pending against the Company, including settlements entered into during the fourth quarter of 2006.
During the first and second quarters of 2007, the Company reached agreements to settle
substantially all of the remaining securities litigation claims, a substantial portion of which had
been reserved for at December 31, 2006. For the nine months ended September 30, 2007, the Company
recorded charges of approximately $153 million for these settlements. At September 30, 2007, the
Company’s remaining reserve related to these matters is approximately $10 million, including
approximately $8 million that has been reserved for an expected attorneys’ fee award related to a
previously settled matter. The Company believes the potential exposure in the securities litigation
matters that remain pending at September 30, 2007 to be de minimis.
Other Matters
Warner Bros. (South) Inc. (“WBS”), a wholly owned subsidiary of the Company, is litigating
numerous tax cases in Brazil. WBS currently is the theatrical distribution licensee for Warner
Bros. Entertainment Nederlands (“Warner Bros. Nederlands”) in Brazil and acts as a service provider
to the Warner Bros. Nederlands home video licensee. All of the ongoing tax litigation involves WBS’
distribution activities prior to January 2004, when WBS conducted both theatrical and home video
distribution. Much of the tax litigation stems from WBS’ position that in distributing videos to
rental retailers, it was conducting a distribution service, subject to a municipal service tax, and
not the “industrialization” or sale of videos, subject to Brazilian federal and state VAT-like
taxes. Both the federal tax authorities and the State of Sao Paulo, where WBS is based, have
challenged this position. In June 2007, WBS received an adverse ruling in a case pending before
the Superior Court concerning sales tax allegedly owed on assignments of films to video rental
stores. WBS requested reconsideration of this decision. In September 2007, WBS elected to
participate in a government-sponsored amnesty program, which resolved ten of the state tax matters,
including the foregoing Superior Court case, for a payment of approximately $20 million (based on
the real/U.S. dollar exchange rate on the date the payment was made). The payment made was
consistent with the reserve previously established for these matters. In some additional tax cases,
WBS, often together with other film distributors, is challenging the imposition of taxes on
royalties remitted outside of Brazil and the constitutionality of certain taxes. The Company
intends to defend against the various remaining tax cases vigorously, but is unable to predict the
outcome of these suits.
On October 8, 2004, certain heirs of Jerome Siegel, one of the creators of the “Superman”
character, filed suit against the Company, DC Comics and Warner Bros. Entertainment Inc. in the
U.S. District Court for the Central District of California. Plaintiffs’ complaint seeks an
accounting and demands up to one-half of the profits made on Superman since the alleged April 16,
1999 termination by plaintiffs of Siegel’s grants of one-half of the rights to the Superman
character to DC Comics’ predecessor-in-interest. Plaintiffs have also asserted various Lanham Act
and unfair competition claims, alleging “wasting” of the Superman property by DC Comics and failure
to accord credit to Siegel. The Company answered the complaint and filed counterclaims on November
11, 2004, to which plaintiffs replied on January 7, 2005. On April 30, 2007, the Company filed
motions for partial summary judgment on various issues, including the unavailability of accounting
for pre-termination and foreign works. The case is scheduled for
trial starting in January 2008. The Company intends to defend against this lawsuit
vigorously, but is unable to predict its outcome.
On October 22, 2004, the same Siegel heirs filed a second lawsuit against the Company, DC
Comics, Warner Bros. Entertainment Inc., Warner Communications Inc. and Warner Bros. Television
Production Inc. in the U.S. District Court for the Central District of California. Plaintiffs claim
that Jerome Siegel was the sole creator of the character Superboy and, as such, DC Comics has had
no right to create new Superboy works since the alleged October 17, 2004 termination by plaintiffs
of Siegel’s grants of rights to the Superboy character to DC Comics’ predecessor-in-interest. This
lawsuit seeks a declaration regarding the validity of the alleged termination and an injunction
against future use of the Superboy character.
64
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Plaintiffs have also asserted Lanham Act and unfair competition claims alleging false
statements by DC Comics regarding the creation of the Superboy character. The Company answered the
complaint and filed counterclaims on December 21, 2004, to which plaintiffs replied on January 7,
2005. The case was consolidated for discovery purposes with the “Superman” action described
immediately above. The parties filed cross-motions for summary judgment or partial summary judgment
on February 15, 2006. In its ruling dated March 23, 2006, the court denied the Company’s motion for
summary judgment, granted plaintiffs’ motion for partial summary judgment on termination and held
that further proceedings are necessary to determine whether the Company’s Smallville television
series may infringe on plaintiffs’ rights to the Superboy character. On January 12, 2007, the
Company filed a motion for reconsideration of the court’s decision granting plaintiffs’ motion for
partial summary judgment on termination. On April 30, 2007, the Company filed a motion for summary
judgment on non-infringement of Smallville. On July 27, 2007, the court granted the Company’s
motion for reconsideration, reversing the bulk of the March 23, 2006 ruling, and requested
additional briefing on certain issues. The Company’s motion for summary judgment is pending. The
Company intends to defend against this lawsuit vigorously, but is unable to predict its outcome.
On May 24, 1999, two former AOL Community Leader volunteers filed Hallissey et al. v. America
Online, Inc. in the U.S. District Court for the Southern District of New York. This lawsuit was
brought as a collective action under the Fair Labor Standards Act (“FLSA”) and as a class action
under New York state law against AOL and AOL Community, Inc. The plaintiffs allege that, in serving
as Community Leader volunteers, they were acting as employees rather than volunteers for purposes
of the FLSA and New York state law and are entitled to minimum wages. On December 8, 2000,
defendants filed a motion to dismiss on the ground that the plaintiffs were volunteers and not
employees covered by the FLSA. On March 10, 2006, the court denied defendants’ motion to dismiss.
On May 11, 2006, plaintiffs filed a motion under the Fair Labor Standards Act asking the court to
notify former community leaders nationwide about the lawsuit and allow those community leaders the
opportunity to join the lawsuit. A related case was filed by several of the Hallissey plaintiffs in
the U.S. District Court for the Southern District of New York alleging violations of the
retaliation provisions of the FLSA. This case was stayed pending the outcome of the Hallissey
motion to dismiss and has not yet been activated. Three related class actions have been filed in
state courts in New Jersey, California and Ohio, alleging violations of the FLSA and/or the
respective state laws. The New Jersey and Ohio cases were removed to federal court and subsequently
transferred to the U.S. District Court for the Southern District of New York for consolidated
pretrial proceedings with Hallissey. The California action was remanded to California state court,
and on January 6, 2004 the court denied plaintiffs’ motion for class certification. Plaintiffs
appealed the trial court’s denial of their motion for class certification to the California Court
of Appeals. On May 26, 2005, a three-justice panel of the California Court of Appeals unanimously
affirmed the trial court’s order denying class certification. The plaintiffs’ petition for review
in the California Supreme Court was denied. The Company has settled the remaining individual claims
in the California action. The Company intends to defend against the remaining lawsuits vigorously,
but is unable to predict the outcome of these suits.
On January 17, 2002, Community Leader volunteers filed a class action lawsuit in the U.S.
District Court for the Southern District of New York against the Company, AOL and AOL Community,
Inc. under ERISA. Plaintiffs allege that they are entitled to pension and/or welfare benefits
and/or other employee benefits subject to ERISA. In March 2003, plaintiffs filed and served a
second amended complaint, adding as defendants the Company’s Administrative Committee and the AOL
Administrative Committee. On May 19, 2003, the Company, AOL and AOL Community, Inc. filed a motion
to dismiss and the Administrative Committees filed a motion for judgment on the pleadings. Both of
these motions are pending. The Company intends to defend against these lawsuits vigorously, but is
unable to predict the outcome of these suits.
On August 1, 2005, Thomas Dreiling filed a derivative suit in the U.S. District Court for the
Western District of Washington against AOL and Infospace Inc. as nominal defendant. The complaint,
brought in the name of Infospace by one of its shareholders, asserts violations of Section 16(b) of
the Exchange Act. Plaintiff alleges that certain AOL executives and the founder of Infospace,
Naveen Jain, entered into an agreement to manipulate Infospace’s stock price through the exercise
of warrants that AOL had received in connection with a commercial agreement with Infospace. Because
of this alleged agreement, plaintiff asserts that AOL and Mr. Jain constituted a “group” that held
more than 10% of Infospace’s stock and, as a result, AOL violated the short-swing trading
prohibition of Section 16(b) in connection with sales of shares received from the exercise of those
warrants. The complaint seeks disgorgement of profits, interest and attorneys fees. On September
26, 2005, AOL filed a motion to dismiss the complaint for failure to state a claim, which was
denied by the court on December 5, 2005. On October 11, 2007, the parties filed cross-motions for
summary judgment. The case is
65
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
scheduled for trial starting in January of 2008. The Company intends to defend against this
lawsuit vigorously, but is unable to predict the outcome of this suit or reasonably estimate the
range of possible loss.
On September 1, 2006, Ronald A. Katz Technology Licensing, L.P. (“Katz”) filed a complaint in
the U.S. District Court for the District of Delaware alleging that TWC and AOL, among other
defendants, infringe a number of patents purportedly relating to customer call center operations,
voicemail and/or video-on-demand services. The plaintiff is seeking unspecified monetary damages as
well as injunctive relief. On March 20, 2007, this case, together with other lawsuits filed by
Katz, was made subject to a Multidistrict Litigation Order transferring the case for pretrial
proceedings to the U.S. District Court for the Central District of California. The Company intends
to defend against the claim vigorously, but is unable to predict the outcome of the suit or
reasonably estimate a range of possible loss.
On June 16, 1998, plaintiffs in Andrew Parker and Eric DeBrauwere, et al. v. Time Warner
Entertainment Company, L.P. and Time Warner Cable filed a purported nation-wide class action in
U.S. District Court for the Eastern District of New York claiming that TWE sold its subscribers’
personally identifiable information and failed to inform subscribers of their privacy rights in
violation of the Cable Communications Policy Act of 1984 and common law. The plaintiffs seek
damages and declaratory and injunctive relief. On August 6, 1998, TWE filed a motion to dismiss,
which was denied on September 7, 1999. On December 8, 1999, TWE filed a motion to deny class
certification, which was granted on January 9, 2001 with respect to monetary damages, but denied
with respect to injunctive relief. On June 2, 2003, the U.S. Court of Appeals for the Second
Circuit vacated the District Court’s decision denying class certification as a matter of law and
remanded the case for further proceedings on class certification and other matters. On May 4, 2004,
plaintiffs filed a motion for class certification, which the Company opposed. On October 25, 2005,
the court granted preliminary approval of a class settlement arrangement on terms that were not
material to the Company. A final settlement approval hearing was held on May 19, 2006 and, on
January 26, 2007, the court denied approval of the settlement. The Company intends to defend
against this lawsuit vigorously, but is unable to predict the outcome of this suit.
On October 20, 2005, a group of syndicate participants, including BNZ Investments Limited,
filed three related actions in the High Court of New Zealand, Auckland Registry, against New Line
Cinema Corporation, a wholly owned subsidiary of the Company, and its subsidiary, New Line
Productions Inc. (collectively, “New Line”). The complaints allege breach of contract, breach of
duties of good faith and fair dealing, and other common law and statutory claims under California
and New Zealand law. Plaintiffs contend, among other things, they have not received proceeds from
certain financing transactions they entered into with New Line relating to three motion pictures:
The Lord of the Rings: The Fellowship of the Ring; The Lord of the Rings: The Two Towers; and The
Lord of the Rings: The Return of the King (collectively, “the Trilogy”). The parties to these
actions have agreed that all claims will be heard before a single arbitrator, who has been
selected, before the International Court for Arbitration, and the proceedings before the High Court
of New Zealand have been dismissed without prejudice. The arbitration is scheduled to begin in
September 2008. The Company intends to defend against these proceedings vigorously, but is unable
to predict the outcome of the proceedings.
Other matters relating to the Trilogy are also pending. On February 28, 2005, Wingnut Films,
Ltd. filed a case against New Line Cinema Corporation, and Katja Motion Pictures Corp. and New Line
Productions, Inc., both of which are wholly owned subsidiaries of New Line Cinema
Corporation, as well as other unnamed defendants, in the U.S. District Court for the Central
District of California. The complaint alleges that New Line Cinema
Corporation failed to make full payment to plaintiff
with respect to its participation in Adjusted Gross Receipts (as defined in the parties’ contract).
A trial in this matter has been scheduled for January 2008. Claims have also been made by other
profit participants relating to the Trilogy, including the Estate of J.R.R. Tolkien. The Company
intends to defend against these matters vigorously, but is unable to
predict the outcome of the proceedings.
On December 22, 2006, AOL Europe Services SARL (“AOL Luxembourg”), a wholly owned subsidiary
of AOL organized under the laws of Luxembourg, received an assessment from the French tax
authorities, which assessment, together with accrued interest, equaled €35 million as of September
30, 2007 (approximately $51 million based on the exchange rate as of such date) for value added tax
(“VAT”) due in France related to subscription revenues from French subscribers earned from July 1,
2003 through December 31, 2003. The French tax authorities assert that these revenues are subject
to French VAT, instead of Luxembourg VAT, as originally reported and paid by AOL Luxembourg. The
Company intends to defend against this assessment vigorously and is currently appealing this
assessment at the audit level, but is unable to predict the outcome of the proceedings. AOL
Luxembourg also could receive similar assessments from the French tax authorities in the future for
subscription revenues earned in 2004 through 2006. If AOL Luxembourg
were to receive such additional assessments and were to be
unsuccessful on appeal of such assessments and the current
assessment, the Company believes AOL
66
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Luxembourg’s total net exposure related to subscription revenues from French subscribers
earned from July 1, 2003 through October 31, 2006, including interest accrued through September 30,
2007, could equal up to €78 million (approximately $112 million based on the exchange rate as of
such date).
On August 30, 2007, eight years after the case was initially filed, the Supreme Court of the
Republic of Indonesia overturned the rulings of two lower courts and issued a judgment against Time
Inc. Asia and six journalists in the matter of H.M. Suharto v. Time Inc. Asia et al. The underlying
libel lawsuit was filed in July 1999 by the former dictator of Indonesia following the publication
of TIME magazine’s May 24, 1999 cover story “Suharto Inc.” Following a trial in the Spring of 2000,
a three-judge panel of an Indonesian court found in favor of Time Inc. and the journalists, and
that decision was affirmed by an intermediate appellate court in March 2001. The court’s August 30,
2007 decision reversed those prior determinations and ordered defendants to, among other things,
apologize for certain aspects of the May 1999 article and pay Mr. Suharto damages in the amount of
one trillion rupiah (approximately $110 million based on the exchange rate as of September 30,
2007). The Company continues to defend this matter vigorously and intends to challenge the judgment
by filing a petition for review with the Supreme Court of the Republic of Indonesia. The Company
does not believe it is likely that efforts to enforce such judgment within Indonesia, or in those
jurisdictions outside of Indonesia in which the Company has substantial assets, would result in any
material loss to the Company. Consequently, no loss has been accrued for this matter as of
September 30, 2007. Moreover, the Company believes that insurance coverage is available for the
judgment, were it to be sustained and, eventually, enforced.
On September 20, 2007, Brantley, et al. v. NBC Universal, Inc., et al. was filed in the U.S.
District Court for the Central District of California against the Company and TWC. The complaint,
which also names as defendants several other programming content providers (collectively, the
“programmer defendants”) as well as other cable and satellite providers (collectively, the
“distributor defendants”), alleges violations of Sections 1 and 2 of the Sherman Antitrust Act.
Among other things, the complaint alleges coordination between and among the programmer defendants
to sell and/or license programming on a “bundled” basis to the distributor defendants, who in turn
purportedly offer that programming to subscribers in packaged tiers, rather than on a per channel
(or “à la carte”) basis. Plaintiffs, who seek to represent a purported nationwide class of cable
and satellite subscribers, demand, among other things, unspecified treble monetary damages and an
injunction to compel the offering of channels to subscribers on an “à la carte” basis. The Company
intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this
suit or reasonably estimate a range of possible loss.
From time to time, the Company receives notices from third parties claiming that it infringes
their intellectual property rights. Claims of intellectual property infringement could require Time
Warner to enter into royalty or licensing agreements on unfavorable terms, incur substantial
monetary liability or be enjoined preliminarily or permanently from further use of the intellectual
property in question. In addition, certain agreements entered into by the Company may require the
Company to indemnify the other party for certain third-party intellectual property infringement
claims, which could increase the Company’s damages and its costs of defending against such claims.
Even if the claims are without merit, defending against the claims can be time-consuming and
costly.
The costs and other effects of pending or future litigation, governmental investigations,
legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments
and investigations, claims and changes in those matters (including those matters described above),
and developments or assertions by or against the Company relating to intellectual property rights
and intellectual property licenses, could have a material adverse effect on the Company’s business,
financial condition and operating results.
67
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
Additional financial information with respect to cash (payments) and receipts is as follows
(millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
Cash payments made for interest |
|
$ |
(1,593 |
) |
|
$ |
(1,213 |
) |
Interest income received |
|
|
77 |
|
|
|
108 |
|
|
|
|
|
|
|
|
Cash interest payments, net |
|
$ |
(1,516 |
) |
|
$ |
(1,105 |
) |
|
|
|
|
|
|
|
Cash payments made for income taxes |
|
$ |
(479 |
) |
|
$ |
(372 |
) |
Income tax refunds received |
|
|
84 |
|
|
|
32 |
|
|
|
|
|
|
|
|
Cash tax payments, net |
|
$ |
(395 |
) |
|
$ |
(340 |
) |
|
|
|
|
|
|
|
The nine months ended September 30, 2007 excludes $440 million of common stock repurchased or
due from Liberty, indirectly attributable to the exchange of the Braves and Leisure Arts.
Specifically, the $440 million represents the fair value of the Braves and Leisure Arts of $473
million, less a $33 million working capital adjustment.
In addition, the consolidated statement of cash flows does not reflect approximately $120
million of common stock repurchases that were included in Other current liabilities at December 31,
2006 but for which payment was not made until the first quarter of 2007.
Interest Expense, Net
Interest expense, net, consists of (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Interest income |
|
$ |
55 |
|
|
$ |
62 |
|
|
$ |
154 |
|
|
$ |
238 |
|
Interest expense |
|
|
(644 |
) |
|
|
(541 |
) |
|
|
(1,868 |
) |
|
|
(1,352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense, net |
|
$ |
(589 |
) |
|
$ |
(479 |
) |
|
$ |
(1,714 |
) |
|
$ |
(1,114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income, Net
Other income, net, consists of (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/06 |
|
|
9/30/07 |
|
|
9/30/06 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Investment gains, net |
|
$ |
14 |
|
|
$ |
727 |
|
|
$ |
288 |
|
|
$ |
1,042 |
|
Income (loss) on equity method investees |
|
|
(18 |
) |
|
|
12 |
|
|
|
(21 |
) |
|
|
54 |
|
Losses on accounts receivable securitization programs |
|
|
(13 |
) |
|
|
(13 |
) |
|
|
(40 |
) |
|
|
(39 |
) |
Other |
|
|
15 |
|
|
|
(15 |
) |
|
|
4 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
$ |
(2 |
) |
|
$ |
711 |
|
|
$ |
231 |
|
|
$ |
1,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Current Liabilities
Other current liabilities consists of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
(recast) |
|
Accrued expenses |
|
$ |
3,769 |
|
|
$ |
4,952 |
|
Accrued compensation |
|
|
1,234 |
|
|
|
1,351 |
|
Accrued income taxes |
|
|
99 |
|
|
|
205 |
|
|
|
|
|
|
|
|
Total other current liabilities, net |
|
$ |
5,102 |
|
|
$ |
6,508 |
|
|
|
|
|
|
|
|
69
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(Unaudited)
Overview
TW AOL Holdings Inc, Historic TW Inc., Time Warner Companies, Inc. and Turner Broadcasting
System, Inc. (collectively, the “Guarantor Subsidiaries”) are wholly owned subsidiaries of Time
Warner Inc. (the “Parent Company”). The Guarantor Subsidiaries have fully and unconditionally,
jointly and severally, directly or indirectly, guaranteed, on an unsecured basis, the debt issued
by the Parent Company in its November 2006 public offering.
The Securities and Exchange Commission’s rules require that condensed consolidating financial
information be provided for wholly owned subsidiaries that have guaranteed debt of a registrant
issued in a public offering, where each such guarantee is full and unconditional. Set forth below
are condensed consolidating financial statements presenting the financial position, results of
operations, and cash flows of (i) the Parent Company, (ii) the Guarantor Subsidiaries on a combined
basis (as such guarantees are joint and several), (iii) the direct and indirect non-guarantor
subsidiaries of the Parent Company (the “Non-Guarantor Subsidiaries”) on a combined basis and (iv)
the eliminations necessary to arrive at the information for Time Warner Inc. on a consolidated
basis.
There are no legal or regulatory restrictions on the Parent Company’s ability to obtain funds
from any of its wholly owned subsidiaries through dividends, loans or advances.
These condensed consolidating financial statements should be read in conjunction with the
consolidated financial statements of Time Warner Inc.
Basis of Presentation
In presenting the condensed consolidating financial statements, the equity method of
accounting has been applied to (i) the Parent Company’s interests in the Guarantor Subsidiaries and
(ii) the Guarantor Subsidiaries’ interests in the Non-Guarantor Subsidiaries, where applicable,
even though all such subsidiaries meet the requirements to be consolidated under U.S. generally
accepted accounting principles. All inter-company balances and transactions between the Parent
Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been eliminated, as
shown in the column “Eliminations.”
The Parent Company’s accounting bases in all subsidiaries, including goodwill and identified
intangible assets, have been “pushed down” to the applicable subsidiaries.
All direct and indirect domestic subsidiaries are included in Time Warner Inc.’s consolidated
U.S. tax return. In the condensed consolidating financial statements, tax expense has been
allocated based on each such subsidiary’s relative contribution to the consolidated total. With
respect to the use of certain consolidated tax attributes (principally operating and capital loss
carryforwards), such benefits have been allocated to the respective subsidiary that generated the
taxable income permitting such use (i.e., pro-rata based on where the income was generated). For
example, to the extent a Non-Guarantor Subsidiary generated a gain on the sale of a business for
which the Parent Company utilized tax attributes to offset such gain, the tax attribute benefit
would be allocated to the Non-Guarantor Subsidiary. Deferred taxes of the Parent Company, the
Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been allocated based upon the
temporary differences between the carrying amounts of the respective assets and liabilities of the
applicable entities.
Beginning in 2007, the method of allocating certain corporate overhead expenses was revised
for purposes of preparing these condensed consolidating financial statements. Specifically, these
expenses are no longer being allocated to the Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries, but they instead are reflected as expenses of the Parent Company. The impact of this
change for the three and nine months ended September 30, 2007 was to cause (i) the Parent Company’s
operating loss to increase by approximately $70 million and approximately $220 million,
respectively, (ii) the Guarantor Subsidiaries’ operating
income to increase by approximately $15
million and approximately $50 million, respectively, and (iii) the Non-Guarantor Subsidiaries’
operating income to increase by approximately $55 million and
approximately $170 million,
respectively.
70
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Balance Sheet
September 30, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
(millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
760 |
|
|
$ |
51 |
|
|
$ |
1,062 |
|
|
$ |
— |
|
|
$ |
1,873 |
|
Restricted cash |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
Receivables, net |
|
|
31 |
|
|
|
3 |
|
|
|
5,835 |
|
|
|
— |
|
|
|
5,869 |
|
Inventories |
|
|
— |
|
|
|
1 |
|
|
|
1,995 |
|
|
|
— |
|
|
|
1,996 |
|
Prepaid expenses and other current assets |
|
|
244 |
|
|
|
51 |
|
|
|
607 |
|
|
|
— |
|
|
|
902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,035 |
|
|
|
106 |
|
|
|
9,502 |
|
|
|
— |
|
|
|
10,643 |
|
Noncurrent inventories and film costs |
|
|
— |
|
|
|
— |
|
|
|
5,487 |
|
|
|
— |
|
|
|
5,487 |
|
Investments in amounts due to and from consolidated
subsidiaries |
|
|
87,196 |
|
|
|
82,839 |
|
|
|
— |
|
|
|
(170,035 |
) |
|
|
— |
|
Investments, including available-for-sale securities |
|
|
53 |
|
|
|
585 |
|
|
|
1,874 |
|
|
|
(461 |
) |
|
|
2,051 |
|
Property, plant and equipment, net |
|
|
431 |
|
|
|
241 |
|
|
|
16,875 |
|
|
|
— |
|
|
|
17,547 |
|
Intangible assets subject to amortization, net |
|
|
— |
|
|
|
1 |
|
|
|
4,914 |
|
|
|
— |
|
|
|
4,915 |
|
Intangible assets not subject to amortization |
|
|
— |
|
|
|
641 |
|
|
|
46,601 |
|
|
|
— |
|
|
|
47,242 |
|
Goodwill |
|
|
— |
|
|
|
2,618 |
|
|
|
38,656 |
|
|
|
— |
|
|
|
41,274 |
|
Other assets |
|
|
116 |
|
|
|
225 |
|
|
|
1,807 |
|
|
|
— |
|
|
|
2,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
88,831 |
|
|
$ |
87,256 |
|
|
$ |
125,716 |
|
|
$ |
(170,496 |
) |
|
$ |
131,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
5 |
|
|
$ |
11 |
|
|
$ |
1,055 |
|
|
$ |
— |
|
|
$ |
1,071 |
|
Participations payable |
|
|
— |
|
|
|
— |
|
|
|
2,118 |
|
|
|
— |
|
|
|
2,118 |
|
Royalties and programming costs payable |
|
|
— |
|
|
|
2 |
|
|
|
1,239 |
|
|
|
— |
|
|
|
1,241 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
1,275 |
|
|
|
— |
|
|
|
1,275 |
|
Debt due within one year |
|
|
— |
|
|
|
4 |
|
|
|
69 |
|
|
|
— |
|
|
|
73 |
|
Other current liabilities |
|
|
551 |
|
|
|
237 |
|
|
|
4,380 |
|
|
|
(66 |
) |
|
|
5,102 |
|
Current liabilities of discontinued operations |
|
|
— |
|
|
|
1 |
|
|
|
21 |
|
|
|
— |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
556 |
|
|
|
255 |
|
|
|
10,157 |
|
|
|
(66 |
) |
|
|
10,902 |
|
Long-term debt |
|
|
17,250 |
|
|
|
5,437 |
|
|
|
14,369 |
|
|
|
— |
|
|
|
37,056 |
|
Mandatorily redeemable preferred membership units
issued by a subsidiary |
|
|
— |
|
|
|
— |
|
|
|
300 |
|
|
|
— |
|
|
|
300 |
|
Debt due (from) to affiliates |
|
|
(1,844 |
) |
|
|
735 |
|
|
|
1,109 |
|
|
|
— |
|
|
|
— |
|
Deferred income taxes |
|
|
12,671 |
|
|
|
14,956 |
|
|
|
15,031 |
|
|
|
(29,987 |
) |
|
|
12,671 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
497 |
|
|
|
— |
|
|
|
497 |
|
Other liabilities |
|
|
2,052 |
|
|
|
2,955 |
|
|
|
6,489 |
|
|
|
(4,028 |
) |
|
|
7,468 |
|
Noncurrent liabilities of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
3,913 |
|
|
|
353 |
|
|
|
4,266 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due (to) from Time Warner and subsidiaries |
|
|
— |
|
|
|
(12,383 |
) |
|
|
(30,310 |
) |
|
|
42,693 |
|
|
|
— |
|
Other shareholders’ equity |
|
|
58,146 |
|
|
|
75,301 |
|
|
|
104,160 |
|
|
|
(179,461 |
) |
|
|
58,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
58,146 |
|
|
|
62,918 |
|
|
|
73,850 |
|
|
|
(136,768 |
) |
|
|
58,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
88,831 |
|
|
$ |
87,256 |
|
|
$ |
125,716 |
|
|
$ |
(170,496 |
) |
|
$ |
131,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Balance Sheet
December 31, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
(recast, millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
207 |
|
|
$ |
77 |
|
|
$ |
1,265 |
|
|
$ |
— |
|
|
$ |
1,549 |
|
Restricted cash |
|
|
— |
|
|
|
— |
|
|
|
29 |
|
|
|
— |
|
|
|
29 |
|
Receivables, net |
|
|
30 |
|
|
|
2 |
|
|
|
6,032 |
|
|
|
— |
|
|
|
6,064 |
|
Inventories |
|
|
— |
|
|
|
— |
|
|
|
1,907 |
|
|
|
— |
|
|
|
1,907 |
|
Prepaid expenses and other current assets |
|
|
273 |
|
|
|
39 |
|
|
|
824 |
|
|
|
— |
|
|
|
1,136 |
|
Current assets of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
166 |
|
|
|
— |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
510 |
|
|
|
118 |
|
|
|
10,223 |
|
|
|
— |
|
|
|
10,851 |
|
Noncurrent inventories and film costs |
|
|
— |
|
|
|
— |
|
|
|
5,394 |
|
|
|
— |
|
|
|
5,394 |
|
Investments in amounts due to and from consolidated
subsidiaries |
|
|
86,833 |
|
|
|
81,798 |
|
|
|
— |
|
|
|
(168,631 |
) |
|
|
— |
|
Investments, including available-for-sale securities |
|
|
33 |
|
|
|
607 |
|
|
|
3,203 |
|
|
|
(417 |
) |
|
|
3,426 |
|
Property, plant and equipment, net |
|
|
476 |
|
|
|
242 |
|
|
|
16,000 |
|
|
|
— |
|
|
|
16,718 |
|
Intangible assets subject to amortization, net |
|
|
— |
|
|
|
— |
|
|
|
5,204 |
|
|
|
— |
|
|
|
5,204 |
|
Intangible assets not subject to amortization |
|
|
— |
|
|
|
626 |
|
|
|
45,736 |
|
|
|
— |
|
|
|
46,362 |
|
Goodwill |
|
|
— |
|
|
|
2,546 |
|
|
|
38,203 |
|
|
|
— |
|
|
|
40,749 |
|
Other assets |
|
|
123 |
|
|
|
249 |
|
|
|
2,017 |
|
|
|
— |
|
|
|
2,389 |
|
Noncurrent assets of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
576 |
|
|
|
— |
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
87,975 |
|
|
$ |
86,186 |
|
|
$ |
126,556 |
|
|
$ |
(169,048 |
) |
|
$ |
131,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
4 |
|
|
$ |
13 |
|
|
$ |
1,340 |
|
|
$ |
— |
|
|
$ |
1,357 |
|
Participations payable |
|
|
— |
|
|
|
— |
|
|
|
2,049 |
|
|
|
— |
|
|
|
2,049 |
|
Royalties and programming costs payable |
|
|
— |
|
|
|
5 |
|
|
|
1,210 |
|
|
|
— |
|
|
|
1,215 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
1,434 |
|
|
|
— |
|
|
|
1,434 |
|
Debt due within one year |
|
|
— |
|
|
|
4 |
|
|
|
60 |
|
|
|
— |
|
|
|
64 |
|
Other current liabilities |
|
|
1,458 |
|
|
|
261 |
|
|
|
4,807 |
|
|
|
(18 |
) |
|
|
6,508 |
|
Current liabilities of discontinued operations |
|
|
— |
|
|
|
1 |
|
|
|
152 |
|
|
|
— |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,462 |
|
|
|
284 |
|
|
|
11,052 |
|
|
|
(18 |
) |
|
|
12,780 |
|
Long-term debt |
|
|
14,272 |
|
|
|
5,993 |
|
|
|
14,668 |
|
|
|
— |
|
|
|
34,933 |
|
Mandatorily redeemable preferred membership units
issued by a subsidiary |
|
|
— |
|
|
|
— |
|
|
|
300 |
|
|
|
— |
|
|
|
300 |
|
Debt due (from) to affiliates |
|
|
(1,798 |
) |
|
|
735 |
|
|
|
1,063 |
|
|
|
— |
|
|
|
— |
|
Deferred income taxes |
|
|
13,114 |
|
|
|
16,027 |
|
|
|
16,099 |
|
|
|
(32,126 |
) |
|
|
13,114 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
528 |
|
|
|
— |
|
|
|
528 |
|
Other liabilities |
|
|
454 |
|
|
|
1,179 |
|
|
|
4,873 |
|
|
|
(1,044 |
) |
|
|
5,462 |
|
Noncurrent liabilities of discontinued operations |
|
|
82 |
|
|
|
— |
|
|
|
42 |
|
|
|
— |
|
|
|
124 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
3,800 |
|
|
|
239 |
|
|
|
4,039 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due (to) from Time Warner and subsidiaries |
|
|
— |
|
|
|
(9,310 |
) |
|
|
(24,692 |
) |
|
|
34,002 |
|
|
|
— |
|
Other shareholders’ equity |
|
|
60,389 |
|
|
|
71,278 |
|
|
|
98,823 |
|
|
|
(170,101 |
) |
|
|
60,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
60,389 |
|
|
|
61,968 |
|
|
|
74,131 |
|
|
|
(136,099 |
) |
|
|
60,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
87,975 |
|
|
$ |
86,186 |
|
|
$ |
126,556 |
|
|
$ |
(169,048 |
) |
|
$ |
131,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Three Months Ended September 30, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
(millions) |
|
Revenues |
|
$ |
— |
|
|
$ |
297 |
|
|
$ |
11,415 |
|
|
$ |
(36 |
) |
|
$ |
11,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(153 |
) |
|
|
(6,844 |
) |
|
|
36 |
|
|
|
(6,961 |
) |
Selling, general and administrative |
|
|
(90 |
) |
|
|
(67 |
) |
|
|
(2,250 |
) |
|
|
— |
|
|
|
(2,407 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(167 |
) |
|
|
— |
|
|
|
(167 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
Merger-related, restructuring and shut-down costs |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
|
(12 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Loss on disposal of assets, net |
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(92 |
) |
|
|
77 |
|
|
|
2,145 |
|
|
|
— |
|
|
|
2,130 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
1,817 |
|
|
|
2,101 |
|
|
|
— |
|
|
|
(3,918 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(278 |
) |
|
|
(374 |
) |
|
|
63 |
|
|
|
— |
|
|
|
(589 |
) |
Other income (loss), net |
|
|
8 |
|
|
|
8 |
|
|
|
(8 |
) |
|
|
(10 |
) |
|
|
(2 |
) |
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(67 |
) |
|
|
(17 |
) |
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and discontinued operations |
|
|
1,455 |
|
|
|
1,812 |
|
|
|
2,133 |
|
|
|
(3,945 |
) |
|
|
1,455 |
|
Income tax provision |
|
|
(555 |
) |
|
|
(688 |
) |
|
|
(823 |
) |
|
|
1,511 |
|
|
|
(555 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations |
|
|
900 |
|
|
|
1,124 |
|
|
|
1,310 |
|
|
|
(2,434 |
) |
|
|
900 |
|
Discontinued operations, net of tax |
|
|
186 |
|
|
|
176 |
|
|
|
194 |
|
|
|
(370 |
) |
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,086 |
|
|
$ |
1,300 |
|
|
$ |
1,504 |
|
|
$ |
(2,804 |
) |
|
$ |
1,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Three Months Ended September 30, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
(recast, millions) |
|
Revenues |
|
$ |
— |
|
|
$ |
283 |
|
|
$ |
10,542 |
|
|
$ |
(75 |
) |
|
$ |
10,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(130 |
) |
|
|
(6,098 |
) |
|
|
73 |
|
|
|
(6,155 |
) |
Selling, general and administrative |
|
|
(20 |
) |
|
|
(75 |
) |
|
|
(2,390 |
) |
|
|
2 |
|
|
|
(2,483 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(163 |
) |
|
|
— |
|
|
|
(163 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(29 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(29 |
) |
Merger-related, restructuring and shut-down costs |
|
|
— |
|
|
|
— |
|
|
|
(73 |
) |
|
|
— |
|
|
|
(73 |
) |
Asset Impairments |
|
|
— |
|
|
|
— |
|
|
|
(200 |
) |
|
|
— |
|
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(49 |
) |
|
|
78 |
|
|
|
1,618 |
|
|
|
— |
|
|
|
1,647 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
2,019 |
|
|
|
2,213 |
|
|
|
— |
|
|
|
(4,232 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(193 |
) |
|
|
(331 |
) |
|
|
45 |
|
|
|
— |
|
|
|
(479 |
) |
Other income, net |
|
|
13 |
|
|
|
66 |
|
|
|
664 |
|
|
|
(32 |
) |
|
|
711 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(66 |
) |
|
|
(23 |
) |
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, discontinued operations
and cumulative effect of accounting change |
|
|
1,790 |
|
|
|
2,026 |
|
|
|
2,261 |
|
|
|
(4,287 |
) |
|
|
1,790 |
|
Income tax provision |
|
|
(443 |
) |
|
|
(500 |
) |
|
|
(618 |
) |
|
|
1,118 |
|
|
|
(443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations |
|
|
1,347 |
|
|
|
1,526 |
|
|
|
1,643 |
|
|
|
(3,169 |
) |
|
|
1,347 |
|
Discontinued operations, net of tax |
|
|
975 |
|
|
|
975 |
|
|
|
975 |
|
|
|
(1,950 |
) |
|
|
975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,322 |
|
|
$ |
2,501 |
|
|
$ |
2,618 |
|
|
$ |
(5,119 |
) |
|
$ |
2,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Nine Months Ended September 30, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
(millions) |
|
Revenues |
|
$ |
— |
|
|
$ |
889 |
|
|
$ |
33,038 |
|
|
$ |
(87 |
) |
|
$ |
33,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(411 |
) |
|
|
(19,548 |
) |
|
|
85 |
|
|
|
(19,874 |
) |
Selling, general and administrative |
|
|
(292 |
) |
|
|
(185 |
) |
|
|
(6,738 |
) |
|
|
2 |
|
|
|
(7,213 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(502 |
) |
|
|
— |
|
|
|
(502 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(169 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(169 |
) |
Merger-related, restructuring and shut-down costs |
|
|
— |
|
|
|
— |
|
|
|
(113 |
) |
|
|
— |
|
|
|
(113 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(36 |
) |
|
|
— |
|
|
|
(36 |
) |
Gains on disposal of assets, net |
|
|
— |
|
|
|
— |
|
|
|
673 |
|
|
|
— |
|
|
|
673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(461 |
) |
|
|
293 |
|
|
|
6,774 |
|
|
|
— |
|
|
|
6,606 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
6,035 |
|
|
|
6,781 |
|
|
|
— |
|
|
|
(12,816 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(778 |
) |
|
|
(1,089 |
) |
|
|
153 |
|
|
|
— |
|
|
|
(1,714 |
) |
Other income, net |
|
|
22 |
|
|
|
2 |
|
|
|
251 |
|
|
|
(44 |
) |
|
|
231 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(213 |
) |
|
|
(92 |
) |
|
|
(305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, discontinued operations
and cumulative effect of accounting change |
|
|
4,818 |
|
|
|
5,987 |
|
|
|
6,965 |
|
|
|
(12,952 |
) |
|
|
4,818 |
|
Income tax provision |
|
|
(1,786 |
) |
|
|
(2,232 |
) |
|
|
(2,624 |
) |
|
|
4,856 |
|
|
|
(1,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations |
|
|
3,032 |
|
|
|
3,755 |
|
|
|
4,341 |
|
|
|
(8,096 |
) |
|
|
3,032 |
|
Discontinued operations, net of tax |
|
|
324 |
|
|
|
321 |
|
|
|
276 |
|
|
|
(597 |
) |
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,356 |
|
|
$ |
4,076 |
|
|
$ |
4,617 |
|
|
$ |
(8,693 |
) |
|
$ |
3,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Nine Months Ended September 30, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
(recast, millions) |
|
Revenues |
|
$ |
— |
|
|
$ |
859 |
|
|
$ |
30,608 |
|
|
$ |
(118 |
) |
|
$ |
31,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(380 |
) |
|
|
(17,379 |
) |
|
|
113 |
|
|
|
(17,646 |
) |
Selling, general and administrative |
|
|
(70 |
) |
|
|
(220 |
) |
|
|
(7,308 |
) |
|
|
5 |
|
|
|
(7,593 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(419 |
) |
|
|
— |
|
|
|
(419 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(90 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(90 |
) |
Merger-related, restructuring and shut-down costs |
|
|
(5 |
) |
|
|
— |
|
|
|
(200 |
) |
|
|
— |
|
|
|
(205 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(200 |
) |
|
|
— |
|
|
|
(200 |
) |
Gains on disposal of assets, net |
|
|
20 |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(145 |
) |
|
|
259 |
|
|
|
5,104 |
|
|
|
— |
|
|
|
5,218 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
5,500 |
|
|
|
6,089 |
|
|
|
— |
|
|
|
(11,589 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(469 |
) |
|
|
(917 |
) |
|
|
272 |
|
|
|
— |
|
|
|
(1,114 |
) |
Other income, net |
|
|
22 |
|
|
|
69 |
|
|
|
1,049 |
|
|
|
(71 |
) |
|
|
1,069 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(227 |
) |
|
|
(38 |
) |
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, discontinued operations
and cumulative effect of accounting change |
|
|
4,908 |
|
|
|
5,500 |
|
|
|
6,198 |
|
|
|
(11,698 |
) |
|
|
4,908 |
|
Income tax provision |
|
|
(1,546 |
) |
|
|
(1,738 |
) |
|
|
(2,043 |
) |
|
|
3,781 |
|
|
|
(1,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations and
cumulative effect of accounting change |
|
|
3,362 |
|
|
|
3,762 |
|
|
|
4,155 |
|
|
|
(7,917 |
) |
|
|
3,362 |
|
Discontinued operations, net of tax |
|
|
1,412 |
|
|
|
1,412 |
|
|
|
1,412 |
|
|
|
(2,824 |
) |
|
|
1,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change |
|
|
4,774 |
|
|
|
5,174 |
|
|
|
5,567 |
|
|
|
(10,741 |
) |
|
|
4,774 |
|
Cumulative effect of accounting change, net of tax |
|
|
25 |
|
|
|
2 |
|
|
|
2 |
|
|
|
(4 |
) |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,799 |
|
|
$ |
5,176 |
|
|
$ |
5,569 |
|
|
$ |
(10,745 |
) |
|
$ |
4,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Nine Months Ended September 30, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
(millions) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,356 |
|
|
$ |
4,076 |
|
|
$ |
4,617 |
|
|
$ |
(8,693 |
) |
|
$ |
3,356 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
33 |
|
|
|
51 |
|
|
|
3,190 |
|
|
|
— |
|
|
|
3,274 |
|
Amortization of film costs |
|
|
— |
|
|
|
321 |
|
|
|
4,176 |
|
|
|
— |
|
|
|
4,497 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
36 |
|
|
|
— |
|
|
|
36 |
|
Gain on investments and other assets, net |
|
|
(9 |
) |
|
|
(13 |
) |
|
|
(949 |
) |
|
|
— |
|
|
|
(971 |
) |
Deficiency of distributions over equity in pretax
income of consolidated subsidiaries |
|
|
(6,035 |
) |
|
|
(6,781 |
) |
|
|
— |
|
|
|
12,816 |
|
|
|
— |
|
Equity in losses of investee companies, net of cash
distributions |
|
|
— |
|
|
|
1 |
|
|
|
52 |
|
|
|
— |
|
|
|
53 |
|
Equity-based compensation |
|
|
42 |
|
|
|
16 |
|
|
|
172 |
|
|
|
— |
|
|
|
230 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
213 |
|
|
|
92 |
|
|
|
305 |
|
Deferred income taxes |
|
|
1,406 |
|
|
|
193 |
|
|
|
195 |
|
|
|
(388 |
) |
|
|
1,406 |
|
Amounts related to securities litigation and government
investigations |
|
|
(750 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(750 |
) |
Changes in operating assets and liabilities, net of
acquisitions |
|
|
1,149 |
|
|
|
2,581 |
|
|
|
(4,286 |
) |
|
|
(4,433 |
) |
|
|
(4,989 |
) |
Adjustments relating to discontinued operations |
|
|
(323 |
) |
|
|
(322 |
) |
|
|
(243 |
) |
|
|
597 |
|
|
|
(291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by operations |
|
|
(1,131 |
) |
|
|
123 |
|
|
|
7,173 |
|
|
|
(9 |
) |
|
|
6,156 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
|
(3 |
) |
|
|
— |
|
|
|
(87 |
) |
|
|
— |
|
|
|
(90 |
) |
Investments and acquisitions, net of cash acquired |
|
|
(4 |
) |
|
|
(17 |
) |
|
|
(641 |
) |
|
|
— |
|
|
|
(662 |
) |
Investments in wireless spectrum joint venture |
|
|
— |
|
|
|
— |
|
|
|
(30 |
) |
|
|
— |
|
|
|
(30 |
) |
Investments and acquisitions from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(26 |
) |
|
|
— |
|
|
|
(26 |
) |
Capital expenditures and product development costs |
|
|
12 |
|
|
|
(85 |
) |
|
|
(3,027 |
) |
|
|
— |
|
|
|
(3,100 |
) |
Investment proceeds from available-for-sale securities |
|
|
10 |
|
|
|
23 |
|
|
|
— |
|
|
|
— |
|
|
|
33 |
|
Advances to parent and consolidated subsidiaries |
|
|
4,494 |
|
|
|
3,525 |
|
|
|
— |
|
|
|
(8,019 |
) |
|
|
— |
|
Other investment proceeds |
|
|
1 |
|
|
|
28 |
|
|
|
1,777 |
|
|
|
— |
|
|
|
1,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities |
|
|
4,510 |
|
|
|
3,474 |
|
|
|
(2,034 |
) |
|
|
(8,019 |
) |
|
|
(2,069 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
6,042 |
|
|
|
— |
|
|
|
6,686 |
|
|
|
— |
|
|
|
12,728 |
|
Debt repayments |
|
|
(3,056 |
) |
|
|
(546 |
) |
|
|
(6,949 |
) |
|
|
— |
|
|
|
(10,551 |
) |
Proceeds from exercise of stock options |
|
|
484 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
484 |
|
Excess tax benefit on stock options |
|
|
68 |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
74 |
|
Principal payments on capital leases |
|
|
— |
|
|
|
(3 |
) |
|
|
(42 |
) |
|
|
— |
|
|
|
(45 |
) |
Repurchases of common stock |
|
|
(5,714 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,714 |
) |
Dividends paid |
|
|
(645 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(645 |
) |
Other |
|
|
(5 |
) |
|
|
— |
|
|
|
(89 |
) |
|
|
— |
|
|
|
(94 |
) |
Change in due to/from parent and investment in segment |
|
|
— |
|
|
|
(3,074 |
) |
|
|
(4,954 |
) |
|
|
8,028 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by financing activities |
|
|
(2,826 |
) |
|
|
(3,623 |
) |
|
|
(5,342 |
) |
|
|
8,028 |
|
|
|
(3,763 |
) |
INCREASE
(DECREASE) IN CASH AND EQUIVALENTS |
|
|
553 |
|
|
|
(26 |
) |
|
|
(203 |
) |
|
|
— |
|
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD |
|
|
207 |
|
|
|
77 |
|
|
|
1,265 |
|
|
|
— |
|
|
|
1,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
760 |
|
|
$ |
51 |
|
|
$ |
1,062 |
|
|
$ |
— |
|
|
$ |
1,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Nine Months Ended September 30, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
(recast, millions) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,799 |
|
|
$ |
5,176 |
|
|
$ |
5,569 |
|
|
$ |
(10,745 |
) |
|
$ |
4,799 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change, net of tax |
|
|
(25 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
4 |
|
|
|
(25 |
) |
Depreciation and amortization |
|
|
34 |
|
|
|
40 |
|
|
|
2,430 |
|
|
|
— |
|
|
|
2,504 |
|
Amortization of film costs |
|
|
— |
|
|
|
295 |
|
|
|
4,154 |
|
|
|
— |
|
|
|
4,449 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
200 |
|
|
|
— |
|
|
|
200 |
|
Gain on investments and other assets, net |
|
|
(5 |
) |
|
|
(90 |
) |
|
|
(949 |
) |
|
|
— |
|
|
|
(1,044 |
) |
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries |
|
|
(5,500 |
) |
|
|
(6,089 |
) |
|
|
— |
|
|
|
11,589 |
|
|
|
— |
|
Equity in (income) losses of investee companies, net
of cash distributions |
|
|
— |
|
|
|
— |
|
|
|
(33 |
) |
|
|
— |
|
|
|
(33 |
) |
Equity-based compensation |
|
|
39 |
|
|
|
18 |
|
|
|
155 |
|
|
|
— |
|
|
|
212 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
228 |
|
|
|
37 |
|
|
|
265 |
|
Deferred income taxes |
|
|
1,030 |
|
|
|
(350 |
) |
|
|
(336 |
) |
|
|
686 |
|
|
|
1,030 |
|
Amounts related to securities litigation and
government investigations |
|
|
(177 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(177 |
) |
Changes in operating assets and liabilities, net of
acquisitions |
|
|
5,432 |
|
|
|
11,153 |
|
|
|
(1,845 |
) |
|
|
(19,094 |
) |
|
|
(4,354 |
) |
Adjustments relating to discontinued operations |
|
|
(1,412 |
) |
|
|
(1,411 |
) |
|
|
(1,258 |
) |
|
|
2,825 |
|
|
|
(1,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operations |
|
|
4,215 |
|
|
|
8,740 |
|
|
|
8,313 |
|
|
|
(14,698 |
) |
|
|
6,570 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and acquisitions, net of cash acquired |
|
|
(8 |
) |
|
|
(67 |
) |
|
|
(12,107 |
) |
|
|
— |
|
|
|
(12,182 |
) |
Investments in Wireless Spectrum Joint Venture |
|
|
— |
|
|
|
— |
|
|
|
(182 |
) |
|
|
— |
|
|
|
(182 |
) |
Capital expenditures and product development costs |
|
|
(25 |
) |
|
|
(98 |
) |
|
|
(2,547 |
) |
|
|
— |
|
|
|
(2,670 |
) |
Capital expenditures from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(63 |
) |
|
|
— |
|
|
|
(63 |
) |
Investment proceeds from available-for-sale securities |
|
|
1 |
|
|
|
38 |
|
|
|
3 |
|
|
|
— |
|
|
|
42 |
|
Advances to parents and consolidated subsidiaries |
|
|
(1,073 |
) |
|
|
— |
|
|
|
— |
|
|
|
1,073 |
|
|
|
— |
|
Other investment proceeds |
|
|
11 |
|
|
|
473 |
|
|
|
2,590 |
|
|
|
— |
|
|
|
3,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities |
|
|
(1,094 |
) |
|
|
346 |
|
|
|
(12,306 |
) |
|
|
1,073 |
|
|
|
(11,981 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
4,843 |
|
|
|
— |
|
|
|
10,737 |
|
|
|
— |
|
|
|
15,580 |
|
Issuance of mandatorily redeemable preferred
membership units by a subsidiary |
|
|
— |
|
|
|
— |
|
|
|
300 |
|
|
|
— |
|
|
|
300 |
|
Debt repayments |
|
|
(1,500 |
) |
|
|
(546 |
) |
|
|
(505 |
) |
|
|
— |
|
|
|
(2,551 |
) |
Proceeds from exercise of stock options |
|
|
378 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
378 |
|
Excess tax benefit on stock options |
|
|
61 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
61 |
|
Principal payments on capital leases |
|
|
— |
|
|
|
(2 |
) |
|
|
(62 |
) |
|
|
— |
|
|
|
(64 |
) |
Repurchases of common stock |
|
|
(10,659 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,659 |
) |
Dividends paid |
|
|
(658 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(658 |
) |
Other |
|
|
— |
|
|
|
— |
|
|
|
(18 |
) |
|
|
— |
|
|
|
(18 |
) |
Change in due to/from parent and investment in segment |
|
|
830 |
|
|
|
(8,618 |
) |
|
|
(5,837 |
) |
|
|
13,625 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities |
|
|
(6,705 |
) |
|
|
(9,166 |
) |
|
|
4,615 |
|
|
|
13,625 |
|
|
|
2,369 |
|
INCREASE (DECREASE) IN CASH AND EQUIVALENTS |
|
|
(3,584 |
) |
|
|
(80 |
) |
|
|
622 |
|
|
|
— |
|
|
|
(3,042 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD |
|
|
3,798 |
|
|
|
95 |
|
|
|
327 |
|
|
|
— |
|
|
|
4,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
214 |
|
|
$ |
15 |
|
|
$ |
949 |
|
|
$ |
— |
|
|
$ |
1,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
Part II. Other Information
Item 1. Legal Proceedings
Securities Matters
Other Related Securities Litigation Matters
Reference is made to the shareholder derivative, ERISA and individual securities matters
described on pages 52-56 of the 2006 Form 10-K, page 68 of the Company’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2007 (the “March 2007 Form 10-Q”) and page 76 of the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (the “June 2007 Form 10-Q”). At
September 30, 2007, the Company’s remaining reserve related to these matters is approximately $10
million, including approximately $8 million that has been reserved for an expected attorneys’ fee
award related to a previously settled matter. The Company believes the potential exposure in the
securities litigation matters that remain pending at September 30, 2007 to be de minimis.
Reference is made to the consolidated ERISA class action lawsuits described on page 52 of the
2006 Form 10-K. On October 26, 2007, the court issued an order approving certain attorneys’ fees
and expenses requested by plaintiffs’ counsel, as well as approving certain incentive awards to the
lead plaintiffs. The time to appeal this decision has not yet expired.
Reference is made to the lawsuits described on page 53 of the 2006 Form 10-K and page 68 of
the March 2007 Form 10-Q filed by shareholders who determined to “opt-out” of the settlement
reached in the consolidated federal securities class action. All of these matters have now been
settled.
Reference is made to the putative class action filed by Staro Asset Management, LLC described
on page 54 of the 2006 Form 10-K. On September 27, 2007, the Company filed a motion to dismiss this
action based on plaintiff’s failure to take any action to prosecute the case for nearly four years.
Reference is made to the lawsuit filed on behalf of purchasers of stock in Homestore.com, Inc.
described on page 55 of the 2006 Form 10-K. On August 6, 2007, the court issued preliminary
approval of the settlement of this lawsuit. The settlement agreement remains subject to final
approval by the district court.
Other Matters
Reference is made to the Warner Bros. (South) Inc. (“WBS”) tax cases in Brazil described on
page 57 of the 2006 Form 10-K and page 76 of the June 2007 Form 10-Q. In September 2007, WBS
elected to participate in a government-sponsored amnesty program, which resolved ten of the state
tax matters, including the Superior Court case in which WBS had previously received an adverse
ruling, for a payment of approximately $20 million (based on the real/U.S. dollar exchange rate on
the date the payment was made). The payment made was consistent with the reserve previously
established for these matters.
Reference is made to the lawsuit filed by certain heirs of Jerome Siegel relating to the
Superman character described on page 57 of the 2006 Form 10-K and page 68 of the March 2007 Form
10-Q. This case is scheduled for trial starting in January 2008.
Reference is made to the lawsuit filed by Thomas Dreiling described on page 58 of the 2006
Form 10-K and page 76 of the June 2007 Form 10-Q. On October 11, 2007, the parties filed
cross-motions for summary judgment.
On February 28, 2005, Wingnut Films, Ltd. filed a case against New Line Cinema Corporation,
and Katja Motion Pictures Corp. and New Line Productions, Inc., both of which are wholly
owned subsidiaries of New Line Cinema Corporation, as well as other unnamed defendants, in the U.S.
District Court for the Central District of California relating to The Lord of the Rings: The
Fellowship of the Ring; The Lord of the Rings: The Two Towers; and The Lord of the Rings: The
Return of the King (collectively, “the Trilogy”). The
complaint alleges that New Line Cinema Corporation failed to make
full payment to plaintiff with respect to its participation in Adjusted Gross Receipts (as defined
in the parties’ contract). A trial in this matter has been scheduled for January 2008. Claims have
also been made by other profit participants relating to the Trilogy, including the Estate of J.R.R.
Tolkien. The Company intends to defend against these matters vigorously, but is unable to predict
the outcome of the proceedings.
On August 30, 2007, eight years after the case was initially filed, the Supreme Court of the
Republic of Indonesia overturned the rulings of two lower courts and issued a judgment against Time
Inc. Asia and six journalists in the matter of H.M. Suharto v. Time Inc. Asia et al. The underlying
libel lawsuit was filed in July 1999 by the former dictator of Indonesia following the publication
of TIME magazine’s May 24, 1999 cover story “Suharto Inc.” Following a trial in the Spring of 2000,
a three-judge panel of an Indonesian court found in favor of Time Inc. and the journalists, and
that
79
decision was affirmed by an intermediate appellate court in March 2001. The court’s August 30,
2007 decision reversed those prior determinations and ordered defendants to, among other things,
apologize for certain aspects of the May 1999 article and pay Mr. Suharto damages in the amount of
one trillion rupiah (approximately $110 million based on the exchange rate as of September 30,
2007). The Company continues to defend this matter vigorously and intends to challenge the judgment
by filing a petition for review with the Supreme Court of the Republic of Indonesia. The Company
does not believe it is likely that efforts to enforce such judgment within Indonesia, or in those
jurisdictions outside of Indonesia in which the Company has substantial assets, would result in any
material loss to the Company. Consequently, no loss has been accrued for this matter as of
September 30, 2007. Moreover, the Company believes that insurance coverage is available for the
judgment, were it to be sustained and, eventually, enforced.
On September 20, 2007, Brantley, et al. v. NBC Universal, Inc., et al. was filed in the U.S.
District Court for the Central District of California against the Company and TWC. The complaint,
which also names as defendants several other programming content providers (collectively, the
“programmer defendants”) as well as other cable and satellite providers (collectively, the
“distributor defendants”), alleges violations of Sections 1 and 2 of the Sherman Antitrust Act.
Among other things, the complaint alleges coordination between and among the programmer defendants
to sell and/or license programming on a “bundled” basis to the distributor defendants, who in turn
purportedly offer that programming to subscribers in packaged tiers, rather than on a per channel
(or “à la carte”) basis. Plaintiffs, who seek to represent a purported nationwide class of cable
and satellite subscribers, demand, among other things, unspecified treble monetary damages and an
injunction to compel the offering of channels to subscribers on an “à la carte” basis. The Company
intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this
suit or reasonably estimate a range of possible loss.
80
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Company Purchases of Equity Securities
The following table provides information about purchases by the Company during the quarter
ended September 30, 2007 of equity securities registered by the Company pursuant to Section 12 of
the Exchange Act.
Issuer Purchases of Equity Securities
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
| |
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Value of Shares that |
|
| |
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
May Yet Be |
|
| |
|
Total Number of |
|
|
Average Price |
|
|
Announced Plans or |
|
|
Purchased Under the |
|
| Period |
|
Shares Purchased(1) |
|
|
Paid Per Share(2) |
|
|
Programs(3) |
|
|
Plans or Programs(4) |
|
July 1, 2007 –
July 31, 2007 |
|
|
7,030 |
|
|
$ |
20.61 |
|
|
|
0 |
|
|
$ |
540,483,206 |
|
August 1, 2007 –
August 31, 2007 |
|
|
99,678,500 |
|
|
$ |
18.64 |
|
|
|
99,678,500 |
|
|
$ |
3,682,115,490 |
|
September 1, 2007 –
September 30, 2007 |
|
|
7,352,954 |
|
|
$ |
19.04 |
|
|
|
7,348,200 |
|
|
$ |
3,542,171,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
107,038,484 |
|
|
$ |
18.67 |
|
|
|
107,026,700 |
|
|
|
|
|
|
|
|
| (1) |
|
The total number of shares purchased includes (a) shares of Common Stock purchased
by the Company under the Stock Repurchase Program and the New Stock Repurchase Program, each
as described in footnote 3 below, and (b) shares of Common Stock that are tendered by
employees to the Company to satisfy the employees’ tax withholding obligations in connection
with the vesting of awards of restricted stock, which are repurchased by the Company based on
their fair market value on the vesting date. The number of shares of Common Stock purchased by
the Company in connection with the vesting of such awards totaled 7,030 shares, 0 shares and
4,754 shares, respectively, for the months of July, August and September. |
| |
| (2) |
|
The calculation of the average price paid per share does not give effect to any
fees, commissions or other costs associated with the repurchase of such shares. |
| |
| (3) |
|
On August 3, 2005, the Company announced that its Board of Directors had authorized
a Common Stock repurchase program that allows the Company to repurchase, from time to time, up
to $5 billion of Common Stock over a two-year period (the “Stock Repurchase Program”). On
November 2, 2005, the Company announced the increase of the amount that could be repurchased
under the Stock Repurchase Program to an aggregate of up to $12.5 billion of Common Stock. In
addition, on February 17, 2006, the Company announced a further increase of the amount of the
Stock Repurchase Program and the extension of the program’s ending date. Under the extended
program, the Company has authority to repurchase up to an aggregate of $20 billion of Common
Stock during the period from July 29, 2005 through December 31, 2007. On August 1, 2007, the
Company announced that its Board of Directors had authorized a new stock repurchase program
that allows Time Warner to repurchase, from time to time, up to $5 billion of Common Stock
(the “New Stock Repurchase Program”). Purchases under the Stock Repurchase Program and the New
Stock Repurchase Program may be made from time to time on the open market and in privately
negotiated transactions. The size and timing of these purchases will be based on a number of
factors, including price and business and market conditions. In the past, the Company has
repurchased shares of Common Stock pursuant to trading programs under Rule 10b5-1 promulgated
under the Exchange Act, and it may repurchase shares of Common Stock under such trading
programs in the future. |
| |
| (4) |
|
This amount does not reflect (i) the fees, commissions and other costs associated
with the Stock Repurchase Program and the New Stock Repurchase Program, (ii) the dollar value
of the 4,000,000 shares of Common Stock that are subject to a working capital adjustment in
the transaction with Liberty Media Corporation (“Liberty”) described below, and (iii) the
dollar value of the 18,784,759 shares of Series LMCN-V Common Stock received by the Company on
May 16, 2007 in the Liberty Transaction, which were acquired as part of the Stock Purchase
Program. On May 16, 2007, the Company and Liberty completed a transaction in which Liberty
exchanged shares of the Company’s Series LMCN-V Common Stock and shares of the Company’s
Common Stock for a subsidiary of the Company that owned specified assets and cash (the
“Liberty Transaction”). In connection with the Liberty Transaction, Liberty continues to hold
4,000,000 shares of the Company’s Common Stock that are expected to be delivered to the
Company upon the resolution of a working capital adjustment and applied to the Company’s share
repurchases under the Stock Repurchase Program. |
81
Item 5. Other Information.
Amendment of Compensation Plans and Form of Restricted Stock Units Agreement to Address Section 409A
On October 25, 2007, the Board of Directors approved amendments to a number of compensation
plans maintained by the Company to address compliance with Section 409A of the Internal Revenue
Code, which was enacted in 2004 and for which final regulations were issued in April 2007. With
respect to the Time Warner Inc. Deferred Compensation Plan, the amendments included (i) specifying when
elections to defer compensation and select the form and time of distribution must be made,
generally before the end of the calendar year prior to the year in which the compensation is
earned, (ii) limiting the ability to change deferral elections, (iii) provisions to delay for six
months payments to employees who are among the top-50 compensated officers of the Company who
separate from service, (iv) removing the ability to receive an in-service distribution with a 10%
reduction, and (v) adding “savings language” for Section 409A. These amendments are effective as
of January 1, 2005.
With respect to the Time Warner Inc. Non-Employee Directors’ Deferred Compensation Plan, the
amendments included (i) specifying when a deferral election must be made, (ii) adding language
regarding the irrevocable nature of the election, and (iii) adding “savings language” for
Section 409A. These amendments are effective as of January 1, 2005.
With respect to the Time Warner Inc. Annual Bonus Plan for Executive Officers, the amendments
add (i) specified payment dates, and (ii) “savings language” for Section 409A. In addition, the
Board approved an amendment to the definition of EBITDA so that the definition conforms to the
definition of Adjusted Operating Income before Depreciation and Amortization the Company uses in
connection with its earnings and business outlook releases. The changes will be effective for years
beginning January 1, 2008.
For the equity plans listed below, the amendments, which are all effective October 25, 2007,
consist of either including a “savings provision” for Section 409A that provides for a delay in the
delivery of payments until the first date on which additional taxation would not result under
Section 409A or modifying an existing savings provision:
| |
• |
|
Time Warner Inc. 2006 Stock Incentive Plan |
| |
| |
• |
|
Time Warner Inc. 2003 Stock Incentive Plan |
| |
| |
• |
|
Time Warner Inc. 1999 Stock Plan |
| |
| |
• |
|
AOL Time Warner Inc. 1994 Stock Option Plan |
| |
| |
• |
|
Time Warner Inc. 1988 Restricted Stock and Restricted Stock Unit Plan for
Non-Employee Directors |
In addition, the definition of “change in control” in the Time Warner Inc. 1988 Restricted Stock
and Restricted Stock Unit Plan for Non-Employee Directors was amended to be consistent with the
definition used in the other equity plans listed above. The amendment to the AOL Time Warner Inc.
1994 Stock Option Plan also removed an option exercise deferral feature.
The
Compensation and Human Development Committee of the Board of Directors approved a new form
of agreement governing restricted stock units (“RSUs”) on October 24, 2007 to address compliance
with Section 409A. The changes to the form of RSU Agreement: (i) include language specifying when
shares of Time Warner common stock will be paid out following vesting or a partial vesting in
connection with a termination of employment without cause, (ii) modify the definition of
“disability” to fit within the Section 409A definition, and (iii) provide that distribution of
shares following a change in control that results in an acceleration of vesting will be delayed to
the regular vesting date if the change in control is not one that comes within the events permitted
under Section 409A.
Copies of the compensation plans described above, as amended, and the form of RSU Agreement
are included as exhibits to this report.
Item 6. Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference
as a part of this report and such Exhibit Index is incorporated herein by reference.
82
TIME WARNER INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
|
|
TIME WARNER INC.
(Registrant) |
|
|
|
|
|
|
|
Date: November 7, 2007 |
|
/s/ Wayne H. Pace |
|
|
|
|
Wayne H. Pace
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
83
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
| |
|
|
| Exhibit No. |
|
Description of Exhibit |
|
|
|
10.1
|
|
Time
Warner Inc. 2006 Stock Incentive Plan, as amended October 25,
2007. |
|
|
|
10.2
|
|
Time Warner Inc. 2003 Stock Incentive Plan, as amended October 25, 2007. |
|
|
|
10.3
|
|
Time Warner Inc. 1999 Stock Plan, as amended October 25, 2007. |
|
|
|
10.4
|
|
AOL Time Warner Inc. 1994 Stock Option Plan, as amended October 25, 2007. |
|
|
|
10.5
|
|
Time Warner Inc. 1988 Restricted Stock and Restricted Stock Unit Plan
for Non-Employee Directors, as amended October 25, 2007. |
|
|
|
10.6
|
|
Form of Restricted Stock Units Agreement, for use after October 24, 2007. |
|
|
|
10.7
|
|
Time Warner Inc. Deferred Compensation Plan, as amended October 25,
2007, effective as of January 1, 2005. |
|
|
|
10.8
|
|
Time Warner Inc. Non-Employee Directors’ Deferred Compensation Plan, as
amended October 25, 2007, effective as of January 1, 2005. |
|
|
|
10.9
|
|
Amended and Restated Time Warner Inc. Annual Bonus Plan for Executive
Officers, as amended October 25, 2007, to be effective January 1, 2008. |
|
|
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2007. |
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2007. |
|
|
|
32
|
|
Certification of Principal Executive Officer and Principal Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with
respect to the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2007. † |
|
|
|
| † |
|
This certification will not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that
section. Such certification will not be deemed to be incorporated by reference into any filing
under the Securities Act or Securities Exchange Act, except to the extent that the Company
specifically incorporates it by reference. |
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