TIME WARNER INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| |
|
|
| þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934 |
for the quarterly period ended June 30, 2008 or
| |
|
|
| o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
OF 1934 |
for the transition period from
to
Commission file number 001-15062
TIME WARNER INC.
(Exact name of Registrant as specified in its charter)
| |
|
|
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
13-4099534
(I.R.S. Employer
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, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| |
|
|
|
|
|
|
| Large accelerated filer þ
|
|
|
|
Accelerated filer o |
|
|
| Non-accelerated filer o
|
|
(Do not check if a smaller reporting company) |
|
Smaller reporting company o |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
| |
|
|
|
| |
|
Shares Outstanding |
| Description of Class |
|
as of July 29, 2008 |
|
| Common Stock – $.01 par value
|
|
3,582,821,909 |
|
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:
| |
• |
|
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. |
| |
| |
• |
|
Results of operations. This section provides an analysis of the Company’s results of
operations for the three and six months ended June 30, 2008. 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. |
| |
| |
• |
|
Financial condition and liquidity. This section provides an analysis of the Company’s
financial condition as of June 30, 2008 and cash flows for the six months ended June 30,
2008. |
| |
| |
• |
|
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, 2007 (the “2007 Form 10-K”), as well as Item 1A, “Risk Factors,” in Part
II of this report, for a discussion of the risk factors applicable to the Company. |
1
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, TNT,
CNN, AOL, People, Sports Illustrated, Time and Time Warner Cable. The Company produces and
distributes films through Warner Bros. and New Line Cinema, including The Dark Knight, Get Smart,
Sex and the City, I Am Legend, 10,000 B.C. and Harry Potter and the Order of the Phoenix, as well
as television series, including Two and a Half Men, Without a Trace, Cold Case, The Closer and ER.
During the six months ended June 30, 2008, the Company generated revenues of $22.972 billion (up 4%
from $22.164 billion in 2007), Operating Income of $3.893 billion (down 13% from $4.476 billion in
2007), Net Income of $1.563 billion (down 31% from $2.270 billion in 2007) and Cash Provided by
Operations of $4.932 billion (up 58% from $3.119 billion in 2007). As discussed more fully in
“Business Segment Results,” the six months ended June 30, 2007 included the impact of an
approximate $670 million gain on the sale of AOL’s German access business.
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”) operates a Global Web Services business
that provides online advertising services on both the AOL Network and third-party Internet sites,
referred to as the “Third Party Network.” AOL’s Global Web Services business also develops and
operates the AOL Network, a leading network of web brands and free client software and services for
Internet consumers. In addition, through its Access Services business, AOL operates one of the
largest Internet access subscription services in the United States. As of June 30, 2008, AOL had
8.1 million AOL brand Internet access subscribers in the U.S., which does not include registrations
for the free AOL service. For the six months ended June 30, 2008, AOL generated revenues of $2.185
billion (9% of the Company’s overall revenues), $755 million in Operating Income before
Depreciation and Amortization and $514 million in Operating Income.
AOL’s strategy is to continue 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 recent as well as anticipated growth in online advertising by providing
advertising services on both the AOL Network and the Third Party Network. AOL’s focus is on growing
its Global Web Services business, while managing costs in this business as well as managing its
declining subscriber base and costs in its Access Services business. On February 6, 2008, the
Company announced that it had begun separating the AOL Access Services and Global Web Services
businesses, which should enhance the operational focus and strategic options available for each of
these businesses. The Company anticipates that it will be in a position to operate AOL’s Access
Services and Global Web Services businesses separately in 2009.
Within its Global Web Services business, in 2007 AOL formed a business group called
Platform-A, which includes AOL’s business of selling advertising on the AOL Network and the Third
Party Network and licensing advertising serving technology to third-party websites. Platform-A
sells advertising that uses optimization and targeting technologies to deliver more effective
advertising and to reach specific audiences across the AOL Network and the Third Party Network.
Advertising services on the Third Party Network are primarily provided by Platform-A Inc. (formerly
Advertising.com, Inc.) and its subsidiaries, including TACODA LLC, Quigo Technologies LLC,
ADTECH AG, Third Screen Media LLC, Advertising.com LLC and Perfiliate Limited
(“buy.at”), each of which is a wholly-owned subsidiary of AOL.
2
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
During the first six months of 2008, Advertising revenues on the AOL Network were negatively
impacted by certain factors and trends, including shifts in the mix of sold inventory to
lower-priced inventory, lower revenues from certain advertiser categories, the increasing usage by
online advertisers of third-party advertising networks and declines in the price of advertising
inventory. Additionally, AOL’s Advertising revenues were negatively impacted by the challenges of
integrating recently acquired businesses under Platform-A, including the realignment to create one
integrated Platform-A sales force, which resulted in certain sales execution issues during the
first half of the year. The increasing usage of third-party advertising networks has had a positive
impact on AOL’s Third Party Network Advertising revenues. However, Third Party Network advertising
has historically had higher traffic acquisition costs (“TAC”) and, therefore, lower incremental
margins than display advertising. Due to the differing cost structures associated with the AOL
Network and Third Party Network components of the Global Web Services business, a
period-over-period increase or decrease in aggregate Advertising revenues will not necessarily
translate into a similar increase or decrease in Operating Income before Depreciation and
Amortization attributable to AOL’s advertising activities.
During the first six months of 2008, the Company has experienced a significant decline in
revenues from a major customer of Platform-A Inc. as a result of the customer’s acquisition of a
business believed to perform online advertising services that are similar to those provided by
Platform-A Inc., and the Company anticipates that such revenues will continue to decline for the
remainder of 2008 compared to the similar period in 2007. Revenues from this relationship decreased
to $22 million for the six months ended June 30, 2008 from $104 million for the six months ended
June 30, 2007. For the full year 2007, AOL earned Advertising revenues from this relationship of
$215 million.
AOL’s Publishing business group, a component of the Global Web Services business, develops and
operates the products and programming functions associated with the AOL Network. The AOL Network
consists of a variety of websites, related applications and services, including those accessed via
the AOL and low-cost Internet access services. Specifically, the AOL Network includes owned and
operated websites, applications and services such as AOL.com, international versions of the AOL
portal, e-mail, AIM, MapQuest, Moviefone, ICQ and Truveo (a video search engine). The AOL Network
also includes TMZ.com, a joint venture with Telepictures Productions, Inc. (a subsidiary of Warner
Bros. Entertainment Inc.), 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. In
addition, during the second quarter of 2008, AOL completed the acquisition of Bebo, Inc. (“Bebo”),
a leading global social media network. During the second half of 2008, AOL intends to continue to
focus on cross-promoting its content on the AOL Network, which now includes Bebo’s original
programming, and provide Bebo users with certain products, such as mail and instant messaging.
Paid-search advertising activities on the AOL Network are conducted primarily through AOL’s
strategic relationship with Google Inc. (“Google”). In connection with the expansion of this
strategic relationship in April 2006, Google acquired a 5% interest in AOL, and, as a result, 95%
of the equity interests in AOL are indirectly held by the Company and 5% are indirectly held by
Google. As part of the April 2006 transaction, Google received certain registration rights relating
to its equity interest in AOL. Since July 1, 2008, Google has had the right to require AOL to
register Google’s 5% equity interest for sale in an initial public offering. If Google exercises
this right, Time Warner will have the right to purchase Google’s equity interest for cash or shares
of Time Warner common stock based on the appraised fair market value of the equity interest in lieu
of conducting an initial public offering. The Company cannot predict whether Google will request
the Company to register its 5% equity interest in AOL or, if requested, whether the Company would
exercise its option to purchase Google’s interest at its then appraised value.
AOL’s Access Services business offers an online subscription service to consumers that
includes dial-up Internet access. AOL continued to experience declines in the first six months of
2008 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 to support the advertising business, AOL’s significant reduction of subscriber acquisition
and retention efforts, and the industry-wide decline of the dial-up ISP business and growth in the
broadband Internet access business. The decline in U.S. subscribers has moderated, with a decline
of 1.3 million for the six months ended June 30, 2008 compared to a decline of 2.3 million for the
six months ended June 30, 2007. 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 associated with the AOL
Network, in large part, are generated from the activity of current and former AOL subscribers.
Therefore, the decline in subscribers also could have an adverse impact on AOL’s Advertising
revenues generated on the AOL Network to the extent that subscribers canceling their subscriptions
do not maintain their relationship with and usage of the AOL Network.
3
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Cable. Time Warner’s cable business, Time Warner Cable Inc. and its subsidiaries (“TWC”), is
the second-largest cable operator in the U.S., with technologically advanced, well-clustered
systems located mainly in five geographic areas — New York State (including New York City), the
Carolinas, Ohio, southern California (including Los Angeles) and Texas. As of June 30, 2008, TWC
served approximately 14.7 million customers who subscribed to one or more of its video, high-speed
data and voice services. For the six months ended June 30, 2008, TWC generated revenues of $8.458
billion (37% of the Company’s overall revenues), $2.927 billion in Operating Income before
Depreciation and Amortization and $1.374 billion in Operating Income.
TWC principally offers three services — video, high-speed data and voice — over its broadband
cable systems. TWC markets its services separately and in “bundled” packages of multiple services
and features. As of June 30, 2008, 51% of TWC’s customers subscribed to two or more of its primary
services, including 19% of its customers who subscribed to all three primary services.
Historically, TWC has focused primarily on residential customers, while also selling video,
high-speed data and networking and transport services to commercial customers. Recently, TWC has
begun selling voice services to small- and medium-sized businesses as part of an increased emphasis
on its commercial business. In addition, TWC earns revenues by selling advertising time to
national, regional and local businesses.
Video is TWC’s largest service in terms of revenues generated and, as of June 30, 2008, TWC
had approximately 13.3 million basic video subscribers. Although 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. As of June 30, 2008, TWC had approximately 8.5 million digital
video subscribers, which represented approximately 64% of its basic video subscribers. TWC’s
digital video subscribers provide a broad base of potential customers for additional 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 as a percentage of video revenues will
continue to decline over the next few years as increases in programming costs outpace growth in
video revenues.
As of June 30, 2008, TWC had approximately 8.1 million residential high-speed data
subscribers. TWC expects continued strong growth in residential high-speed data subscribers and
revenues during 2008; 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 287,000 commercial high-speed data
subscribers as of June 30, 2008.
Approximately 3.4 million residential subscribers received Digital Phone service, TWC’s
IP-based telephony voice service, as of June 30, 2008. TWC expects strong increases in Digital
Phone subscribers and revenues for the foreseeable future. TWC also rolled out Business Class
Phone, a commercial Digital Phone service, to small- and medium-sized businesses during 2007 in the
majority of its systems and has nearly completed the roll-out in the remainder of its systems
during the first half of 2008. As of June 30, 2008, TWC had 16,000 commercial Digital Phone
subscribers.
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,
high-speed data and/or voice services offered by TWC. These services are also offered in bundles
similar to TWC’s and, in certain cases, such offerings include wireless service. 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. TWC plans to
continue to enhance its services with innovative offerings, which TWC believes will distinguish its
services from those of its competitors.
Time Warner owns approximately 84% of the common stock of TWC (representing a 90.6% voting
interest), and also owns an indirect 12.43% non-voting equity interest in TW NY Cable Holding Inc.
(“TW NY”), a subsidiary of TWC. On May 20, 2008, TWC and its subsidiaries Time Warner Entertainment
Company, L.P. (“TWE”) and TW NY entered into a Separation Agreement (the “Separation Agreement”)
with Time Warner and its subsidiaries Warner Communications Inc. (“WCI”), Historic TW Inc.
(“Historic TW”) and American Television and Communications Corporation (“ATC”), the terms of which
will govern TWC’s legal and structural separation from Time Warner. Refer to “Recent Developments”
for further details.
4
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Filmed Entertainment. Time Warner’s Filmed Entertainment segment comprises Warner Bros.
Entertainment Group (“Warner Bros.”), one of the world’s leading studios, and New Line Cinema
Corporation (“New Line”). For the six months ended June 30, 2008, the Filmed Entertainment segment
generated revenues of $5.404 billion (22% of the Company’s overall revenues), $476 million in
Operating Income before Depreciation and Amortization and $277 million in Operating Income.
The
Filmed Entertainment segment has diversified sources of revenues within its film and
television businesses, including an extensive film library and a global distribution
infrastructure, which has helped it to deliver consistent long-term performance. As announced in
the first quarter of 2008, in an effort to increase operational efficiencies and maximize
performance within the Filmed Entertainment segment, the Company has reorganized
the New Line business to be operated as a unit of Warner
Bros. while maintaining separate development, production and other operations. During the first six
months of 2008, the Company incurred restructuring charges related to planned involuntary employee
terminations in connection with the reorganization. The Company expects to incur
additional restructuring charges related to the reorganization during the
remainder of 2008.
Warner Bros. continues to be an industry leader in the television business. For the 2007-2008
broadcast season, Warner Bros. produced more than 20 primetime series, with at least one series
airing on each of the five broadcast networks (including Two and a Half Men, Without a Trace, Cold
Case, ER and Smallville), as well as original series for several cable networks (including The
Closer and Nip/Tuck).
In February 2008, the Writers Guild of America (East and West) (the “WGA”) reached an
agreement with the film and television studios, ending an industry-wide work stoppage that began on
November 5, 2007. The strike caused cancellations and delays in the production of Warner Bros.’
television programs and feature films and hampered the development of new television series.
Although the Company has experienced a short-term reduction in operating results attributable to
these cancellations and delays, it does not anticipate that the strike will have a significant
long-term impact.
The sale of DVDs has been one of the largest drivers of the segment’s profit over the last
several years, and its 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 leisure time. In the first quarter of 2008, the home
video industry settled on the Blu-ray format as the single high-definition technology. The shift to
a single format may lead to increased consumer purchases of high-definition players and DVDs.
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”). For the six months ended June 30, 2008, the Networks
segment generated revenues of $5.485 billion (22% of the Company’s overall revenues), $1.800
billion in Operating Income before Depreciation and Amortization and $1.623 billion in Operating
Income.
The Turner networks — including such recognized brands as TNT, TBS, CNN, Cartoon Network,
truTV and Headline News — are among the leaders in advertising-supported cable TV networks. For six
consecutive years, more primetime households have watched advertising-supported cable TV networks
than the national broadcast networks. The Turner networks generate revenues principally from the
sale of advertising and from receipt of monthly subscriber fees paid by cable system operators,
satellite distribution services and other distributors. Key contributors to Turner’s success are
its continued investments in high-quality programming focused on sports, original and syndicated
series, news, network movie premieres and animation leading to strong ratings and Advertising and
Subscription revenue growth, as well as strong brands and operating efficiency.
5
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
HBO operates the HBO and Cinemax multichannel pay television programming services, with the
HBO service ranking as the nation’s most widely distributed premium pay television service. HBO
generates revenues principally from monthly subscriber fees from cable system operators, satellite
distribution services and other distributors. An additional source of revenues is the sale of its
original programming, including The Sopranos, Sex and the City, Rome and Entourage.
During the first half of 2008, the results of the Networks segment benefited from the
segment’s recent international expansion efforts, including Turner’s fourth-quarter 2007
acquisition of seven pay networks operating principally in Latin America and HBO’s acquisitions of
additional interests in HBO Asia and HBO South Asia during the fourth quarter of 2007 and the first
quarter of 2008. The Company anticipates that international expansion will continue to be an area
of focus at the Networks segment for the foreseeable future.
Publishing. Time Warner’s Publishing segment consists principally of magazine publishing and
related websites as well as a number of direct-marketing and direct-selling businesses. The segment
generated revenues of $2.221 billion (10% of the Company’s overall revenues), $414 million in
Operating Income before Depreciation and Amortization and $311 million in Operating Income for the
six months ended June 30, 2008.
As of June 30, 2008, Time Inc. published over 120 magazines worldwide, including People,
Sports Illustrated, InStyle, Southern Living, Real Simple, Time, Cooking Light, Entertainment
Weekly and What’s on TV. Time Inc. generates revenues primarily from advertising (including
advertising on digital properties), magazine subscriptions and newsstand sales. The Company owns
IPC Media (“IPC”), one of the largest consumer magazine companies in the U.K., and the magazine
subscription marketer, Synapse Group, Inc. The Company’s Publishing segment has experienced a
continued decline in print advertising sales due to the uncertain economy and the ongoing shift of
advertising expenditures to digital media, which is expected to continue. Time Inc. continues to
invest in developing digital content, including the launches of Health.com and the MyHomeIdeas.com
network and the expansion of Sports Illustrated’s, People’s and InStyle’s digital properties as
well as the expansion of digital properties owned by IPC and the acquisition of various websites,
to advance the Publishing segment’s digital initiatives. For both the three and six months ended
June 30, 2008, online Advertising revenues were 9% of Time Inc.’s total Advertising revenues,
compared to 6% for both the three and six months ended June 30, 2007. 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.
Recent Developments
TWC Separation from Time Warner
On May 20, 2008, the Company and its subsidiaries WCI, Historic TW and ATC entered into the
Separation Agreement with TWC and its subsidiaries TWE and TW NY. Pursuant to the Separation
Agreement, (i) Time Warner will complete certain internal restructuring transactions, (ii) Historic
TW, a wholly-owned subsidiary of Time Warner, will transfer its 12.43% interest in TW NY to TWC in
exchange for 80 million newly issued shares of TWC Class A Common Stock (the “TW NY Exchange”),
(iii) all TWC Class A Common Stock and TWC Class B Common Stock then held by Historic TW will be
distributed to Time Warner, (iv) TWC will declare and pay a special cash dividend (the “Special
Dividend”) of $10.855 billion ($10.27 per share of TWC Common Stock) to be distributed pro rata to
all holders of TWC Class A Common Stock and TWC Class B Common Stock, resulting in the receipt by
Time Warner of approximately $9.25 billion from the dividend immediately prior to the Distribution
(as defined below), (v) TWC will file with the Secretary of State of the State of Delaware an
amended and restated certificate of incorporation, pursuant to which, among other things, each
outstanding share of TWC Class A Common Stock and TWC Class B Common Stock will automatically be
converted into one share of common stock, par value $0.01 per share (the “TWC Common Stock”), and
(vi) Time Warner will distribute all the issued and outstanding shares of TWC Common Stock then
held by Time Warner to its stockholders as (a) a pro rata dividend in a spin-off, (b) an exchange
offer in a split-off or (c) a combination thereof (the “Distribution”) ((i) to (vi) collectively,
the “TWC Separation Transactions”). Time Warner has not yet made a decision as to the form of the
Distribution.
Upon consummation of the TWC Separation Transactions, Time Warner’s stockholders and/or former
stockholders will hold approximately 85.2% of the TWC Common Stock, and TWC’s stockholders other
than Time Warner will hold approximately 14.8% of the TWC Common Stock issued and outstanding.
6
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The Separation Agreement contains customary covenants, and consummation of the TWC Separation
Transactions is subject to customary closing conditions, including customary regulatory reviews and
local franchise approvals, the receipt of a favorable ruling from the Internal Revenue Service that
the TWC Separation Transactions will generally qualify as tax-free for Time Warner and Time
Warner’s stockholders, the receipt of certain tax opinions and the entry into the 2008 Cable Bridge
Facility and the Supplemental Facility (each as defined below under “2008 Cable Bond Offering and
Additional Financing Commitments”). Time Warner and TWC expect the TWC Separation Transactions to
be consummated by the end of 2008 or in early 2009. See Item 1A, “Risk Factors,” in Part II of
this report for a discussion of risk factors relating to the separation of TWC from the Company.
2008 Cable Bond Offering and Additional Financing Commitments
On June 19, 2008, TWC issued $5.0 billion in aggregate principal amount of senior unsecured
notes and debentures in a public offering registered under the Securities Act of 1933, as amended
(the “2008 Cable Bond Offering”). TWC expects to use the net proceeds of $4.963 billion from this
issuance to finance, in part, the Special Dividend. If the TWC Separation Transactions are not
consummated and the Special Dividend is not paid, TWC will use the net proceeds from the issuance
of the debt securities for general corporate purposes, including repayment of indebtedness.
Additionally, to finance, in part, the Special Dividend, on June 30, 2008, TWC entered into a
credit agreement with certain financial institutions for a senior unsecured term loan facility in
an aggregate principal amount of $9.0 billion with an initial maturity date that is 364 days after
the borrowing date (the “2008 Cable Bridge Facility”). As a result of the 2008 Cable Bond Offering,
immediately after the credit agreement was executed, the amount of the commitments under the 2008
Cable Bridge Facility was reduced to $4.040 billion. TWC may elect to extend the maturity date of
the loans outstanding under the 2008 Cable Bridge Facility for an additional year. TWC may not
borrow any amounts under the 2008 Cable Bridge Facility unless and until the Special Dividend is
declared in connection with the TWC Separation Transactions. In May 2008, Time Warner (as lender)
committed to lend TWC (as borrower) up to an aggregate principal amount of $3.5 billion under a
two-year senior unsecured supplemental term loan facility (the “Supplemental Facility”). As a
result of the 2008 Cable Bond Offering, Time Warner’s original commitment under the Supplemental
Facility was reduced to $2.520 billion. TWC may borrow under the Supplemental Facility at the final
maturity of the 2008 Cable Bridge Facility to repay amounts then outstanding under the 2008 Cable
Bridge Facility. See “Financial Condition and Liquidity” and Note 5 to the accompanying
consolidated financial statements for further details regarding the 2008 Cable Bond Offering, the
2008 Cable Bridge Facility and the Supplemental Facility.
Sprint/Clearwire Joint Venture
In May 2008, TWC, Intel Corporation, Google, Comcast Corporation (together with its
subsidiaries, “Comcast”) and Bright House Networks LLC entered into agreements to collectively
invest $3.2 billion in a wireless communications joint venture (the “Sprint/Clearwire Joint
Venture”), which is expected to be formed by Sprint Nextel Corporation (“Sprint”) and Clearwire
Corporation (“Clearwire”). TWC’s share of such investment is expected to be approximately $550
million, which it expects to fund with cash on hand at TWC, borrowings under TWC’s $6.0 billion
senior unsecured five-year revolving credit facility (the “Cable Revolving Facility”), TWC’s
commercial paper program or a combination thereof. Once formed, the Sprint/Clearwire Joint Venture
will be focused on deploying the first nationwide fourth generation wireless network to provide
mobile broadband services to wholesale and retail customers. In connection with its investment in
the Sprint/Clearwire Joint Venture, TWC has entered into a wholesale agreement with Sprint that
allows TWC to offer wireless services utilizing Sprint’s 2G/3G network. Upon closing, TWC also
expects to enter into a wholesale agreement with the Sprint/Clearwire Joint Venture that would
allow TWC to offer wireless services utilizing the Sprint/Clearwire Joint Venture’s broadband
wireless network. The closing of these transactions, which is expected to occur by the end of the
first half of 2009, is subject to customary regulatory review and approvals. There can be no
assurance that the formation of the Sprint/Clearwire Joint Venture will be completed, or, if
completed, that the Sprint/Clearwire Joint Venture would successfully deploy a nationwide mobile
broadband network. If completed, TWC’s investment in the Sprint/Clearwire Joint Venture would be
accounted for under the equity method of accounting and the Company expects that the
Sprint/Clearwire Joint Venture would incur losses in its early periods of operation.
7
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Bebo Acquisition
On May 14, 2008, the Company, through its AOL segment, completed the acquisition of Bebo, a
leading global social media network, for $857 million, net of cash acquired, $8 million of which
will be paid by the Company in the first quarter of 2009. The Bebo acquisition did not
significantly impact the Company’s consolidated financial results for the six months ended June 30,
2008 (Note 2).
Buy.at Acquisition
On February 5, 2008, the Company, through its AOL segment, completed the acquisition of
buy.at, which provides performance-based e-commerce marketing services to advertisers, for $125
million in cash, net of cash acquired. The buy.at acquisition did not significantly impact the
Company’s consolidated financial results for the six months ended June 30, 2008 (Note 2).
RESULTS OF OPERATIONS
Recent Accounting Standards
See
Note 1 to the accompanying consolidated financial statements for a discussion of the
accounting standards adopted during the six months ended June 30, 2008 and recent accounting standards not yet adopted.
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 |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
6/30/08 |
|
6/30/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to securities
litigation and government
investigations |
|
$ |
(4 |
) |
|
$ |
(4 |
) |
|
$ |
(8 |
) |
|
$ |
(167 |
) |
Asset impairments |
|
|
(63 |
) |
|
|
(34 |
) |
|
|
(63 |
) |
|
|
(35 |
) |
Gain (loss) on disposal of assets, net |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Operating Income (Loss) |
|
|
(67 |
) |
|
|
(39 |
) |
|
|
(71 |
) |
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains (losses), net |
|
|
12 |
|
|
|
111 |
|
|
|
(15 |
) |
|
|
274 |
|
Costs related to the separation of TWC |
|
|
(51 |
) |
|
|
— |
|
|
|
(54 |
) |
|
|
— |
|
Minority interest impact |
|
|
16 |
|
|
|
— |
|
|
|
16 |
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax impact |
|
|
(90 |
) |
|
|
72 |
|
|
|
(124 |
) |
|
|
684 |
|
Income tax impact |
|
|
35 |
|
|
|
(31 |
) |
|
|
37 |
|
|
|
(321 |
) |
Other tax items affecting comparability |
|
|
— |
|
|
|
77 |
|
|
|
1 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax impact |
|
$ |
(55 |
) |
|
$ |
118 |
|
|
$ |
(86 |
) |
|
$ |
443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the items affecting comparability above, the Company incurred merger-related,
restructuring and shutdown costs of $6 million and $148 million during the three and six months
ended June 30, 2008, respectively, and $33 million and $101 million during the three and six months
ended June 30, 2007, 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 $4 million and $8 million for the three and
six months ended June 30, 2008, respectively, and $5 million and $176 million for the three and six
months ended June 30, 2007, respectively. In addition, the Company recognized related insurance
recoveries of $1 million and $9 million for the three and six months ended June 30, 2007,
respectively.
8
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Asset Impairments
During the three and six months ended June 30, 2008, the Company recorded a $45 million
noncash impairment of certain non-core cable systems held for sale at the Cable segment and an $18
million noncash impairment of GameTap at the Networks segment as a result of Turner’s decision to
sell its on-line video game business. During the three and six months ended June 30, 2007, the
Company recorded a $34 million noncash impairment of the Court TV tradename at the Networks segment
as a result of rebranding the network’s name to truTV, effective January 1, 2008. During the six
months ended June 30, 2007, the Company recorded a $1 million noncash asset impairment at the AOL
segment related to asset write-offs in connection with facility closures primarily as a result of
AOL’s revised strategy.
Gains on Disposal of Assets, Net
For the three and six months ended June 30, 2007, the Company recorded a net $1 million
reduction to the gains on the sales of AOL’s German and U.K. access businesses, and for the six
months ended June 30, 2007 the Company recorded a gain of approximately $670 million on the sale of
AOL’s German access business.
Investment Gains (Losses), Net
For the three months ended June 30, 2008, the Company recognized $12 million of miscellaneous
investment gains. For the six months ended June 30, 2008, the Company recognized a $26 million
impairment of the Company’s investment in SCi Entertainment Group plc and $10 million of losses
resulting from market fluctuations in equity derivative instruments, offset by other miscellaneous
investment gains.
For the three and six months ended June 30, 2007, the Company recognized net gains of $111
million and $274 million, respectively, primarily related to the sale of investments, including a
$100 million gain on the Company’s sale in April 2007 of its 50% interest in Bookspan, and for the
six months ended June 30, 2007, a $146 million gain at the Cable segment on TWC’s deemed sale of
its 50% interest in the pool of assets consisting of the Houston cable systems in connection with
the distribution of the assets of Texas and Kansas City Cable Partners, L.P. (the “TKCCP Gain”).
For the three and six months ended June 30, 2007, investment gains, net also included a $2 million
loss and a $4 million gain, respectively, which resulted from market fluctuations in equity
derivative instruments.
Costs related to the Separation of TWC
During the three and six months ended June 30, 2008, the Company incurred costs related to the
separation of TWC of $51 million and $54 million, respectively, including direct transaction costs
(e.g., legal and professional fees) of $14 million and $17 million, respectively (which have been
reflected in other income, net on the Company’s consolidated statement of operations), and
financing costs of $37 million for both periods. For the three and six months ended June 30, 2008,
financing costs included $6 million in net interest expense (after considering the interest income
received on the proceeds of the 2008 Cable Bond Offering) on the $5.0 billion of debt securities
issued in the 2008 Cable Bond Offering and $31 million of debt issuance costs related to the
portion of the upfront loan fees for the 2008 Cable Bridge Facility that were expensed during the
second quarter of 2008 due to the reduction of the commitments under such facility as a result of
the 2008 Cable Bond Offering. The Company expects to incur additional costs relating to the
separation of TWC during the remainder of 2008 associated with additional financing and direct
transaction costs.
Minority Interest Impact
For the three and six months ended June 30, 2008, expense of $16 million was attributed to the
minority owners’ shares of the impairment of certain non-core cable systems held for sale and the
costs related to the separation of TWC.
For the six months ended June 30, 2007, income of $57 million was attributed to minority
interests, which primarily reflects the respective minority owners’ shares of the gain on the sale
of AOL’s German access business and the TKCCP Gain.
9
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
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 six months ended June 30, 2007, these items included $77 million and $80 million, respectively,
of tax benefits related primarily to the realization of tax attribute carryforwards and changes in
certain state tax laws.
Three and Six Months Ended June 30, 2008 Compared to Three and Six Months Ended June 30, 2007
Consolidated Results
The following discussion provides an analysis of the Company’s results of operations and
should be read in conjunction with the accompanying consolidated statement of operations.
Revenues. The components of revenues are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
6,462 |
|
|
$ |
6,229 |
|
|
|
4 |
% |
|
$ |
12,822 |
|
|
$ |
12,468 |
|
|
|
3 |
% |
Advertising |
|
|
2,311 |
|
|
|
2,268 |
|
|
|
2 |
% |
|
|
4,335 |
|
|
|
4,200 |
|
|
|
3 |
% |
Content |
|
|
2,563 |
|
|
|
2,243 |
|
|
|
14 |
% |
|
|
5,371 |
|
|
|
5,022 |
|
|
|
7 |
% |
Other |
|
|
219 |
|
|
|
240 |
|
|
|
(9 |
%) |
|
|
444 |
|
|
|
474 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
11,555 |
|
|
$ |
10,980 |
|
|
|
5 |
% |
|
$ |
22,972 |
|
|
$ |
22,164 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in Subscription revenues for the three and six months ended June 30, 2008 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 primarily driven by the continued growth of
digital video services and video price increases, partially offset by a decrease in pay-per-view
event revenues, as well as growth in high-speed data and Digital Phone subscribers. 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 for Turner’s networks, as well as the
impact of international acquisitions. The decline in Subscription revenues at the AOL segment
resulted primarily from a decrease in the number of domestic AOL brand Internet access subscribers
and for the six months ended June 30, 2008, also reflected the sale of AOL’s German access business
in the first quarter of 2007, which resulted in a decrease of approximately $90 million for six
months ended June 30, 2008.
The increase in Advertising revenues for the three and six months ended June 30, 2008 was
primarily due to growth at the Networks segment, which was driven primarily by Turner’s domestic
entertainment and news networks.
The increase in Content revenues for the three and six months ended June 30, 2008 was
principally related to growth at the Filmed Entertainment segment, primarily driven by an increase
in theatrical product revenues.
Each of the revenue categories is discussed in greater detail by segment in “Business Segment
Results.”
Costs of Revenues. For the three months ended June 30, 2008 and 2007, costs of revenues
totaled $6.870 billion and $6.417 billion, respectively, and, as a percentage of revenues, were 59%
and 58%, respectively. For the six months ended June 30, 2008 and 2007, costs of revenues totaled
$13.533 billion and $12.913 billion, respectively, and, as a percentage of revenues, were 59% and
58%, respectively. The segment variations are discussed in detail in “Business Segment Results.”
Selling, General and Administrative Expenses. For the three months ended June 30, 2008,
selling, general and administrative expenses increased 3% to $2.472 billion in 2008 from $2.397
billion in 2007. For the six months ended June 30, 2008, selling, general and administrative
expenses increased 3% to $4.950 billion in 2008 from $4.806 billion in 2007. The increase in
selling, general and administrative expenses for the three and six months ended June 30, 2008
primarily related to increases at the Cable, Filmed Entertainment and Networks segments, partially
offset by declines at the AOL and Publishing segments. The segment variations are discussed in
detail in “Business Segment Results.”
10
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Included in costs of revenues and selling, general and administrative expenses is depreciation
expense, which increased to $969 million and $1.917 billion for the three and six months ended June
30, 2008, respectively, from $928 million and $1.829 billion for the three and six months ended
June 30, 2007, respectively. The increase in depreciation expense for the three and six months
ended June 30, 2008 primarily related to an increase at the Cable segment, partially offset by a
decline at the AOL segment. The increase at the Cable segment was primarily associated with
purchases of customer premise equipment, scalable infrastructure and line extensions (each of which
is primarily driven by customer demand) occurring during or subsequent to the comparable period in
2007. The decline at the AOL segment was primarily due to a reduction in network assets due to
subscriber declines.
Amortization Expense. Amortization expense increased to $194 million and $377 million for the
three and six months ended June 30, 2008, respectively, from $158 million and $335 million for the
three and six months ended June 30, 2007, respectively. The increase in amortization expense for
the three months ended June 30, 2008 primarily related to an increase at the AOL segment due to the
amortization of finite-lived intangible assets related to AOL’s recent business acquisitions. For
the six months ended June 30, 2008, this increase was partially offset by a decline at the Cable
segment, primarily due to the absence of amortization expense associated with customer
relationships recorded in connection with the 2003 restructuring of TWE, which were fully amortized
as of the end of the first quarter of 2007.
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
$4 million and $8 million for the three and six months ended June 30, 2008, respectively, and $5
million and $176 million for the three and six months ended June 30, 2007, respectively. In
addition, the Company recognized related insurance recoveries of $1 million and $9 million for the
three and six months ended June 30, 2007, respectively.
Merger-related, Restructuring and Shutdown Costs. The Company incurred restructuring costs
for the three and six months ended June 30, 2008 of $6 million and $148 million, respectively,
primarily related to various employee terminations and other exit activities, including $4 million
and $13 million, respectively, at the AOL segment for the three and six months ended June 30, 2008,
$5 million and $15 million, respectively, at the Publishing segment for the three and six months
ended June 30, 2008, and $7 million at the Corporate segment for the six months ended June 30,
2008. In addition, the results for the six months included net restructuring charges of $113
million, including a $3 million reversal for the three months ended June 30, 2008, at the Filmed
Entertainment segment.
The Company incurred restructuring costs for the three and six months ended June 30, 2007 of
$30 million and $94 million, respectively, primarily related to various employee terminations and
other exit activities, including $4 million and $27 million, respectively, at the AOL segment for
the three and six months ended June 30, 2007, $3 million and $9 million, respectively, at the Cable
segment for the three and six months ended June 30, 2007, $16 million at the Networks segment for
the three and six months ended June 30, 2007 and $7 million and $42 million, respectively, at the
Publishing segment for the three and six months ended June 30, 2007. In addition, for the three and
six months ended June 30, 2007, the Cable segment also expensed $3 million and $7 million,
respectively, of non-capitalizable merger-related and restructuring costs associated with the 2006
transactions with Adelphia Communications Corporation and Comcast (the “Adelphia/Comcast
Transactions”) (Note 9).
Operating Income. Operating Income increased to $1.946 billion for the three months ended
June 30, 2008 from $1.936 billion for the three months ended June 30, 2007. Excluding the items
previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling
$67 million and $39 million of expense, net for the three months ended June 30, 2008 and 2007,
respectively, Operating Income increased $38 million, primarily reflecting increases at the
Networks, Cable and Filmed Entertainment segments, partially offset by declines at the AOL and
Publishing segments.
Operating Income decreased to $3.893 billion for the six months ended June 30, 2008 from
$4.476 billion for the six months ended June 30, 2007. Excluding the items previously noted under
“Significant Transactions and Other Items Affecting Comparability” totaling $71 million of expense,
net and $467 million of income, net for the six months ended June 30, 2008 and 2007, respectively,
Operating Income decreased $45 million, primarily reflecting declines at the AOL and Filmed
Entertainment segments, partially offset by increases at the Networks, Cable and Publishing
segments.
The segment variations are discussed under “Business Segment Results.”
11
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Interest Expense, Net. Interest expense, net, decreased to $550 million and $1.096 billion
for the three and six months ended June 30, 2008, respectively, from $574 million and $1.125
billion for the three and six months ended June 30, 2007, respectively. The decrease in interest
expense, net is primarily due to lower average interest rates on borrowings, partially offset by a
higher average outstanding balance of borrowings and amortization of $31 million of debt issuance
costs related to a portion of the upfront loan fees for the 2008 Cable Bridge Facility that were
expensed at the Cable segment due to the reduction of commitments under such facility as a result
of the 2008 Cable Bond Offering.
Other Income (Loss), Net. Other income (loss), net, detail is shown in the table below
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
6/30/08 |
|
6/30/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains (losses), net |
|
$ |
12 |
|
|
$ |
111 |
|
|
$ |
(15 |
) |
|
$ |
274 |
|
Income (loss) from equity method investees |
|
|
— |
|
|
|
9 |
|
|
|
(8 |
) |
|
|
(3 |
) |
Other |
|
|
(17 |
) |
|
|
(12 |
) |
|
|
(30 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss), net |
|
$ |
(5 |
) |
|
$ |
108 |
|
|
$ |
(53 |
) |
|
$ |
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in investment gains (losses), net are discussed under “Significant Transactions
and Other Items Affecting Comparability.” Excluding the impact of investment gains, other income,
net decreased primarily due to higher foreign exchange losses for the three months ended June 30,
2008.
Minority Interest Expense, Net. Time Warner had $87 million and $170 million of minority
interest expense, net for the three and six months ended June 30, 2008, respectively, compared to
$91 million and $221 million for the three and six months ended June 30, 2007, respectively. The
decrease for the three and six months ended June 30, 2008 related primarily to the minority owners’
shares of the impairment of certain non-core cable systems held for sale and the costs related to
the separation of TWC, partially offset by larger profits recorded by the Cable segment during
2008. In addition, the decrease for the six months ended June 30, 2008 reflects the absence in the
first quarter of 2008 of the respective minority owners’ shares of the gain on the sale of AOL’s
German access business and the TKCCP Gain, both of which occurred during the first quarter of 2007.
Income Tax Provision. Income tax expense from continuing operations was $509 million for the
three months ended June 30, 2008 compared to $434 million for the three months ended June 30, 2007
and was $1.008 billion for the six months ended June 30, 2008 compared to $1.231 billion for the
six months ended June 30, 2007. The Company’s effective tax rate for continuing operations was 39%
for both the three and six months ended June 30, 2008 compared to 31% and 37% for the three and six
months ended June 30, 2007, respectively. The increases are primarily attributable to tax attribute
carryforwards recognized during the three and six months ended June 30, 2007, partially offset by
nondeductible goodwill associated with the sale of AOL’s German access business during the six
months ended June 30, 2007.
Income from Continuing Operations. Income from continuing operations was $795 million for the
three months ended June 30, 2008 compared to $945 million for the three months ended June 30, 2007.
Basic and diluted net income per share from continuing operations were both $0.22 in 2008 compared
to $0.25 for both in 2007. Basic and diluted income per common share from continuing operations for
the three months ended June 30, 2008 reflect the favorable impact of repurchases of shares under
the Company’s stock repurchase programs. Excluding the items previously noted under “Significant
Transactions and Other Items Affecting Comparability” totaling $55 million of expense, net and $118
million of income, net for the three months ended June 30, 2008 and 2007, respectively, income from
continuing operations increased by $23 million, primarily reflecting higher Operating Income, as
noted above, partially offset by lower Other income (loss), net, as noted above.
Income from continuing operations was $1.566 billion for the six months ended June 30, 2008
compared to $2.132 billion for the six months ended June 30, 2007. Basic and diluted net income per
share from continuing operations were $0.44 and $0.43, respectively, in 2008 compared to $0.56 and
$0.55, respectively, in 2007. Basic and diluted income per common share from continuing operations
for the six months ended June 30, 2008 reflect the favorable impact of repurchases of shares under
the Company’s stock repurchase programs. Excluding the items previously noted under “Significant
Transactions and Other Items Affecting Comparability” totaling $86 million of expense, net and $443
million of income, net for the six months ended June 30, 2008 and 2007, respectively, income from
continuing operations
12
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
decreased by $37 million, primarily reflecting lower Operating Income, as noted above, and
lower Other income (loss), net, as noted above.
Discontinued Operations, Net of Tax. The financial results for the three and six months ended
June 30, 2007 included the impact of treating certain businesses sold, which included Tegic
Communications, Inc., Wildseed LLC, the Parenting Group, most of the Time4 Media magazine titles,
The Progressive Farmer magazine, Leisure Arts, Inc. and the Atlanta Braves baseball franchise, as
discontinued operations. For additional information, see Note 2 to the accompanying consolidated
financial statements.
Net Income and Net Income Per Common Share. Net income was $792 million for the three months
ended June 30, 2008 compared to $1.067 billion for the three months ended June 30, 2007. Basic and
diluted net income per common share were both $0.22 in 2008 compared to $0.28 for both in 2007. Net
income was $1.563 billion for the six months ended June 30, 2008 compared to $2.270 billion for the
six months ended June 30, 2007. Basic and diluted net income per common share were $0.44 and $0.43,
respectively, in 2008 compared to $0.60 and $0.59, respectively, in 2007. Net income per common
share for the three and six months ended June 30, 2008 reflect the favorable impact of repurchases
of shares under the Company’s stock repurchase programs.
Business Segment Results
AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of
the AOL segment for the three and six months ended June 30, 2008 and 2007 are as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
491 |
|
|
$ |
691 |
|
|
|
(29 |
%) |
|
$ |
1,030 |
|
|
$ |
1,564 |
|
|
|
(34 |
%) |
Advertising |
|
|
530 |
|
|
|
522 |
|
|
|
2 |
% |
|
|
1,082 |
|
|
|
1,071 |
|
|
|
1 |
% |
Other |
|
|
36 |
|
|
|
40 |
|
|
|
(10 |
%) |
|
|
73 |
|
|
|
76 |
|
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,057 |
|
|
|
1,253 |
|
|
|
(16 |
%) |
|
|
2,185 |
|
|
|
2,711 |
|
|
|
(19 |
%) |
Costs of revenues(a) |
|
|
(530 |
) |
|
|
(539 |
) |
|
|
(2 |
%) |
|
|
(1,074 |
) |
|
|
(1,160 |
) |
|
|
(7 |
%) |
Selling, general and administrative(a) |
|
|
(173 |
) |
|
|
(225 |
) |
|
|
(23 |
%) |
|
|
(343 |
) |
|
|
(497 |
) |
|
|
(31 |
%) |
Gain (loss) on disposal of consolidated
businesses |
|
|
— |
|
|
|
(1 |
) |
|
|
(100 |
%) |
|
|
— |
|
|
|
669 |
|
|
|
(100 |
%) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
(100 |
%) |
Restructuring costs |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
— |
|
|
|
(13 |
) |
|
|
(27 |
) |
|
|
(52 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
350 |
|
|
|
484 |
|
|
|
(28 |
%) |
|
|
755 |
|
|
|
1,695 |
|
|
|
(55 |
%) |
Depreciation |
|
|
(79 |
) |
|
|
(104 |
) |
|
|
(24 |
%) |
|
|
(162 |
) |
|
|
(209 |
) |
|
|
(22 |
%) |
Amortization |
|
|
(41 |
) |
|
|
(20 |
) |
|
|
105 |
% |
|
|
(79 |
) |
|
|
(42 |
) |
|
|
88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
230 |
|
|
$ |
360 |
|
|
|
(36 |
%) |
|
$ |
514 |
|
|
$ |
1,444 |
|
|
|
(64 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The decline in Subscription revenues for the three and six months ended June 30, 2008 compared
to the three and six months ended June 30, 2007 was primarily due to a decrease in the number of
domestic AOL brand Internet access subscribers. In addition, the decline for the six months ended
June 30, 2008 was also due to the sale of AOL’s German access business in the first quarter of
2007, which resulted in a decrease of approximately $90 million for the six months ended June 30,
2008.
The number of domestic AOL brand Internet access subscribers was 8.1 million, 8.7 million and
10.9 million as of June 30, 2008, March 31, 2008 and June 30, 2007, respectively. The average
revenue per domestic AOL brand subscriber (“ARPU”) was $17.99 and $18.59 for the three months ended
June 30, 2008 and 2007, respectively, and $18.14 and $18.78 for the six months ended June 30, 2008
and 2007, 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 Internet access service
include subscribers
13
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
participating in introductory free-trial periods and subscribers that are not paying any, or
paying reduced, monthly fees through member service and retention programs. Total domestic AOL
brand Internet access subscribers include free-trial and retention members of 1% as of June 30,
2008, 2% as of March 31, 2008 and 3% as of June 30, 2007. 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 Internet access subscriber numbers presented above.
The continued decline in domestic subscribers is 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 competition from broadband access providers. The decrease in ARPU for the
three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007
was due primarily to a shift in the subscriber mix to lower-priced subscriber price plans and a
decrease in premium services revenues, partially offset by an increase in the percentage of
revenue-generating customers.
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 the Third Party Network. Total
Advertising revenues improved slightly for the three and six months ended June 30, 2008 compared to
the three and six months ended June 30, 2007 due to increased Advertising revenues generated on the
Third Party Network, partially offset by a decrease in Advertising revenues generated on the AOL
Network, as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL Network: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Display |
|
$ |
191 |
|
|
$ |
221 |
|
|
|
(14 |
%) |
|
$ |
382 |
|
|
$ |
453 |
|
|
|
(16 |
%) |
Paid-search |
|
|
172 |
|
|
|
156 |
|
|
|
10 |
% |
|
|
345 |
|
|
|
323 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AOL Network |
|
|
363 |
|
|
|
377 |
|
|
|
(4 |
%) |
|
|
727 |
|
|
|
776 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Party Network |
|
|
167 |
|
|
|
145 |
|
|
|
15 |
% |
|
|
355 |
|
|
|
295 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Advertising revenues |
|
$ |
530 |
|
|
$ |
522 |
|
|
|
2 |
% |
|
$ |
1,082 |
|
|
$ |
1,071 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in display Advertising revenues generated on the AOL Network for the three and
six months ended June 30, 2008 compared to the three and six months ended June 30, 2007 was
primarily due to the challenges of integrating recently acquired businesses (including certain
sales execution issues), shifts in the mix of inventory sold to lower-priced inventory, lower
revenues from certain advertiser categories and pricing declines, as well as the discontinuation of
certain advertising programs, partially offset by revenues attributable to recent business
acquisitions. In addition, for the six months ended June 30, 2007, display Advertising revenues
generated on the AOL Network included a $19 million benefit recognized in the first quarter of 2007
related to a change in an accounting estimate resulting from more timely system data. For the three
and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007, the
increase in paid-search Advertising revenues on the AOL Network, which are generated primarily
through AOL’s strategic relationship with Google, was attributable primarily to broader
distribution through the AOL Network and higher revenues per search query on certain AOL Network
properties.
The increase in Advertising revenues on the Third Party Network for the three and six months
ended June 30, 2008 compared to the three and six months ended June 30, 2007 was primarily due to
revenues of $40 million and $81 million attributable to recent business acquisitions for the three
and six months ended June 30, 2008, respectively, and continued advertising growth of $25 million
and $61 million for the three and six months ended June 30, 2008, respectively, partially offset by
a decrease of $43 million and $82 million for the three and six months ended June 30, 2008,
respectively, due to the change in the relationship with a major customer of Platform-A Inc. Since
January 1, 2008, this customer has been under no obligation to continue to do business with
Platform-A Inc., and revenues associated with this relationship were $5 million and $22 million for
the three and six months ended June 30, 2008, respectively, compared to $48 million and $104
million for the three and six months ended June 30, 2007, respectively. The Company anticipates
that revenues from this customer will continue to decline for the remainder of the year compared to
the similar period in 2007.
Total Advertising revenues for the three months ended June 30, 2008 decreased $22 million from
the three months
14
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
ended March 31, 2008, primarily due to a decrease in sales of advertising run on the Third
Party Network as a result of the change in the relationship with a major customer of Platform-A
Inc., as well as lower revenues from certain advertiser categories and, to a lesser extent,
declines due to seasonality.
The Company expects Advertising revenues at the AOL segment to increase during the remainder
of 2008 compared to the similar period in 2007 due to expected increases on both the AOL Network,
primarily paid-search, and the Third Party Network, including the impact of the Company’s recent
business acquisitions, partially offset by expected declines associated with the end of commitments
from a major customer of Platform-A Inc., as discussed above.
For the three and six months ended June 30, 2008, costs of revenues decreased 2% and 7%,
respectively, and as a percentage of revenues were 50% and 49%, respectively, compared to 43% for
both the three and six months ended June 30, 2007. For the three and six months ended June 30,
2008, approximately $10 million and $70 million, respectively, of the decrease in costs of revenues
were attributable to the sales of AOL’s European access businesses. Excluding amounts attributable
to the sales of AOL’s European access businesses, for the three months ended June 30, 2008, costs
of revenues were essentially flat and for the six months ended June 30, 2008, costs of revenues
declined due primarily to lower network-related expenses and lower royalties and customer service
expenses, primarily associated with the closures and sales of certain customer support call
centers, partially offset by an increase in TAC. TAC consists of the costs of acquiring third-party
online advertising inventory and costs incurred in connection with distributing AOL’s free products
or services or otherwise directing traffic to the AOL Network. TAC increased 37% to $179 million
for the three months ended June 30, 2008 from $131 million for the three months ended June 30, 2007
and increased 37% to $370 million for the six months ended June 30, 2008 from $270 million for the
six months ended June 30, 2007, due primarily to a new product distribution agreement and costs
associated with growth in the Third Party Network’s Advertising revenues. The Company expects TAC
to continue to increase during the remainder of 2008 as compared to the similar period in 2007.
Selling, general and administrative expenses decreased 23% to $173 million and 31% to $343
million for the three and six months ended June 30, 2008, respectively. For the six months ended
June 30, 2008, approximately $30 million of the decrease was attributable to the sales of AOL’s
European access businesses. For the three and six months ended June 30, 2008, the remaining
decrease in selling, general and administrative expenses reflects a significant reduction in direct
marketing costs of approximately $25 million and $65 million, respectively, primarily due to
reduced subscriber acquisition marketing as part of AOL’s strategy, and other cost savings,
primarily related to involuntary employee terminations. In addition, selling, general and
administrative expenses for the three and six months ended June 30, 2008 included $9 million and
$16 million, respectively, of external costs related to the separation of AOL’s Access Services and
Global Web Services businesses.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the three and six months ended June 30, 2007 included a net $1 million reduction to
the gains on the sales of AOL’s German and U.K. access businesses, and for the six months ended
June 30, 2007, included a gain of approximately $670 million on the sale of AOL’s German access
business. In addition, the results for three and the six months ended June 30, 2008 included net
restructuring charges of $4 million and $13 million, respectively, and for the three and six months
ended June 30, 2007 included net restructuring charges of $4 million and $27 million, respectively,
primarily related to involuntary employee terminations and facility closures.
For the three and six months ended June 30, 2008, Operating Income before Depreciation and
Amortization decreased compared to the three and six months ended June 30, 2007, due to a decline
in Subscription revenues, partially offset by lower costs of revenues and selling, general and
administrative expenses. In addition, for the six months ended June 30, 2008, the decrease in
Operating Income before Depreciation and Amortization was due to the absence of the gain on the
sale of AOL’s German access business, which occurred in the first quarter of 2007. The decreases in
Operating Income for the three and six months ended June 30, 2008 compared to the three and six
months ended June 30, 2007 were due primarily to the decreases in Operating Income before
Depreciation and Amortization, as discussed above, as well as an increase in amortization expense
due to the amortization of finite-lived intangible assets related to AOL’s recent business
acquisitions, partially offset by a decrease in depreciation expense as a result of a reduction 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.
Accordingly, during the remainder of 2008, AOL
15
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
expects to continue to reduce costs of revenues, including dial-up network and customer
service expenses, and selling, general and administrative expenses.
Cable. Revenues, Operating Income before Depreciation and Amortization and Operating Income
of the Cable segment for the three and six months ended June 30, 2008 and 2007 are as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
4,065 |
|
|
$ |
3,788 |
|
|
|
7 |
% |
|
$ |
8,028 |
|
|
$ |
7,450 |
|
|
|
8 |
% |
Advertising |
|
|
233 |
|
|
|
226 |
|
|
|
3 |
% |
|
|
430 |
|
|
|
415 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
4,298 |
|
|
|
4,014 |
|
|
|
7 |
% |
|
|
8,458 |
|
|
|
7,865 |
|
|
|
8 |
% |
Costs of revenues(a) |
|
|
(2,018 |
) |
|
|
(1,872 |
) |
|
|
8 |
% |
|
|
(4,025 |
) |
|
|
(3,755 |
) |
|
|
7 |
% |
Selling, general and administrative(a) |
|
|
(710 |
) |
|
|
(692 |
) |
|
|
3 |
% |
|
|
(1,461 |
) |
|
|
(1,343 |
) |
|
|
9 |
% |
Asset impairment |
|
|
(45 |
) |
|
|
— |
|
|
NM |
|
|
(45 |
) |
|
|
— |
|
|
NM |
Merger-related and restructuring costs |
|
|
— |
|
|
|
(6 |
) |
|
|
(100 |
%) |
|
|
— |
|
|
|
(16 |
) |
|
|
(100 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
1,525 |
|
|
|
1,444 |
|
|
|
6 |
% |
|
|
2,927 |
|
|
|
2,751 |
|
|
|
6 |
% |
Depreciation |
|
|
(722 |
) |
|
|
(669 |
) |
|
|
8 |
% |
|
|
(1,423 |
) |
|
|
(1,318 |
) |
|
|
8 |
% |
Amortization |
|
|
(65 |
) |
|
|
(64 |
) |
|
|
2 |
% |
|
|
(130 |
) |
|
|
(143 |
) |
|
|
(9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
738 |
|
|
$ |
711 |
|
|
|
4 |
% |
|
$ |
1,374 |
|
|
$ |
1,290 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
Revenues, including the components of Subscription revenues, are as follows for the three and
six months ended June 30, 2008 and 2007 (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video |
|
$ |
2,636 |
|
|
$ |
2,579 |
|
|
|
2 |
% |
|
$ |
5,239 |
|
|
$ |
5,083 |
|
|
|
3 |
% |
High-speed data |
|
|
1,032 |
|
|
|
924 |
|
|
|
12 |
% |
|
|
2,026 |
|
|
|
1,818 |
|
|
|
11 |
% |
Voice(a) |
|
|
397 |
|
|
|
285 |
|
|
|
39 |
% |
|
|
763 |
|
|
|
549 |
|
|
|
39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Subscription revenues |
|
|
4,065 |
|
|
|
3,788 |
|
|
|
7 |
% |
|
|
8,028 |
|
|
|
7,450 |
|
|
|
8 |
% |
Advertising revenues |
|
|
233 |
|
|
|
226 |
|
|
|
3 |
% |
|
|
430 |
|
|
|
415 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
4,298 |
|
|
$ |
4,014 |
|
|
|
7 |
% |
|
$ |
8,458 |
|
|
$ |
7,865 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| (a) |
|
For the three and six months ended June 30, 2007, voice revenues include $11 million
and $25 million, respectively, of revenues associated with subscribers who received
traditional, circuit-switched telephone service. |
16
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Selected subscriber-related statistics as of June 30, 2008 and 2007 are as follows (thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of June 30, |
| |
|
2008 |
|
2007 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic video(a) |
|
|
13,297 |
|
|
|
13,391 |
|
|
|
(1 |
%) |
Digital video(b) |
|
|
8,483 |
|
|
|
7,732 |
|
|
|
10 |
% |
Residential high-speed data(c) |
|
|
8,125 |
|
|
|
7,188 |
|
|
|
13 |
% |
Commercial high-speed data(c) |
|
|
287 |
|
|
|
263 |
|
|
|
9 |
% |
Residential Digital Phone(d) |
|
|
3,421 |
|
|
|
2,334 |
|
|
|
47 |
% |
Commercial Digital Phone(d) |
|
|
16 |
|
|
|
1 |
|
|
NM |
Revenue generating units(e) |
|
|
33,629 |
|
|
|
30,983 |
|
|
|
9 |
% |
Customer relationships(f) |
|
|
14,737 |
|
|
|
14,677 |
|
|
|
— |
|
|
|
|
| |
| (a) |
|
Basic video subscriber numbers reflect billable subscribers who receive at least
basic video service. |
| (b) |
|
Digital video subscriber numbers reflect billable subscribers who receive any level
of video service via digital transmissions. |
| (c) |
|
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. |
| (d) |
|
Digital Phone subscriber numbers reflect billable subscribers who receive an
IP-based telephony service. Residential Digital Phone subscriber numbers as of June 30, 2007
exclude 74,000 subscribers who received traditional, circuit-switched telephone service.
During the first half of 2008, TWC completed the process of discontinuing the provision of
circuit-switched telephone service in accordance with regulatory requirements. As a result,
during 2008, Digital Phone has been the only voice service offered by TWC. |
| (e) |
|
Revenue generating units represent the total of all basic video, digital video,
high-speed data and voice (including circuit-switched telephone service, as applicable)
subscribers. |
| (f) |
|
Customer relationships represent the number of subscribers who receive at least one
level of service, encompassing video, high-speed data and voice services, without regard to
the number of services purchased. For example, a subscriber who purchases only high-speed data
service and no video service will count as one customer relationship, and a subscriber who
purchases both video and high-speed data services will also count as only one customer
relationship. |
For the three and six months ended June 30, 2008, Subscription revenues increased, primarily
driven by the continued growth of digital video services and video price increases, partially
offset by a decrease in pay-per-view event revenues, as well as growth in high-speed data and
Digital Phone subscribers. Digital video revenues, which include revenues from digital tiers,
digital pay channels, pay-per-view, video-on-demand, subscription-video-on-demand and digital video
recorder services, represented 24% of video revenues for both the three months ended June 30, 2008
and 2007, and 24% and 23% of video revenues for the six months ended June 30, 2008 and 2007,
respectively. Strong growth rates for Subscription revenues associated with high-speed data and
voice services are expected to continue during the remainder of 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
6/30/08 |
|
6/30/07 |
|
% Change |
| |
|
(millions) |
|
|
|
|
|
(millions) |
|
|
|
|
Costs of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video programming |
|
$ |
939 |
|
|
$ |
882 |
|
|
|
6 |
% |
|
$ |
1,868 |
|
|
$ |
1,762 |
|
|
|
6 |
% |
Employee |
|
|
571 |
|
|
|
531 |
|
|
|
8 |
% |
|
|
1,155 |
|
|
|
1,078 |
|
|
|
7 |
% |
High-speed data |
|
|
37 |
|
|
|
39 |
|
|
|
(5 |
%) |
|
|
77 |
|
|
|
83 |
|
|
|
(7 |
%) |
Voice |
|
|
134 |
|
|
|
111 |
|
|
|
21 |
% |
|
|
262 |
|
|
|
223 |
|
|
|
17 |
% |
Franchise fees |
|
|
116 |
|
|
|
111 |
|
|
|
5 |
% |
|
|
228 |
|
|
|
220 |
|
|
|
4 |
% |
Other direct operating costs |
|
|
221 |
|
|
|
198 |
|
|
|
12 |
% |
|
|
435 |
|
|
|
389 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues |
|
$ |
2,018 |
|
|
$ |
1,872 |
|
|
|
8 |
% |
|
$ |
4,025 |
|
|
$ |
3,755 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2008, costs of revenues increased 8% and 7%,
respectively, and, as a percentage of revenues, were 47% for both the three months ended June 30,
2008 and 2007 and 48% for both the six months ended June 30, 2008 and 2007. Video programming costs
increased for the three and six months ended June 30, 2008 primarily due to contractual rate
increases and an increase in the percentage of basic video subscribers who also subscribe to
expanded tiers of video services. Employee costs increased for the three and six months ended June
30, 2008 primarily due to higher headcount resulting from the continued growth of digital video,
high-speed data and Digital Phone services, as well as salary increases. Voice costs increased for
the three and six months ended June 30, 2008 primarily due to growth in Digital Phone subscribers,
partially offset by a decline in per-subscriber connectivity costs. Other direct operating costs
increased for the three and six months ended June 30, 2008 primarily due to increases in certain
other costs associated with the continued growth of digital video, high-speed data and Digital
Phone services.
17
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The increase in selling, general and administrative expenses for the three and six months
ended June 30, 2008 was attributable to higher marketing costs resulting from intensified marketing
efforts, as well as, for the six months ended June 30, 2008, higher employee costs. Employee costs
for the three and six months ended June 30, 2008 were impacted by headcount and salary increases.
For the three months ended June 30, 2008, higher employee costs were offset by lower equity-based
compensation expense, reflecting mainly the timing of 2008 grants, which were made during the first
quarter as compared to 2007 grants, which were made in the second quarter.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the three and six months ended June 30, 2008 included a $45 million noncash
impairment of certain non-core cable systems held for sale. In addition, the Cable segment expensed
non-capitalizable merger-related and restructuring costs associated with the Adelphia/Comcast
Transactions of $3 million and $7 million for the three and six months ended June 30, 2007,
respectively. The results for the three and six months ended June 30, 2007 also included other
restructuring costs of $3 million and $9 million, respectively.
Operating Income before Depreciation and Amortization increased for the three and six months
ended June 30, 2008 principally as a result of revenue growth (particularly in high margin
high-speed data revenues), partially offset by higher costs of revenues and selling, general and
administrative expenses, as well as the impairment of certain non-core cable systems held for sale,
as discussed above.
Operating Income increased for the three and six months ended June 30, 2008 primarily due to
the increases in Operating Income before Depreciation and Amortization discussed above, partially
offset by an increase in depreciation expense. In addition, for the six months ended June 30, 2008,
the decrease in amortization expense contributed to the increase in Operating Income. For the three
and six months ended June 30, 2008, the increase in depreciation expense was primarily associated
with purchases of customer premise equipment, scalable infrastructure and line extensions (each of
which is primarily driven by customer demand) occurring during or subsequent to the comparable
period in 2007. For the six months ended June 30, 2008, the decrease in amortization expense was
primarily due to the absence of amortization expense associated with customer relationships
recorded in connection with the 2003 restructuring of TWE, which were fully amortized as of the end
of the first quarter of 2007.
Filmed Entertainment. Revenues, Operating Income before Depreciation and Amortization and
Operating Income of the Filmed Entertainment segment for the three and six months ended June 30,
2008 and 2007 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
10 |
|
|
$ |
7 |
|
|
|
43 |
% |
|
$ |
20 |
|
|
$ |
14 |
|
|
|
43 |
% |
Advertising |
|
|
22 |
|
|
|
13 |
|
|
|
69 |
% |
|
|
37 |
|
|
|
18 |
|
|
|
106 |
% |
Content |
|
|
2,484 |
|
|
|
2,179 |
|
|
|
14 |
% |
|
|
5,237 |
|
|
|
4,842 |
|
|
|
8 |
% |
Other |
|
|
48 |
|
|
|
54 |
|
|
|
(11 |
%) |
|
|
110 |
|
|
|
122 |
|
|
|
(10 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,564 |
|
|
|
2,253 |
|
|
|
14 |
% |
|
|
5,404 |
|
|
|
4,996 |
|
|
|
8 |
% |
Costs of revenues(a) |
|
|
(1,901 |
) |
|
|
(1,709 |
) |
|
|
11 |
% |
|
|
(3,876 |
) |
|
|
(3,717 |
) |
|
|
4 |
% |
Selling, general and administrative(a) |
|
|
(470 |
) |
|
|
(370 |
) |
|
|
27 |
% |
|
|
(939 |
) |
|
|
(773 |
) |
|
|
21 |
% |
Restructuring costs |
|
|
3 |
|
|
|
— |
|
|
NM |
|
|
(113 |
) |
|
|
— |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
196 |
|
|
|
174 |
|
|
|
13 |
% |
|
|
476 |
|
|
|
506 |
|
|
|
(6 |
%) |
Depreciation |
|
|
(43 |
) |
|
|
(40 |
) |
|
|
8 |
% |
|
|
(84 |
) |
|
|
(75 |
) |
|
|
12 |
% |
Amortization |
|
|
(59 |
) |
|
|
(53 |
) |
|
|
11 |
% |
|
|
(115 |
) |
|
|
(107 |
) |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
94 |
|
|
$ |
81 |
|
|
|
16 |
% |
|
$ |
277 |
|
|
$ |
324 |
|
|
|
(15 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
18
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Content revenues primarily include theatrical product (which is content made available for
initial exhibition in theaters) and television product (which is content made available for initial
airing on television). The components of Content revenues for the three and six months ended June
30, 2008 and 2007 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical film |
|
$ |
286 |
|
|
$ |
339 |
|
|
|
(16 |
%) |
|
$ |
795 |
|
|
$ |
795 |
|
|
|
— |
|
Home video and electronic delivery |
|
|
766 |
|
|
|
595 |
|
|
|
29 |
% |
|
|
1,576 |
|
|
|
1,356 |
|
|
|
16 |
% |
Television licensing |
|
|
421 |
|
|
|
341 |
|
|
|
23 |
% |
|
|
821 |
|
|
|
733 |
|
|
|
12 |
% |
Consumer products and other |
|
|
47 |
|
|
|
32 |
|
|
|
47 |
% |
|
|
82 |
|
|
|
67 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total theatrical product |
|
|
1,520 |
|
|
|
1,307 |
|
|
|
16 |
% |
|
|
3,274 |
|
|
|
2,951 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television licensing |
|
|
540 |
|
|
|
579 |
|
|
|
(7 |
%) |
|
|
1,211 |
|
|
|
1,327 |
|
|
|
(9 |
%) |
Home video and electronic delivery |
|
|
190 |
|
|
|
171 |
|
|
|
11 |
% |
|
|
350 |
|
|
|
311 |
|
|
|
13 |
% |
Consumer products and other |
|
|
47 |
|
|
|
57 |
|
|
|
(18 |
%) |
|
|
106 |
|
|
|
112 |
|
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total television product |
|
|
777 |
|
|
|
807 |
|
|
|
(4 |
%) |
|
|
1,667 |
|
|
|
1,750 |
|
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
187 |
|
|
|
65 |
|
|
|
188 |
% |
|
|
296 |
|
|
|
141 |
|
|
|
110 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Content revenues |
|
$ |
2,484 |
|
|
$ |
2,179 |
|
|
|
14 |
% |
|
$ |
5,237 |
|
|
$ |
4,842 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline in theatrical film revenues for the three months ended June 30, 2008 was due
primarily to difficult comparisons to the prior year period, which included revenues from 300 and
Ocean’s 13. Revenues for the three months ended June 30, 2008 included Sex and the City, Get Smart
and Speed Racer. For the six months ended June 30, 2008, the decline for the three months ended
June 30, 2008 was offset, primarily due to the success of key releases in the first quarter of
2008, which included revenues from 10,000 B.C. and Fool’s Gold, as well as carryover from I Am
Legend and The Bucket List. Revenues in the first quarter of 2007 included the releases of 300 and
Music & Lyrics, as well as carryover revenues from Blood Diamond and Happy Feet. Theatrical product
revenues from home video and electronic delivery increased for the three and six months ended June
30, 2008 primarily due to a greater number of significant titles in 2008, including I Am Legend,
The Bucket List, 10,000 B.C. and Fool’s Gold, compared to 2007, which included Happy Feet and The
Departed. Theatrical product revenues from television licensing increased for the three and six
months ended June 30, 2008 due primarily to the timing and quantity of availabilities.
The decrease in television product licensing fees for the three and six months ended June 30,
2008 was primarily due to the impact of the WGA strike, partially offset by off-network license
fees from Seinfeld. The increase in television product revenues from home video and electronic
delivery for the three and six months ended June 30, 2008 primarily reflected the timing of
releases, including the release of additional seasons of Two and a Half Men.
The increase in other Content revenues for the three and six months ended June 30, 2008 was
due primarily to the impact of the acquisition of TT Games Limited in the fourth quarter of 2007,
including revenues from the second-quarter 2008 release of LEGO Indiana Jones, as well as the
expansion of the distribution of interactive video games.
The increase in costs of revenues for the three and six months ended June 30, 2008 resulted
primarily from higher film costs ($1.074 billion and $2.226 billion for the three and six months
ended June 30, 2008, respectively, compared to $943 million and $2.086 billion for the three and
six months ended June 30, 2007, respectively), partially offset for the six months ended June 30,
2008 by lower theatrical advertising and print costs due to the timing, quantity and mix of films
released. Included in film costs are net pre-release theatrical film valuation adjustments, which
decreased to $9 million for the three months ended June 30, 2008 from $51 million for the three
months ended June 30, 2007 and decreased to $18 million for the six months ended June 30, 2008 from
$104 million for the six months ended June 30, 2007. In addition, during the six months ended June
30, 2008, the Company recognized approximately $40 million in participation expense, which reflects
a reduction of approximately $10 million in the second quarter of 2008, related to current claims
on films released in prior periods. Costs of revenues as a percentage of revenues decreased to 74%
for the three months ended June 30, 2008 from 76% for the three months ended June 30, 2007, and to
72% for the six months ended June 30, 2008 from 74% for the six months ended June 30, 2007,
reflecting the quantity and mix of products released.
19
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The increase in selling, general and administrative expenses for the three and six months
ended June 30, 2008 was primarily the result of higher employee costs and higher distribution costs
attributable to the increase in revenues.
The results for the six months ended June 30, 2008 included net restructuring charges of $113
million, including a $3 million reversal for the three months ended June 30, 2008, related to
involuntary employee terminations in connection with the operational reorganization of the New Line
business. The Company expects to incur incremental restructuring charges ranging from $20 million
to $30 million during the remainder of 2008.
Operating Income before Depreciation and Amortization and Operating Income increased for the
three months ended June 30, 2008 primarily due to an increase in revenues, partially offset by an
increase in costs of revenues and selling, general and administrative expenses. Operating Income
before Depreciation and Amortization and Operating Income for the six months ended June 30, 2008
decreased primarily due to the increase in restructuring charges and an increase in selling,
general and administrative expenses, partially offset by an increase in revenues.
Networks. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Networks segment for the three and six months ended June 30, 2008 and 2007 are as
follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
1,719 |
|
|
$ |
1,561 |
|
|
|
10 |
% |
|
$ |
3,414 |
|
|
$ |
3,106 |
|
|
|
10 |
% |
Advertising |
|
|
906 |
|
|
|
817 |
|
|
|
11 |
% |
|
|
1,645 |
|
|
|
1,472 |
|
|
|
12 |
% |
Content |
|
|
189 |
|
|
|
212 |
|
|
|
(11 |
%) |
|
|
402 |
|
|
|
412 |
|
|
|
(2 |
%) |
Other |
|
|
12 |
|
|
|
11 |
|
|
|
9 |
% |
|
|
24 |
|
|
|
21 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,826 |
|
|
|
2,601 |
|
|
|
9 |
% |
|
|
5,485 |
|
|
|
5,011 |
|
|
|
9 |
% |
Costs of revenues(a) |
|
|
(1,459 |
) |
|
|
(1,373 |
) |
|
|
6 |
% |
|
|
(2,716 |
) |
|
|
(2,440 |
) |
|
|
11 |
% |
Selling, general and administrative(a) |
|
|
(507 |
) |
|
|
(466 |
) |
|
|
9 |
% |
|
|
(951 |
) |
|
|
(872 |
) |
|
|
9 |
% |
Asset impairments |
|
|
(18 |
) |
|
|
(34 |
) |
|
|
(47 |
%) |
|
|
(18 |
) |
|
|
(34 |
) |
|
|
(47 |
%) |
Restructuring costs |
|
|
— |
|
|
|
(16 |
) |
|
|
(100 |
%) |
|
|
— |
|
|
|
(16 |
) |
|
|
(100 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
842 |
|
|
|
712 |
|
|
|
18 |
% |
|
|
1,800 |
|
|
|
1,649 |
|
|
|
9 |
% |
Depreciation |
|
|
(81 |
) |
|
|
(73 |
) |
|
|
11 |
% |
|
|
(159 |
) |
|
|
(147 |
) |
|
|
8 |
% |
Amortization |
|
|
(12 |
) |
|
|
(5 |
) |
|
|
140 |
% |
|
|
(18 |
) |
|
|
(8 |
) |
|
|
125 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
749 |
|
|
$ |
634 |
|
|
|
18 |
% |
|
$ |
1,623 |
|
|
$ |
1,494 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The increase in Subscription revenues for the three and six months ended June 30, 2008 was due
primarily to higher subscription rates at both Turner and HBO and, to a lesser extent, an increase
in the number of subscribers for Turner’s networks, as well as the impact of international
acquisitions.
The increase in Advertising revenues for the three and six months ended June 30, 2008 was
driven primarily by Turner’s domestic entertainment and news networks, reflecting mainly audience
growth, higher CPMs (advertising rates per thousand viewers) and an increase in advertising units
sold.
For the three and six months ended June 30, 2008, costs of revenues increased due primarily to
increases in programming costs, as well as election-related newsgathering costs. For the three
months ended June 30, 2008, programming costs increased 8% to $1.109 billion from $1.028 billion
for the three months ended June 30, 2007 and for the six months ended June 30, 2008, programming
costs increased 14% to $2.016 billion from $1.768 billion for the six months ended June 30, 2007.
The increase in programming costs for the three and six months ended June 30, 2008 was due
primarily to an increase in sports programming costs at Turner, particularly related to NBA
programming, higher original programming costs at both HBO and Turner, as well as programming costs
associated with international acquisitions. Programming costs for the six months ended June 30,
2008 also included a $21 million impairment related to HBO’s decision to not proceed with an
original series. Costs of revenues as a percentage of revenues were 52% and 50% for the three and
six months ended June 30, 2008 compared to 53% and 49% for the three and six months ended June 30,
2007.
20
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The increase in selling, general and administrative expenses for the three and six months
ended June 30, 2008 reflected, in part, higher costs related to international expansion.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the three and six months ended June 30, 2008 included an $18 million noncash
impairment of GameTap as a result of Turner’s decision to sell its on-line video game business and
the three and six months ended June 30, 2007 included a $34 million noncash impairment of the Court
TV tradename as a result of rebranding the network’s name to truTV, effective January 1, 2008. The
results for the three and six months ended June 30, 2007 also included $16 million of restructuring
charges and severance related to senior management changes at HBO.
Operating Income before Depreciation and Amortization and Operating Income increased for the
three and six months ended June 30, 2008 primarily due to an increase in revenues and reductions in
restructuring costs and asset impairments, as discussed above, partially offset by increases in
costs of revenues and selling, general and administrative expenses.
Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Publishing segment for the three and six months ended June 30, 2008 and 2007 are as
follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
387 |
|
|
$ |
383 |
|
|
|
1 |
% |
|
$ |
752 |
|
|
$ |
739 |
|
|
|
2 |
% |
Advertising |
|
|
648 |
|
|
|
714 |
|
|
|
(9 |
%) |
|
|
1,198 |
|
|
|
1,268 |
|
|
|
(6 |
%) |
Content |
|
|
12 |
|
|
|
13 |
|
|
|
(8 |
%) |
|
|
24 |
|
|
|
26 |
|
|
|
(8 |
%) |
Other |
|
|
129 |
|
|
|
143 |
|
|
|
(10 |
%) |
|
|
247 |
|
|
|
268 |
|
|
|
(8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,176 |
|
|
|
1,253 |
|
|
|
(6 |
%) |
|
|
2,221 |
|
|
|
2,301 |
|
|
|
(3 |
%) |
Costs of revenues(a) |
|
|
(457 |
) |
|
|
(475 |
) |
|
|
(4 |
%) |
|
|
(881 |
) |
|
|
(911 |
) |
|
|
(3 |
%) |
Selling, general and administrative(a) |
|
|
(445 |
) |
|
|
(469 |
) |
|
|
(5 |
%) |
|
|
(911 |
) |
|
|
(962 |
) |
|
|
(5 |
%) |
Restructuring costs |
|
|
(5 |
) |
|
|
(7 |
) |
|
|
(29 |
%) |
|
|
(15 |
) |
|
|
(42 |
) |
|
|
(64 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
269 |
|
|
|
302 |
|
|
|
(11 |
%) |
|
|
414 |
|
|
|
386 |
|
|
|
7 |
% |
Depreciation |
|
|
(34 |
) |
|
|
(30 |
) |
|
|
13 |
% |
|
|
(68 |
) |
|
|
(57 |
) |
|
|
19 |
% |
Amortization |
|
|
(17 |
) |
|
|
(16 |
) |
|
|
6 |
% |
|
|
(35 |
) |
|
|
(35 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
218 |
|
|
$ |
256 |
|
|
|
(15 |
%) |
|
$ |
311 |
|
|
$ |
294 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
For the three and six months ended June 30, 2008, Subscription revenues increased primarily as
a result of higher newsstand sales for certain domestic magazine titles and at IPC, partially
offset by the impact of the sale of four non-strategic magazine titles in the third quarter of 2007
(the “2007 magazine sales”).
For the three and six months ended June 30, 2008, Advertising revenues decreased due primarily
to declines in domestic print Advertising revenues and declines in custom publishing revenues, as
well as the impact of the 2007 closures of LIFE and Business 2.0 magazines and the impact of the
2007 magazine sales, partly offset by growth in online revenues, led by contributions from
People.com, Time.com and CNNMoney.com.
For the three and six months ended June 30, 2008, Other revenues decreased due primarily to
decreases at Synapse and Southern Living at Home.
Costs of revenues decreased 4% for the three months ended June 30, 2008 and, as a percentage
of revenues, were 39% and 38% for the three months ended June 30, 2008 and 2007, respectively.
Costs of revenues decreased 3% for the six months ended June 30, 2008 and, as a percentage of
revenues, were 40% for both the six months ended June 30, 2008 and 2007. Costs of revenues for the
magazine publishing business include manufacturing costs (paper, printing and distribution) and
editorial-related costs, which together decreased 2% to $407 million for the three months ended
June 30, 2008 and decreased 2% to $780 million for the six months ended June 30, 2008, primarily
due to cost savings related to the impact of
21
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
the magazine closures in 2007 and the 2007 magazine sales, partially offset by higher paper
prices, which are expected to continue for the remainder of 2008. These decreases at the magazine
publishing business, as well as a decrease in costs associated with lower volumes at the
non-magazine businesses, were offset by increased costs associated with investments in digital
properties, including incremental editorial costs.
Selling, general and administrative expenses decreased for the three and six months ended June
30, 2008 primarily due to cost savings initiatives and the impact of magazine closures in 2007 and
the 2007 magazine sales, partially offset by costs associated with investments in digital
properties.
The results for the three and six months ended June 30, 2008 included $5 million and $15
million, respectively, of restructuring costs, primarily severance associated with continuing
efforts to streamline operations. The results for the three and six months ended June 30, 2007
included $7 million and $42 million, respectively, of restructuring costs, primarily severance
associated with efforts to streamline operations and costs related to the shutdown of LIFE magazine
in the first quarter of 2007.
Operating Income before Depreciation and Amortization decreased for the three months ended
June 30, 2008 due primarily to a decline in revenues, partially offset by decreases in costs of
revenues and selling, general and administrative expenses. Operating Income decreased for the
three months ended June 30, 2008 due primarily to the decline in Operating Income before
Depreciation and Amortization discussed above, as well as an increase in depreciation expense due
primarily to the completion of construction on IPC’s new U.K. headquarters during the second
quarter of 2007. Operating Income before Depreciation and Amortization increased for the six months
ended June 30, 2008 due primarily to decreases in costs of revenues and selling, general and
administrative expenses as well as a decline in restructuring charges, partially offset by a
decline in revenues. Operating Income increased for the six months ended June 30, 2008 due
primarily to the increase in Operating Income before Depreciation and Amortization described above,
partially offset by an increase in depreciation expense due primarily to the completion of
construction on IPC’s new U.K. headquarters during the second quarter of 2007.
The
Company anticipates that both Operating Income before Depreciation and Amortization and Operating
Income at the Publishing segment will decline for the remainder of 2008 compared to the similar period
in the prior year, primarily due to expected declines in both domestic print Advertising revenues
and Other revenues as well as paper price increases.
Corporate. Operating Loss before Depreciation and Amortization and Operating Loss of the
Corporate segment for the three and six months ended June 30, 2008 and 2007 are as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
6/30/08 |
|
6/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
related to securities litigation and
government investigations |
|
$ |
(4 |
) |
|
$ |
(4 |
) |
|
|
— |
|
|
$ |
(8 |
) |
|
$ |
(167 |
) |
|
|
(95 |
%) |
Selling, general and administrative(a) |
|
|
(77 |
) |
|
|
(89 |
) |
|
|
(13 |
%) |
|
|
(169 |
) |
|
|
(194 |
) |
|
|
(13 |
%) |
Restructuring costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss before Depreciation and Amortization |
|
|
(81 |
) |
|
|
(93 |
) |
|
|
(13 |
%) |
|
|
(184 |
) |
|
|
(361 |
) |
|
|
(49 |
%) |
Depreciation |
|
|
(10 |
) |
|
|
(12 |
) |
|
|
(17 |
%) |
|
|
(21 |
) |
|
|
(23 |
) |
|
|
(9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
$ |
(91 |
) |
|
$ |
(105 |
) |
|
|
(13 |
%) |
|
$ |
(205 |
) |
|
$ |
(384 |
) |
|
|
(47 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| (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 $4 million and
$8 million for the three and six months ended June 30, 2008, respectively, and $5 million and $176
million for the three and six months ended June 30, 2007, respectively. In addition, the Company
recognized related insurance recoveries of $1 million and $9 million for the three and six months
ended June 30, 2007, respectively. Although 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, they are not anticipated to be material.
22
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The results for the six months ended June 30, 2008 included $7 million of restructuring costs,
due primarily to involuntary employee terminations as a result of the Company’s cost savings
initiatives at the Corporate segment. The Company anticipates that these initiatives will result in
annual savings of more than $50 million.
Excluding the items noted above, for the three and six months ended June 30, 2008, Operating
Loss before Depreciation and Amortization and Operating Loss decreased due primarily to lower
corporate costs, related primarily to the cost savings initiatives.
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 quarterly dividend
payments and the remainder of its $5 billion common stock repurchase program. Time Warner’s sources
of cash include cash provided by operations, cash and equivalents on hand, available borrowing
capacity under its committed credit facilities and commercial paper programs and access to capital
markets. Time Warner’s unused committed capacity at June 30, 2008 (not including amounts at TWC)
was $4.516 billion, including $1.336 billion of cash and equivalents. At the same date, TWC’s
unused committed capacity was $13.641 billion, including $3.849 billion of cash and equivalents and
$4.040 billion under the 2008 Cable Bridge Facility, under which TWC may not borrow any amounts
unless and until the Special Dividend is declared in connection with the TWC Separation
Transactions. TWC expects to use $10.855 billion of its total unused committed capacity to finance
the Special Dividend, $9.25 billion of which Time Warner expects to receive.
Current Financial Condition
At June 30, 2008, Time Warner had $39.735 billion of debt, $5.185 billion of cash and
equivalents (net debt of $34.550 billion, defined as total debt less cash and equivalents), $300
million of mandatorily redeemable preferred membership units at a subsidiary and $59.374 billion of
shareholders’ equity, compared to $37.130 billion of debt, $1.516 billion of cash and equivalents
(net debt of $35.614 billion, defined as total debt less cash and equivalents), $300 million of
mandatorily redeemable preferred membership units at a subsidiary and $58.536 billion of
shareholders’ equity at December 31, 2007.
The following table shows the significant items contributing to the decrease in net debt from
December 31, 2007 to June 30, 2008 (millions):
| |
|
|
|
|
Balance at December 31, 2007 |
|
$ |
35,614 |
|
Cash provided by operations |
|
|
(4,932 |
) |
Proceeds from exercise of stock options |
|
|
(73 |
) |
Capital expenditures and product development costs |
|
|
2,049 |
|
Dividends paid to common stockholders |
|
|
450 |
|
Repurchases of common stock |
|
|
332 |
|
Investments and acquisitions, net(a) |
|
|
1,250 |
|
Proceeds from the sale of investments(a) |
|
|
(245 |
) |
All other, net |
|
|
105 |
|
|
|
|
|
Balance at June 30, 2008(b)(c) |
|
$ |
34,550 |
|
|
|
|
|
|
|
|
| |
| (a) |
|
Refer to the “Investing Activities” section for further detail. |
| (b) |
|
Included in the net debt balance is $172 million that represents the net unamortized
fair value adjustment recognized as a result of the merger of AOL and Historic TW Inc. |
| (c) |
|
Net debt at June 30, 2008 includes $21.936 billion at Time Warner and $12.614
billion at TWC. |
Time Warner has a shelf registration statement on file with the Securities and Exchange
Commission (the “SEC”) that allows it to offer and sell from time to time debt securities,
preferred stock, common stock and/or warrants to purchase debt and equity securities. As discussed
below, TWC also has a shelf registration statement on file with the SEC that allows it to offer and
sell from time to time senior and subordinated debt securities and debt warrants.
As discussed in “Recent Developments,” as part of the TWC Separation Transactions, TWC will
declare and pay the Special Dividend of $10.855 billion ($10.27 per share of TWC Common Stock) to
be distributed pro rata to all holders of TWC Class A Common Stock and TWC Class B Common Stock,
resulting in the receipt by Time Warner of approximately
23
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
$9.25 billion from the dividend immediately prior to the Distribution.
As noted under “Recent Developments,” TWC is a participant in the Sprint/Clearwire Joint
Venture, which is expected to close by the end of the first half of 2009. TWC’s share of such
investment is expected to be approximately $550 million, which it expects to fund with cash on hand
at TWC, borrowings under the Cable Revolving Facility, TWC’s commercial paper program or a
combination thereof.
On July 26, 2007, Time Warner’s Board of Directors authorized a common stock repurchase
program that allows the Company to purchase up to an aggregate of $5 billion of common stock.
Purchases under this 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 August 5, 2008, the Company has repurchased approximately 154 million shares of common
stock for approximately $2.8 billion, which included approximately 19 million shares of common
stock purchased for approximately $299 million in the first six months of 2008, pursuant to trading
programs under Rule 10b5-1 of the Exchange Act (Note 6).
On January 8, 2008, the Company entered into an agreement for a $2.0 billion three-year
unsecured term loan facility with a maturity date of January 8, 2011. Substantially all of the
borrowings under the facility, which was fully drawn on January 8, 2008, were used to repay
existing short-term borrowings (Note 5).
Time Warner’s 7.48% notes due January 15, 2008 (aggregate principal amount of $166 million)
matured and were retired on January 15, 2008. On September 1, 2008, TWE’s 7.25% notes due September
1, 2008 (aggregate principal amount of $600 million) will mature.
Cash Flows
Cash and equivalents increased by $3.669 billion and decreased by $659 million for the six
months ended June 30, 2008 and 2007, respectively. Components of these changes are discussed below
in more detail.
Operating Activities
Details of cash provided by operations are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
3,893 |
|
|
$ |
4,476 |
|
Depreciation and amortization |
|
|
2,294 |
|
|
|
2,164 |
|
Amounts related to securities litigation and government investigations: |
|
|
|
|
|
|
|
|
Net expenses |
|
|
8 |
|
|
|
167 |
|
Cash payments, net of recoveries |
|
|
(8 |
) |
|
|
(910 |
) |
Gain on disposal of assets, net |
|
|
— |
|
|
|
(669 |
) |
Noncash asset impairments |
|
|
63 |
|
|
|
35 |
|
Net interest payments(a) |
|
|
(1,055 |
) |
|
|
(1,091 |
) |
Net income taxes paid(b) |
|
|
(331 |
) |
|
|
(327 |
) |
Noncash equity-based compensation |
|
|
169 |
|
|
|
173 |
|
Net cash flows from discontinued operations(c) |
|
|
(12 |
) |
|
|
55 |
|
Domestic pension plan contributions |
|
|
(210 |
) |
|
|
(10 |
) |
Merger-related and restructuring payments, net of accruals(d) |
|
|
46 |
|
|
|
(83 |
) |
All other, net, including working capital changes |
|
|
75 |
|
|
|
(861 |
) |
|
|
|
|
|
|
|
Cash provided by operations |
|
$ |
4,932 |
|
|
$ |
3,119 |
|
|
|
|
|
|
|
|
|
|
|
| |
| (a) |
|
Includes interest income received of $58 million and $44 million in 2008 and 2007,
respectively. |
| (b) |
|
Includes income tax refunds received of $105 million and $65 million in 2008 and
2007, respectively. |
| (c) |
|
Reflects net income (loss) from discontinued operations of $(3) million and $138
million in 2008 and 2007, respectively, net of noncash gains and expenses and working
capital-related adjustments of $9 million and $83 million in 2008 and 2007, respectively. |
| (d) |
|
Includes payments for merger-related and restructuring costs and payments for
certain other merger-related liabilities, net of accruals. |
Cash provided by operations increased to $4.932 billion in 2008 from $3.119 billion in 2007.
The increase in cash provided by operations was related primarily to cash provided by working
capital and a decrease in payments made in
24
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
connection with the settlements in the securities litigation and the government
investigations, partially offset by an increase in domestic pension plan contributions. 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 primarily
reflects higher cash collections on receivables and the timing of payments for programming
production spending, accounts payable and accrued liabilities. As the majority of the Company’s
U.S. federal tax attribute carryforwards were utilized as of December 31, 2007, the Company expects
a significant increase in U.S. federal income tax payments during 2008, including $223 million paid
during the first half of the year. Partially offsetting this increase are the benefits from the
Economic Stimulus Act of 2008, which provides for a special 50% depreciation deduction in 2008 for
certain qualifying property. Additionally, the Company has made $200 million of discretionary cash
contributions to certain domestic funded defined benefit plans for the six months ended June 30,
2008 and, subject to market conditions and other considerations, anticipates making additional
discretionary cash contributions of at least $50 million during the remainder of the year.
Investing Activities
Details of cash used by investing activities are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
$ |
(14 |
) |
|
$ |
(89 |
) |
Investments and acquisitions, net of cash acquired: |
|
|
|
|
|
|
|
|
Bebo |
|
|
(849 |
) |
|
|
— |
|
buy.at |
|
|
(125 |
) |
|
|
— |
|
Third Screen Media |
|
|
— |
|
|
|
(104 |
) |
All other |
|
|
(262 |
) |
|
|
(208 |
) |
Investment activities of discontinued operations |
|
|
— |
|
|
|
(26 |
) |
Capital expenditures and product development costs |
|
|
(2,049 |
) |
|
|
(1,987 |
) |
Proceeds from the sale of available-for-sale securities |
|
|
14 |
|
|
|
23 |
|
Proceeds from the sale of AOL’s German access business |
|
|
— |
|
|
|
850 |
|
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 |
|
All other investment and asset sale proceeds |
|
|
231 |
|
|
|
205 |
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
$ |
(3,054 |
) |
|
$ |
(971 |
) |
|
|
|
|
|
|
|
Cash used by investing activities increased to $3.054 billion in 2008 from $971 million in
2007. The change in cash used by investing activities primarily reflected the decrease in proceeds
from the sales of assets and an increase in investment and acquisition expenditures.
Financing Activities
Details of cash provided (used) by financing activities are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
|
|
|
|
|
|
|
|
Borrowings |
|
$ |
24,599 |
|
|
$ |
9,542 |
|
Debt repayments |
|
|
(21,982 |
) |
|
|
(8,614 |
) |
Proceeds from exercise of stock options |
|
|
73 |
|
|
|
420 |
|
Excess tax benefit on stock options |
|
|
3 |
|
|
|
58 |
|
Principal payments on capital leases |
|
|
(20 |
) |
|
|
(32 |
) |
Repurchases of common stock |
|
|
(332 |
) |
|
|
(3,668 |
) |
Dividends paid |
|
|
(450 |
) |
|
|
(417 |
) |
Other financing activities |
|
|
(100 |
) |
|
|
(96 |
) |
|
|
|
|
|
|
|
Cash provided (used) by financing activities |
|
$ |
1,791 |
|
|
$ |
(2,807 |
) |
|
|
|
|
|
|
|
25
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Cash provided by financing activities was $1.791 billion in 2008 compared to cash used by
financing activities of $2.807 billion in 2007. The change in cash provided (used) by financing
activities was primarily due to a decline in repurchases of common stock made in connection with
the Company’s common stock repurchase programs, as well as an increase in net borrowings (defined
as borrowings less repayments) primarily related to the 2008 Cable Bond Offering.
Outstanding Debt and Other Financing Arrangements
Outstanding Debt and Committed Financial Capacity
At June 30, 2008, Time Warner had total committed capacity, defined as maximum available
borrowings under various existing debt arrangements and cash and short-term investments, of $58.095
billion, including $4.040 billion under the 2008 Cable Bridge Facility, under which TWC may not
borrow any amounts unless and until the Special Dividend is declared in connection with the TWC
Separation Transactions. Of this committed capacity, $18.157 billion was unused and $39.735 billion
was outstanding as debt. The $18.157 billion of unused committed capacity includes $4.516 billion
at Time Warner and $13.641 billion at TWC, $10.855 billion of which TWC expects to use to finance
the Special Dividend. At June 30, 2008, total committed capacity, outstanding letters of credit,
unamortized discount on commercial paper, outstanding debt and total unused committed capacity were
as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Unamortized |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Discount on |
|
|
|
|
|
Unused |
| |
|
Committed |
|
Letters of |
|
Commercial |
|
Outstanding |
|
Committed |
| |
|
Capacity(a) |
|
Credit(b) |
|
Paper |
|
Debt(c) |
|
Capacity(d)(e) |
Cash and equivalents |
|
$ |
5,185 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,185 |
|
Bank credit agreements and commercial paper programs(a) |
|
|
22,085 |
|
|
|
201 |
|
|
|
2 |
|
|
|
8,910 |
|
|
|
12,972 |
|
Floating-rate public debt |
|
|
2,000 |
|
|
|
— |
|
|
|
— |
|
|
|
2,000 |
|
|
|
— |
|
Fixed-rate public debt(e) |
|
|
28,523 |
|
|
|
— |
|
|
|
— |
|
|
|
28,523 |
|
|
|
— |
|
Other fixed-rate obligations(f) |
|
|
302 |
|
|
|
— |
|
|
|
— |
|
|
|
302 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
58,095 |
|
|
$ |
201 |
|
|
$ |
2 |
|
|
$ |
39,735 |
|
|
$ |
18,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| (a) |
|
The bank credit agreements, commercial paper programs and public debt of the Company
rank pari passu with the 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 10.6 years. |
| (b) |
|
Represents the portion of committed capacity reserved for outstanding and undrawn
letters of credit. |
| (c) |
|
Represents principal amounts adjusted for premiums and discounts. |
| (d) |
|
Includes $13.641 billion of unused committed capacity at TWC, $10.855 billion of
which TWC expects to use to finance the Special Dividend. TWC’s unused committed capacity
includes $4.040 billion under the 2008 Cable Bridge Facility (described below), under which
TWC may not borrow any amounts unless and until the Special Dividend is declared in connection
with the TWC Separation Transactions. |
| (e) |
|
The Company has classified $600 million in debt of Time Warner due within the next
twelve months as long-term on the accompanying 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. |
| (f) |
|
Includes debt due within one year of $128 million, which primarily relates to
capital lease obligations. |
2008 Cable Bond Offering
On June 16, 2008, TWC filed a shelf registration statement on Form S-3 (the “TWC Shelf
Registration Statement”) with the SEC that allows TWC to offer and sell from time to time senior
and subordinated debt securities and debt warrants. On June 19, 2008, TWC issued $5.0 billion in
aggregate principal amount of senior unsecured notes and debentures under the TWC Shelf
Registration Statement in the 2008 Cable Bond Offering, consisting of $1.5 billion principal amount
of 6.20% Notes due 2013 (the “2013 Notes”), $2.0 billion principal amount of 6.75% Notes due 2018
(the “2018 Notes”) and $1.5 billion principal amount of 7.30% Debentures due 2038 (the “2038
Debentures” and, together with the 2013 Notes and the 2018 Notes, the “2008 Cable Debt
Securities”). TWC expects to use the net proceeds of $4.963 billion from this issuance to finance,
in part, the Special Dividend. If the TWC Separation Transactions are not consummated and the
Special Dividend is not paid, TWC will use the net proceeds from the issuance of the 2008 Cable
Debt Securities for general corporate purposes, including repayment of indebtedness. The 2008 Cable
Debt Securities are guaranteed by TWE and TW NY (the “Guarantors”).
26
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
2008 Cable Bridge Facility
In addition to the 2008 Cable Debt Securities described above, on June 30, 2008, TWC entered
into a credit agreement (the “Bridge Credit Agreement”) with certain financial institutions for the
$9.0 billion 2008 Cable Bridge Facility in order to finance, in part, the Special Dividend. Subject
to certain limited exceptions, to the extent TWC incurs debt (other than an incurrence of debt
under the Cable Revolving Facility and its existing commercial paper program), issues equity
securities or completes asset sales prior to drawing on the 2008 Cable Bridge Facility, the
commitments of the lenders under the 2008 Cable Bridge Facility will be reduced by an amount equal
to the net cash proceeds from any such incurrence, issuance or sale. As a result of the 2008 Cable
Bond Offering, immediately after the Bridge Credit Agreement was executed, the amount of the
commitments under the 2008 Cable Bridge Facility was reduced to $4.040 billion. TWC may elect to
extend the maturity date of the loans outstanding under the 2008 Cable Bridge Facility for an
additional year. In the event TWC borrows any amounts under the 2008 Cable Bridge Facility, subject
to certain limited exceptions, TWC is required to use the net cash proceeds from any subsequent
incurrence of debt (other than an incurrence of debt under the Cable Revolving Facility and its
existing commercial paper program), issuance of equity securities and asset sale to prepay amounts
outstanding under the 2008 Cable Bridge Facility. TWC may prepay amounts outstanding under the 2008
Cable Bridge Facility at any time without penalty or premium, subject to minimum amounts. TWC may
not borrow any amounts under the 2008 Cable Bridge Facility unless and until the Special Dividend
is declared in connection with the TWC Separation Transactions. TWC’s obligations under the 2008
Cable Bridge Facility are guaranteed by TWE and TW NY.
Supplemental Facility
In May 2008, Time Warner (as lender) committed to lend TWC (as borrower) up to an aggregate
principal amount of $3.5 billion under the Supplemental Facility. TWC may borrow under the
Supplemental Facility at the final maturity of the 2008 Cable Bridge Facility to repay amounts then
outstanding under the 2008 Cable Bridge Facility. As a result of the 2008 Cable Bond Offering, Time
Warner’s original commitment under the Supplemental Facility was reduced to $2.520 billion. TWC’s
obligations under the Supplemental Facility will be guaranteed by TWE and TW NY.
Time Warner’s commitment under the Supplemental Facility will be further reduced by (i) 50% of
any additional amounts by which the commitments under the 2008 Cable Bridge Facility are further
reduced by the net cash proceeds of subsequent issuances of debt or equity or certain asset sales
by TWC prior to TWC’s borrowing under the 2008 Cable Bridge Facility and (ii) the amount by which
borrowing availability under the Cable Revolving Facility exceeds $2.0 billion on the date of
borrowing under the Supplemental Facility.
Additional Information
See Note 5 to the accompanying consolidated financial statements for additional information
regarding the 2008 Cable Bond Offering, the 2008 Cable Bridge Facility and the Supplemental
Facility, and Note 7 to the Company’s consolidated financial statements in the 2007 Form 10-K for
further details regarding the Company’s outstanding debt and other financing arrangements,
including certain information about maturities, covenants, rating triggers and bank credit
agreement leverage ratios relating to such debt and financing arrangements.
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 $4.0 billion and $3.7
billion at June 30, 2008 and December 31, 2007, respectively. Included in these amounts is
licensing of film product from the Filmed Entertainment segment to the Networks segment in the
amount of $966 million and $700 million at June 30, 2008 and December 31, 2007, respectively.
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
27
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
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 2007 Form 10-K, which should be read in
conjunction with this report (including Item 1A, “Risk Factors,” in Part II of this report), 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 2007 Form 10-K and in Part II of this report, 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,
including the planned separation of TWC from Time Warner; |
| |
| |
• |
|
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. |
28
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 June 30, 2008 that have materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting.
29
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
December 31, |
| |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
5,185 |
|
|
$ |
1,516 |
|
Receivables, less allowances of $1,928 and $2,410 |
|
|
6,148 |
|
|
|
7,296 |
|
Inventories |
|
|
2,013 |
|
|
|
2,105 |
|
Prepaid expenses and other current assets |
|
|
773 |
|
|
|
834 |
|
Deferred income taxes |
|
|
732 |
|
|
|
700 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
14,851 |
|
|
|
12,451 |
|
|
|
|
|
|
|
|
|
|
Noncurrent inventories and film costs |
|
|
5,240 |
|
|
|
5,304 |
|
Investments, including available-for-sale securities |
|
|
1,940 |
|
|
|
1,963 |
|
Property, plant and equipment, net |
|
|
18,212 |
|
|
|
18,048 |
|
Intangible assets subject to amortization, net |
|
|
5,088 |
|
|
|
5,167 |
|
Intangible assets not subject to amortization |
|
|
47,214 |
|
|
|
47,220 |
|
Goodwill |
|
|
42,534 |
|
|
|
41,749 |
|
Other assets |
|
|
1,981 |
|
|
|
1,928 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
137,060 |
|
|
$ |
133,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,217 |
|
|
$ |
1,470 |
|
Participations payable |
|
|
2,590 |
|
|
|
2,547 |
|
Royalties and programming costs payable |
|
|
1,300 |
|
|
|
1,253 |
|
Deferred revenue |
|
|
1,278 |
|
|
|
1,178 |
|
Debt due within one year |
|
|
128 |
|
|
|
126 |
|
Other current liabilities |
|
|
4,946 |
|
|
|
5,611 |
|
Current liabilities of discontinued operations |
|
|
3 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
11,462 |
|
|
|
12,193 |
|
Long-term debt |
|
|
39,607 |
|
|
|
37,004 |
|
Mandatorily redeemable preferred membership units issued by a subsidiary |
|
|
300 |
|
|
|
300 |
|
Deferred income taxes |
|
|
14,361 |
|
|
|
13,736 |
|
Deferred revenue |
|
|
473 |
|
|
|
522 |
|
Other liabilities |
|
|
7,048 |
|
|
|
7,217 |
|
Minority interests |
|
|
4,435 |
|
|
|
4,322 |
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Time Warner common stock, $0.01 par value, 4.885 and
4.877 billion
shares issued
and 3.582 and 3.593 billion shares outstanding |
|
|
49 |
|
|
|
49 |
|
Paid-in-capital |
|
|
172,547 |
|
|
|
172,443 |
|
Treasury stock, at cost (1.303 and 1.284 billion shares) |
|
|
(25,836 |
) |
|
|
(25,526 |
) |
Accumulated other comprehensive income, net |
|
|
93 |
|
|
|
149 |
|
Accumulated deficit |
|
|
(87,479 |
) |
|
|
(88,579 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
59,374 |
|
|
|
58,536 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
137,060 |
|
|
$ |
133,830 |
|
|
|
|
|
|
|
|
See accompanying notes.
30
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
6/30/08 |
|
6/30/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
6,462 |
|
|
$ |
6,229 |
|
|
$ |
12,822 |
|
|
$ |
12,468 |
|
Advertising |
|
|
2,311 |
|
|
|
2,268 |
|
|
|
4,335 |
|
|
|
4,200 |
|
Content |
|
|
2,563 |
|
|
|
2,243 |
|
|
|
5,371 |
|
|
|
5,022 |
|
Other |
|
|
219 |
|
|
|
240 |
|
|
|
444 |
|
|
|
474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(a) |
|
|
11,555 |
|
|
|
10,980 |
|
|
|
22,972 |
|
|
|
22,164 |
|
Costs of revenues(a) |
|
|
(6,870 |
) |
|
|
(6,417 |
) |
|
|
(13,533 |
) |
|
|
(12,913 |
) |
Selling, general and administrative(a) |
|
|
(2,472 |
) |
|
|
(2,397 |
) |
|
|
(4,950 |
) |
|
|
(4,806 |
) |
Amortization of intangible assets |
|
|
(194 |
) |
|
|
(158 |
) |
|
|
(377 |
) |
|
|
(335 |
) |
Amounts related to securities litigation and government
investigations |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(8 |
) |
|
|
(167 |
) |
Merger-related, restructuring and shutdown costs |
|
|
(6 |
) |
|
|
(33 |
) |
|
|
(148 |
) |
|
|
(101 |
) |
Asset impairments |
|
|
(63 |
) |
|
|
(34 |
) |
|
|
(63 |
) |
|
|
(35 |
) |
Gains on disposal of assets, net |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,946 |
|
|
|
1,936 |
|
|
|
3,893 |
|
|
|
4,476 |
|
Interest expense, net(a) |
|
|
(550 |
) |
|
|
(574 |
) |
|
|
(1,096 |
) |
|
|
(1,125 |
) |
Other income (loss), net |
|
|
(5 |
) |
|
|
108 |
|
|
|
(53 |
) |
|
|
233 |
|
Minority interest expense, net |
|
|
(87 |
) |
|
|
(91 |
) |
|
|
(170 |
) |
|
|
(221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
1,304 |
|
|
|
1,379 |
|
|
|
2,574 |
|
|
|
3,363 |
|
Income tax provision |
|
|
(509 |
) |
|
|
(434 |
) |
|
|
(1,008 |
) |
|
|
(1,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
795 |
|
|
|
945 |
|
|
|
1,566 |
|
|
|
2,132 |
|
Discontinued operations, net of tax |
|
|
(3 |
) |
|
|
122 |
|
|
|
(3 |
) |
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
792 |
|
|
$ |
1,067 |
|
|
$ |
1,563 |
|
|
$ |
2,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share from continuing operations |
|
$ |
0.22 |
|
|
$ |
0.25 |
|
|
$ |
0.44 |
|
|
$ |
0.56 |
|
Discontinued operations |
|
|
— |
|
|
|
0.03 |
|
|
|
— |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.22 |
|
|
$ |
0.28 |
|
|
$ |
0.44 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic common shares outstanding |
|
|
3,579.8 |
|
|
|
3,756.7 |
|
|
|
3,579.4 |
|
|
|
3,798.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share from continuing
operations |
|
$ |
0.22 |
|
|
$ |
0.25 |
|
|
$ |
0.43 |
|
|
$ |
0.55 |
|
Discontinued operations |
|
|
— |
|
|
|
0.03 |
|
|
|
— |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.22 |
|
|
$ |
0.28 |
|
|
$ |
0.43 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted common shares outstanding |
|
|
3,603.0 |
|
|
|
3,807.1 |
|
|
|
3,601.4 |
|
|
|
3,849.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash dividends declared per share of common stock |
|
$ |
0.0625 |
|
|
$ |
0.0550 |
|
|
$ |
0.1250 |
|
|
$ |
0.1100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
Includes the following income (expenses) resulting from transactions with related
companies: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
86 |
|
|
$ |
93 |
|
|
$ |
179 |
|
|
$ |
200 |
|
Costs of revenues |
|
|
(56 |
) |
|
|
(68 |
) |
|
|
(111 |
) |
|
|
(111 |
) |
Selling, general and administrative |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
See accompanying notes.
31
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
(Unaudited; millions)
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
OPERATIONS |
|
|
|
|
|
|
|
|
Net income(a) |
|
$ |
1,563 |
|
|
$ |
2,270 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,294 |
|
|
|
2,164 |
|
Amortization of film and television costs |
|
|
2,959 |
|
|
|
2,874 |
|
Asset impairments |
|
|
63 |
|
|
|
35 |
|
(Gain) loss on investments and other assets, net |
|
|
7 |
|
|
|
(951 |
) |
Equity in losses of investee companies, net of cash distributions |
|
|
25 |
|
|
|
28 |
|
Equity-based compensation |
|
|
169 |
|
|
|
173 |
|
Minority interests |
|
|
170 |
|
|
|
221 |
|
Deferred income taxes |
|
|
311 |
|
|
|
1,014 |
|
Amounts related to securities litigation and government investigations |
|
|
— |
|
|
|
(743 |
) |
Changes in operating assets and liabilities, net of acquisitions |
|
|
(2,620 |
) |
|
|
(3,883 |
) |
Adjustments relating to discontinued operations(a) |
|
|
(9 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
|
Cash provided by operations(b) |
|
|
4,932 |
|
|
|
3,119 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
|
(14 |
) |
|
|
(89 |
) |
Investments and acquisitions, net of cash acquired |
|
|
(1,236 |
) |
|
|
(312 |
) |
Investment activities of discontinued operations |
|
|
— |
|
|
|
(26 |
) |
Capital expenditures and product development costs |
|
|
(2,049 |
) |
|
|
(1,987 |
) |
Investment proceeds from available-for-sale securities |
|
|
14 |
|
|
|
23 |
|
Other investment proceeds |
|
|
231 |
|
|
|
1,420 |
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
|
(3,054 |
) |
|
|
(971 |
) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Borrowings |
|
|
24,599 |
|
|
|
9,542 |
|
Debt repayments |
|
|
(21,982 |
) |
|
|
(8,614 |
) |
Proceeds from exercise of stock options |
|
|
73 |
|
|
|
420 |
|
Excess tax benefit on stock options |
|
|
3 |
|
|
|
58 |
|
Principal payments on capital leases |
|
|
(20 |
) |
|
|
(32 |
) |
Repurchases of common stock |
|
|
(332 |
) |
|
|
(3,668 |
) |
Dividends paid |
|
|
(450 |
) |
|
|
(417 |
) |
Other financing activities |
|
|
(100 |
) |
|
|
(96 |
) |
|
|
|
|
|
|
|
Cash provided (used) by financing activities |
|
|
1,791 |
|
|
|
(2,807 |
) |
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND EQUIVALENTS |
|
|
3,669 |
|
|
|
(659 |
) |
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
1,516 |
|
|
|
1,549 |
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
5,185 |
|
|
$ |
890 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The six months ended June 30, 2008 and June 30, 2007 include net income (loss) from
discontinued operations of $(3) million and $138 million, respectively. After considering
noncash gains and expenses and working capital-related adjustments relating to discontinued
operations, net operational cash flows from discontinued operations were $(12) million and $55
million for the six months ended June 30, 2008 and 2007, respectively. |
| (b) |
|
The six months ended June 30, 2007 includes approximately $2 million of cash related
to changing the fiscal year end of certain international operations from November 30 to
December 31. |
See accompanying notes.
32
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Six Months Ended June 30,
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
BALANCE AT BEGINNING OF PERIOD |
|
$ |
58,536 |
|
|
$ |
60,389 |
|
Net income |
|
|
1,563 |
|
|
|
2,270 |
|
Other comprehensive income (loss) |
|
|
(56 |
) |
|
|
147 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
1,507 |
|
|
|
2,417 |
|
Cash dividends ($0.125 and $0.110 per common share) |
|
|
(450 |
) |
|
|
(417 |
) |
Common stock repurchases |
|
|
(299 |
) |
|
|
(4,034 |
) |
Impact of adopting new accounting pronouncements(a) |
|
|
(13 |
) |
|
|
386 |
|
Other(b) |
|
|
93 |
|
|
|
474 |
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD |
|
$ |
59,374 |
|
|
$ |
59,215 |
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
For the six months ended June 30, 2008, amount relates to the impact of adopting the
provisions of Emerging Issues Task Force (“EITF”) Issue No. 06-10, Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements (“EITF 06-10”), and EITF Issue No. 06-04,
Accounting for Deferred Compensation and Postretirement Benefits Aspects of Endorsement
Split-Dollar Life Insurance Arrangements (“EITF 06-04”). For the six months ended June 30,
2007, amount 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 of $445 million, partially offset by the impact of
adopting the provisions of EITF Issue No. 06-02, Accounting for Sabbatical Leave and Other
Similar Benefits (“EITF 06-02”) of $59 million. |
| (b) |
|
For the six months ended June 30, 2008, amount includes $103 million primarily
related to stock option, restricted stock and restricted stock unit activity, partially offset
by $7 million related to the allocation of certain equity adjustments to minority interest.
For the six months ended June 30, 2007, amount includes $483 million related to stock option,
restricted stock and restricted stock unit activity, $22 million related to the allocation of
certain equity adjustments to minority interest and a net gain of approximately $5 million
related to changing the fiscal year end of certain international operations from November 30
to December 31 (net of the related income tax benefit of approximately $2 million). |
See accompanying notes.
33
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 operations into five reportable
segments: AOL: consisting principally of interactive consumer and advertising services; Cable:
consisting principally of 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 that provide
programming; 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.
The effects of any changes in the Company’s ownership interests resulting from the issuance of
equity capital by consolidated subsidiaries or equity investees to unaffiliated parties and certain
other equity transactions recorded by consolidated subsidiaries or equity investees are accounted
for as capital transactions pursuant to the Securities and Exchange Commission (“SEC”) Staff
Accounting Bulletin No. 51, Accounting for the Sales of Stock of a Subsidiary. Deferred taxes
generally have not been recorded on such capital transactions, as such temporary differences would,
in most instances, be recovered in a tax-free manner.
Reclassifications
Certain reclassifications have been made to the prior year financial information to conform to
the June 30, 2008 presentation.
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 consolidated financial statements
and footnotes thereto. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements
include accounting for asset impairments, allowances for doubtful accounts, depreciation and
amortization, film ultimate revenues, home video and magazine returns, business combinations,
pension 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
34
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, 2007 (the “2007 Form 10-K”).
Income Per Common Share
Basic income per common share is computed by dividing the net income applicable to common
shares by the weighted average of common shares outstanding during the period. Weighted-average
common shares include shares of Time Warner’s common stock. 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 from
continuing operations (millions, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
6/30/08 |
|
|
6/30/07 |
|
|
6/30/08 |
|
|
6/30/07 |
|
Income from continuing operations — basic and diluted |
|
$ |
795 |
|
|
$ |
945 |
|
|
$ |
1,566 |
|
|
$ |
2,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding — basic |
|
|
3,579.8 |
|
|
|
3,756.7 |
|
|
|
3,579.4 |
|
|
|
3,798.1 |
|
Dilutive effect of equity awards |
|
|
23.2 |
|
|
|
50.4 |
|
|
|
22.0 |
|
|
|
51.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding — diluted |
|
|
3,603.0 |
|
|
|
3,807.1 |
|
|
|
3,601.4 |
|
|
|
3,849.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.22 |
|
|
$ |
0.25 |
|
|
$ |
0.44 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.22 |
|
|
$ |
0.25 |
|
|
$ |
0.43 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share for the three months ended June 30, 2008 and 2007 and the six
months ended June 30, 2008 and 2007 exclude approximately 387 million and 290 million,
respectively, and 396 million and 290 million, respectively, common shares that may be issued under
the Company’s stock compensation plans because they do not have a dilutive effect.
Accounting Standards Adopted in 2008
Fair Value Measurements
On January 1, 2008, the Company adopted certain provisions of Financial Accounting Standards
Board (“FASB”) Statement of Financial Accounting Standards (“Statement”) No. 157, Fair Value
Measurements (“FAS 157”), which establishes the authoritative definition of fair value, sets out a
framework for measuring fair value and expands the required disclosures about fair value
measurement. The provisions of FAS 157 adopted on January 1, 2008 relate to financial assets and
liabilities as well as other assets and liabilities carried at fair value on a recurring basis and
did not have a material impact on the Company’s consolidated financial statements. The provisions
of FAS 157 related to other nonfinancial assets and liabilities will be effective for Time Warner
on January 1, 2009, and will be applied prospectively. See Note 4 for further discussion.
Recent Accounting Standards Not Yet Adopted
Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating Securities
In June 2008, the FASB issued Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue
No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (“FSP No. EITF 03-6-1”), in which the FASB concluded that all outstanding
unvested share-based payment awards that contain rights to nonforfeitable dividends (such as
restricted stock units granted by the Company) are considered participating securities. Because the
awards are considered participating securities, the issuing entity is required to apply the
two-class method of computing basic and diluted earnings per share. The provisions of FSP No. EITF
03-6-1 will be effective for Time Warner on January 1, 2009 and will be applied retroactively to
all prior-period earnings per share computations. The adoption of FSP No. EITF 03-6-1 is not
expected to have a material impact on earnings per share amounts in prior periods.
35
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Interim Impairment Testing of Goodwill and Indefinite-lived Intangible Assets at TWC
As discussed in more detail in Note 1 to the Company’s consolidated financial statements in
the 2007 Form 10-K, goodwill and indefinite-lived intangible assets, primarily certain franchise
assets, trademarks and brand names, are tested annually for impairment during the fourth quarter or
earlier upon the occurrence of certain events or substantive changes in circumstances. As a result
of entering into the Separation Agreement (defined in Note 2), the Company was required under FASB
Statement No. 142, Goodwill and Other Intangible Assets (“FAS 142”) to test goodwill and cable
franchise rights at Time Warner Cable Inc. (“TWC”) as of May 20, 2008 (the “interim testing date”).
The impairment testing was performed on a basis consistent with the analysis performed as of
December 31, 2007. In performing goodwill impairment testing, the Company determines the fair value
of a reporting unit by using various valuation techniques, with the primary methods being: a
discounted cash flow (“DCF”) analysis and a market-based approach. The Company determines the fair
value of the cable franchise rights of a reporting unit using a DCF valuation analysis. A DCF
valuation requires the exercise of significant judgments, including judgments about appropriate
discount rates based on the assessment of risks inherent in the projected future cash flows and the
amount and timing of expected future cash flows, including expected cash flows beyond the current
long-term business planning period for TWC. In assessing the reasonableness of its determined fair
values, the Company evaluates its results against other value indicators such as comparable company
public trading values, research analyst estimates and values observed in private market
transactions.
The Company’s interim impairment analysis did not result in any impairment charges during the
second quarter of 2008. However, the fair values of the cable franchise rights in certain of
TWC’s
reporting units, particularly the Texas reporting unit, were at or only modestly in excess of their
carrying values. Accordingly, any future declines in the estimated fair values of the cable
franchise rights in one or more of such reporting units would likely result in noncash cable
franchise rights impairment charges.
To illustrate the magnitude of a potential impairment charge related to changes in estimated
fair value, had the fair values of each of the TWC reporting units and their respective cable
franchise rights been lower by 10% as of the interim testing date, the Company would have recorded
cable franchise rights impairment charges of approximately $750 million, and had each of the fair
values been lower by 20%, the Company would have recorded cable franchise rights impairment charges
of approximately $3.7 billion. In neither of these cases would the Company have been required to
record goodwill impairment charges.
2. BUSINESS ACQUISITIONS AND DISPOSITIONS
TWC Separation from Time Warner
On May 20, 2008, the Company and its subsidiaries Warner Communications Inc. (“WCI”), Historic
TW Inc. (“Historic TW”) and American Television and Communications Corporation (“ATC”) entered into
a Separation Agreement (the “Separation Agreement”) with TWC and its
subsidiaries Time Warner Entertainment Company, L.P. (“TWE”) and TW NY Cable Holding Inc. (“TW
NY”). Pursuant to the Separation Agreement, (i) Time Warner will complete certain internal
restructuring transactions, (ii) Historic TW, a wholly-owned subsidiary of Time Warner, will
transfer its 12.43% interest in TW NY to TWC in exchange for 80 million newly issued shares of TWC
Class A Common Stock (the “TW NY Exchange”), (iii) all TWC Class A Common Stock and TWC Class B
Common Stock then held by Historic TW will be distributed to Time Warner, (iv) TWC will declare and
pay a special cash dividend (the “Special Dividend”) of $10.855 billion ($10.27 per share of TWC
Common Stock) to be distributed pro rata to all holders of TWC Class A Common Stock and TWC Class B
Common Stock, resulting in the receipt by Time Warner of approximately $9.25 billion from the
dividend immediately prior to the Distribution (as defined below), (v) TWC will file with the
Secretary of State of the State of Delaware an amended and restated certificate of incorporation,
pursuant to which, among other things, each outstanding share of TWC Class A Common Stock and TWC
Class B Common Stock will automatically be converted into one share of common stock, par value
$0.01 per share (the “TWC Common Stock”), and (vi) Time Warner will distribute all the issued and
outstanding shares of TWC Common Stock then held by Time Warner to its stockholders as (a) a pro
rata dividend in a spin-off, (b) an exchange offer in a split-off or (c) a combination thereof (the
“Distribution”) ((i) to (vi) collectively, the “TWC Separation Transactions”). Time Warner has not
yet made a decision as to the form of the Distribution.
36
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Upon consummation of the TWC Separation Transactions, Time Warner’s stockholders and/or former
stockholders will hold approximately 85.2% of the TWC Common Stock, and TWC’s stockholders other
than Time Warner will hold approximately 14.8% of the TWC Common Stock issued and outstanding.
The Separation Agreement contains customary covenants and consummation of the TWC Separation
Transactions is subject to customary closing conditions, including customary regulatory reviews and
local franchise approvals, the receipt of a favorable ruling from the Internal Revenue Service that
the TWC Separation Transactions will generally qualify as tax-free for Time Warner and Time
Warner’s stockholders, the receipt of certain tax opinions and the entry into the 2008 Cable Bridge
Facility and the Supplemental Facility (each as defined in Note 5). Time Warner and TWC expect the
TWC Separation Transactions to be consummated by the end of 2008 or in early 2009.
Sprint/Clearwire Joint Venture
In May 2008, TWC, Intel Corporation, Google Inc., Comcast Corporation (together with its
subsidiaries, “Comcast”) and Bright House Networks LLC entered into agreements to collectively
invest $3.2 billion in a wireless communications joint venture (the “Sprint/Clearwire Joint
Venture”), which is expected to be formed by Sprint Nextel Corporation (“Sprint”) and Clearwire
Corporation (“Clearwire”). TWC’s share of such investment is expected to be approximately $550
million, which it expects to fund with cash on hand at TWC, borrowings under TWC’s $6.0 billion
senior unsecured five-year revolving credit facility (the “Cable Revolving Facility”), TWC’s
commercial paper program or a combination thereof. Once formed, the Sprint/Clearwire Joint Venture
will be focused on deploying the first nationwide fourth generation wireless network to provide
mobile broadband services to wholesale and retail customers. In connection with its investment in
the Sprint/Clearwire Joint Venture, TWC has entered into a wholesale agreement with Sprint that
allows TWC to offer wireless services utilizing Sprint’s 2G/3G network. Upon closing, TWC also
expects to enter into a wholesale agreement with the Sprint/Clearwire Joint Venture that would
allow TWC to offer wireless services utilizing the Sprint/Clearwire Joint Venture’s broadband
wireless network. The closing of these transactions, which is expected to occur by the end of the
first half of 2009, is subject to customary regulatory review and approvals. There can be no
assurance that the formation of the Sprint/Clearwire Joint Venture will be completed, or, if
completed, that the Sprint/Clearwire Joint Venture would successfully deploy a nationwide mobile
broadband network. If completed, TWC’s investment in the Sprint/Clearwire Joint Venture would be
accounted for under the equity method of accounting and the Company expects that the
Sprint/Clearwire Joint Venture would incur losses in its early periods of operation.
Bebo Acquisition
On May 14, 2008, the Company, through its AOL segment, completed the acquisition of Bebo, Inc.
(“Bebo”), a leading global social media network, for $857 million, net of cash acquired, $8 million
of which will be paid by the Company in the first quarter of 2009. As of June 30, 2008, $760
million has been recorded as goodwill and $86 million has been allocated to specific amortizable
intangible assets. The Bebo acquisition did not significantly impact the Company’s consolidated
financial results for the six months ended June 30, 2008.
Buy.at Acquisition
On February 5, 2008, the Company, through its AOL segment, completed the acquisition of
Perfiliate Limited (“buy.at”), which provides performance-based e-commerce marketing services to
advertisers, for $125 million in cash, net of cash acquired. The buy.at acquisition did not
significantly impact the Company’s consolidated financial results for the six months ended June 30,
2008.
Assets Held for Sale
During the three and six months ended June 30, 2008, the Company recorded a $45 million
noncash impairment of certain non-core cable systems held for sale at the Cable segment and an $18
million noncash impairment of GameTap at the Networks segment as a result of Turner’s decision to
sell its on-line video game business.
37
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Summary of Discontinued Operations
Discontinued operations for both the three and six months ended June 30, 2008 reflect a $3
million loss related to Warner Music Group tax indemnifications. Discontinued operations for the
three and six months ended June 30, 2007 reflect certain businesses sold, which included Tegic
Communications, Inc., Wildseed LLC, the Parenting Group, most of the Time4 Media magazine titles,
The Progressive Farmer magazine, Leisure Arts, Inc. and the
Atlanta Braves baseball franchise. The
financial data for the discontinued operations for the three and six months ended June 30, 2007 is
as follows (millions, except per share amounts):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
6/30/07 |
|
|
6/30/07 |
|
Total revenues |
|
$ |
61 |
|
|
$ |
123 |
|
|
|
|
|
|
|
|
|
|
Pretax income |
|
|
34 |
|
|
|
31 |
|
Income tax benefit |
|
|
88 |
|
|
|
107 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
122 |
|
|
$ |
138 |
|
|
|
|
|
|
|
|
Basic income per common share from discontinued operations |
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
Average basic common shares outstanding |
|
|
3,756.7 |
|
|
|
3,798.1 |
|
|
|
|
|
|
|
|
Diluted income per common share from discontinued operations |
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
Average diluted common shares outstanding |
|
|
3,807.1 |
|
|
|
3,849.2 |
|
|
|
|
|
|
|
|
| |
|
3. INVENTORIES AND FILM COSTS
|
| |
|
Inventories and film costs consist of (millions):
|
| |
| |
|
June 30, 2008 |
|
|
December 31, 2007 |
Inventories: |
|
|
|
|
|
|
|
|
Programming costs, less amortization |
|
$ |
3,445 |
|
|
$ |
3,536 |
|
DVDs, books, paper and other merchandise |
|
|
433 |
|
|
|
450 |
|
|
|
|
|
|
|
|
Total inventories(a) |
|
|
3,878 |
|
|
|
3,986 |
|
Less: current portion of inventory |
|
|
(2,013 |
) |
|
|
(2,105 |
) |
|
|
|
|
|
|
|
Total noncurrent inventories |
|
|
1,865 |
|
|
|
1,881 |
|
|
|
|
|
|
|
|
Film costs — Theatrical: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
691 |
|
|
|
814 |
|
Completed and not released |
|
|
388 |
|
|
|
165 |
|
In production |
|
|
1,021 |
|
|
|
1,017 |
|
Development and pre-production |
|
|
73 |
|
|
|
96 |
|
Film costs — Television: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
630 |
|
|
|
680 |
|
Completed and not released |
|
|
108 |
|
|
|
140 |
|
In production |
|
|
460 |
|
|
|
508 |
|
Development and pre-production |
|
|
4 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total film cost |
|
|
3,375 |
|
|
|
3,423 |
|
|
|
|
|
|
|
|
Total noncurrent inventories and film costs |
|
$ |
5,240 |
|
|
$ |
5,304 |
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
Does not include $2.371 billion and $2.477 billion of net film library costs as of
June 30, 2008 and December 31, 2007, respectively, which are included in intangible assets
subject to amortization on the consolidated balance sheet. |
38
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
4. FAIR VALUE MEASUREMENTS
In accordance with FAS 157, a fair value measurement is determined based on the assumptions
that a market participant would use in pricing an asset or liability. FAS 157 also established a
three-tiered hierarchy that draws a distinction between market participant assumptions based on (i)
observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted
prices in active markets that are observable either directly or indirectly (Level 2) and (iii)
unobservable inputs that require the Company to use present value and other valuation techniques in
the determination of fair value (Level 3). The following table presents information about assets
and liabilities required to be carried at fair value on a recurring basis as of June 30, 2008
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fair Value Measurements as of June 30, 2008 Using |
| |
|
|
|
|
|
|
Quoted Market Prices |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
in Active Markets for |
|
Significant Other |
|
Significant |
| |
|
Fair Value |
|
Identical Assets |
|
Observable Inputs |
|
Unobservable Inputs |
| Description |
|
as of 6/30/08 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
$ |
|
330 |
|
|
|
$ |
325 |
|
|
|
$ |
5 |
|
|
|
$ |
— |
|
Available-for-sale securities |
|
|
|
142 |
|
|
|
|
94 |
|
|
|
|
48 |
|
|
|
|
— |
|
Derivatives |
|
|
|
66 |
|
|
|
|
10 |
|
|
|
|
56 |
|
|
|
|
— |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
(75 |
) |
|
|
|
— |
|
|
|
|
(75 |
) |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
463 |
|
|
|
$ |
429 |
|
|
|
$ |
34 |
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company primarily applies the market approach for recurring fair value measurements.
The following table reconciles the beginning and ending balances of assets classified as Level
3 measurements and identifies the net income (losses) the Company recognized during the six months
ended June 30, 2008 on such assets and liabilities that were included in the balance as of June 30,
2008 (millions):
| |
|
|
|
|
| |
Derivatives |
|
|
|
|
|
Balance as of January 1, 2008 |
|
$ |
11 |
|
Total gains (losses): |
|
|
|
|
Included in net income |
|
|
(10 |
) |
Included in other comprehensive income |
|
|
— |
|
Purchases, issuances and settlements |
|
|
(1 |
) |
Transfers in and/or out of Level 3 |
|
|
— |
|
|
|
|
|
Balance as of June 30, 2008 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Total loss for the six months ended June 30, 2008
included in net income related to assets still held
as of June 30, 2008 |
|
$ |
— |
|
|
|
|
|
Gains and losses recognized for assets and liabilities valued using significant unobservable
inputs are reported in Investment gains (losses), net, a component of other income (loss), net
(Note 12).
39
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 |
|
2008 |
|
|
|
|
| |
|
Rate at |
|
|
|
|
|
|
2008 |
|
Letters |
|
on |
|
Unused |
|
Outstanding Debt |
| |
|
June 30, |
|
|
|
|
|
Committed |
|
of |
|
Commercial |
|
Committed |
|
June 30, |
|
December 31, |
| |
|
2008 |
|
Maturities |
|
Capacity |
|
Credit(a) |
|
Paper |
|
Capacity(b) |
|
2008 |
|
2007 |
Cash and equivalents |
|
|
|
|
|
|
|
|
|
$ |
5,185 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,185 |
|
|
|
|
|
|
|
|
|
Bank credit agreements debt and
commercial paper programs(c) |
|
|
2.85% |
|
|
|
2011 |
|
|
|
22,085 |
|
|
|
201 |
|
|
|
2 |
|
|
|
12,972 |
|
|
$ |
8,910 |
|
|
$ |
11,124 |
|
Floating-rate public debt(c) |
|
|
2.92% |
|
|
|
2009 |
|
|
|
2,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,000 |
|
|
|
2,000 |
|
Fixed-rate public debt(c)(d) |
|
|
6.94% |
|
|
|
2008-2038 |
|
|
|
28,523 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28,523 |
|
|
|
23,705 |
|
Other fixed-rate obligations(e) |
|
|
7.17% |
|
|
|
— |
|
|
|
302 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
302 |
|
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
58,095 |
|
|
|
201 |
|
|
|
2 |
|
|
|
18,157 |
|
|
|
39,735 |
|
|
|
37,130 |
|
Debt due within one year(f) |
|
|
|
|
|
|
|
|
|
|
(128 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(128 |
) |
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
57,967 |
|
|
$ |
201 |
|
|
$ |
2 |
|
|
$ |
18,157 |
|
|
$ |
39,607 |
|
|
$ |
37,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Represents the portion of committed capacity reserved for outstanding and undrawn
letters of credit. |
| (b) |
|
Amount includes $13.641 billion of unused committed capacity at TWC, $10.855 billion
of which TWC expects to use to finance the Special Dividend. TWC’s unused committed capacity
includes $4.040 billion under the 2008 Cable Bridge Facility (described below), under which
TWC may not borrow any amounts unless and until the Special Dividend is declared in connection
with the TWC Separation Transactions. |
| (c) |
|
The bank credit agreements, commercial paper programs and public debt of the Company
rank pari passu with the senior debt of the respective obligors thereon. The maturity profile
of the Company’s outstanding debt and other financing arrangements is relatively long-term,
with a weighted maturity of approximately 10.6 years. |
| (d) |
|
As of June 30, 2008, the Company has classified $600 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. |
| (e) |
|
Amount includes capital lease and other obligations.
|
| (f) |
|
Debt due within one year primarily relates to capital lease obligations. |
Time Warner Bank Credit Agreement
On January 8, 2008, the Company entered into an agreement for a $2.0 billion three-year
unsecured term loan facility with a maturity date of January 8, 2011. Substantially all of the
borrowings under the facility, which was fully drawn on January 8, 2008, were used to repay
existing short-term borrowings.
2008 Cable Bond Offering
On June 16, 2008, TWC filed a shelf registration statement on Form S-3 (the “TWC Shelf
Registration Statement”) with the SEC that allows TWC to offer and sell from time to time senior
and subordinated debt securities and debt warrants. On June 19, 2008, TWC issued $5.0 billion in
aggregate principal amount of senior unsecured notes and debentures under the TWC Shelf
Registration Statement (the “2008 Cable Bond Offering”), consisting of $1.5 billion principal
amount of 6.20% Notes due 2013 (the “2013 Notes”), $2.0 billion principal amount of 6.75% Notes due
2018 (the “2018 Notes”) and $1.5 billion principal amount of 7.30% Debentures due 2038 (the “2038
Debentures” and, together with the 2013 Notes and the 2018 Notes, the “2008 Cable Debt
Securities”). TWC expects to use the net proceeds of $4.963 billion from this issuance to finance,
in part, the Special Dividend. If the TWC Separation Transactions are not consummated and the
Special Dividend is not paid, TWC will use the net proceeds from the issuance of the 2008 Cable
Debt Securities for general corporate purposes, including repayment of indebtedness. The 2008 Cable
Debt Securities are guaranteed by TWE and TW NY (the “Guarantors”).
The 2008 Cable Debt Securities were issued pursuant to an Indenture, dated as of April 9,
2007, as it may be amended from time to time (the “Cable Indenture”), by and among TWC, the
Guarantors and The Bank of New York, as trustee. The Cable Indenture contains customary covenants
relating to restrictions on the ability of TWC or any material subsidiary 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.
40
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The 2013 Notes mature on July 1, 2013, the 2018 Notes mature on July 1, 2018 and the 2038
Debentures mature on July 1, 2038. Interest on the 2008 Cable Debt Securities is payable
semi-annually in arrears on January 1 and July 1 of each year, beginning on January 1, 2009. The
2008 Cable Debt Securities are unsecured senior obligations of TWC and rank equally with its other
unsecured and unsubordinated obligations. The guarantees of the 2008 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 2008 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 2008 Cable
Debt Securities being redeemed and (ii) the sum of the present values of the remaining scheduled
payments on the 2008 Cable Debt Securities discounted to the redemption date on a semi-annual basis
at a government treasury rate plus 40 basis points for each of the 2013 Notes, 2018 Notes and the
2038 Debentures as further described in the Cable Indenture and the 2008 Cable Debt Securities,
plus, in each case, accrued but unpaid interest to the redemption date.
2008 Cable Bridge Facility
In addition to the 2008 Cable Debt Securities described above, on June 30, 2008, TWC entered
into a credit agreement (the “Bridge Credit Agreement”) with certain financial institutions for a
senior unsecured term loan facility in an aggregate principal amount of $9.0 billion with an
initial maturity date that is 364 days after the borrowing date (the “2008 Cable Bridge Facility”)
in order to finance, in part, the Special Dividend. Subject to certain limited exceptions, to the
extent TWC incurs debt (other than an incurrence of debt under the Cable Revolving Facility and its
existing commercial paper program), issues equity securities or completes asset sales prior to
drawing on the 2008 Cable Bridge Facility, the commitments of the lenders under the 2008 Cable
Bridge Facility will be reduced by an amount equal to the net cash proceeds from any such
incurrence, issuance or sale. As a result of the 2008 Cable Bond Offering, immediately after the
Bridge Credit Agreement was executed, the amount of the commitments under the 2008 Cable Bridge
Facility was reduced to $4.040 billion. TWC may elect to extend the maturity date of the loans
outstanding under the 2008 Cable Bridge Facility for an additional year. In the event TWC borrows
any amounts under the 2008 Cable Bridge Facility, subject to certain limited exceptions, TWC is
required to use the net cash proceeds from any subsequent incurrence of debt (other than an
incurrence of debt under the Cable Revolving Facility and its existing commercial paper program),
issuance of equity securities and asset sale to prepay amounts outstanding under the 2008 Cable
Bridge Facility. TWC may prepay amounts outstanding under the 2008 Cable Bridge Facility at any
time without penalty or premium, subject to minimum amounts. TWC may not borrow any amounts under
the 2008 Cable Bridge Facility unless and until the Special Dividend is declared in connection with
the TWC Separation Transactions.
TWC’s obligations under the 2008 Cable Bridge Facility are guaranteed by TWE and TW NY.
Amounts outstanding under the 2008 Cable Bridge Facility will bear interest at a rate equal to
LIBOR plus an applicable margin based on TWC’s credit rating, which margin, at the time of the TWC
Separation Transactions, is expected to be 100 basis points. In addition, the per annum interest
rate under the 2008 Cable Bridge Facility will increase by 25 basis points every six months until
all amounts outstanding under the 2008 Cable Bridge Facility are repaid.
The 2008 Cable Bridge Facility contains a maximum leverage ratio covenant of five times the
consolidated EBITDA (as defined in the Bridge Credit Agreement) of TWC. The 2008 Cable Bridge
Facility contains conditions, covenants, representations and warranties and events of default
substantially identical to those contained in TWC’s existing $3.045 billion five-year term loan
facility maturing on February 21, 2011.
The financial institutions’ commitments to fund borrowings under the 2008 Cable Bridge
Facility will expire upon the earliest of (i) May 19, 2009, (ii) the date on which the Separation
Agreement is terminated in accordance with its terms or (iii) the completion of the TWC Separation
Transactions.
Supplemental Facility
In May 2008, Time Warner (as lender) committed to lend TWC (as borrower) up to an aggregate
principal amount of $3.5 billion under a two-year senior unsecured supplemental term loan facility
(the “Supplemental Facility”). TWC may borrow under the Supplemental Facility at the final maturity
of the 2008 Cable Bridge Facility to repay amounts then outstanding under the 2008 Cable Bridge
Facility. As a result of the 2008 Cable Bond Offering, Time Warner’s original
41
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
commitment under the Supplemental Facility was reduced to $2.520 billion. TWC’s obligations
under the Supplemental Facility will be guaranteed by TWE and TW NY.
Time Warner’s commitment under the Supplemental Facility will be further reduced by (i) 50% of
any additional amounts by which the commitments under the 2008 Cable Bridge Facility are further
reduced by the net cash proceeds of subsequent issuances of debt or equity or certain asset sales
by TWC prior to TWC’s borrowing under the 2008 Cable Bridge Facility and (ii) the amount by which
borrowing availability under the Cable Revolving Facility exceeds $2.0 billion on the date of
borrowing under the Supplemental Facility.
6. SHAREHOLDERS’ EQUITY
Common Stock Repurchase Program
On July 26, 2007, Time Warner’s Board of Directors authorized a common stock repurchase
program that allows the Company to purchase up to an aggregate of $5 billion of common stock.
Purchases under this 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 June 30, 2008, the Company repurchased approximately 154 million shares of common stock for
approximately $2.8 billion, which included approximately 19 million shares of common stock
purchased for approximately $299 million during the six months ended June 30, 2008, pursuant to
trading programs under Rule 10b5-1 of the Exchange Act.
7. EQUITY-BASED COMPENSATION
Time Warner Equity Plans
The Company has two active equity plans under which it is authorized to grant equity awards to
employees covering an aggregate of 250 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 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 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 six months ended June 30,
2008, the Company granted approximately 29 million options at a weighted-average grant date fair
value per option of $4.12 ($2.55 net of tax). For the six months ended June 30, 2007, the Company
granted approximately 27 million stock options at a weighted-average grant date fair value per
option of $5.17 ($3.21 net of tax). The table below presents the weighted-average values of the
assumptions used to value stock options at their grant date.
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
| |
|
6/30/08 |
|
|
6/30/07 |
|
Expected volatility |
|
|
28.7% |
|
|
|
22.1% |
|
Expected term to exercise from grant date |
|
5.96 years |
|
|
5.32 years |
|
Risk-free rate |
|
|
3.2% |
|
|
|
4.4% |
|
Expected dividend yield |
|
|
1.7% |
|
|
|
1.1% |
|
Pursuant to these equity plans and an additional plan limited to non-employee directors, 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. 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. Holders of
restricted stock and RSU awards are generally entitled to receive cash dividends or dividend
equivalents, respectively, paid by the Company during the period of time that the restricted stock
or RSU awards are unvested. For the six months ended June 30, 2008, the Company granted
approximately 10 million RSUs at a weighted-average grant date fair value per RSU of $14.93. For
the six months ended June 30, 2007, the Company granted approximately 8 million RSUs at a
weighted-average grant date fair value per RSU of $19.99.
42
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Time Warner also has a performance stock unit program for senior level executives. Under this
program, recipients of performance stock 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 performance period (generally three years) 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, as well as a requirement of continued employment, the recipient 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 on
the date of grant by using a Monte Carlo analysis to estimate the total return ranking of Time
Warner among the S&P 500 Index companies over the performance period. For the six months ended June
30, 2008, the Company granted approximately 1.1 million target PSUs at a weighted-average grant
date fair value per PSU of $17.53. For the six months ended June 30, 2007, the Company granted
approximately 1.1 million target PSUs at a weighted-average grant date fair value per PSU of
$19.47.
TWC Equity Plan
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.
The Time Warner Cable Inc. 2006 Stock Incentive Plan (the “TWC 2006 Plan”) provides for the
issuance of up to 100 million shares of TWC Class A common stock to directors, employees and
certain non-employee advisors of TWC. Stock options have been granted under the TWC 2006 Plan with
exercise prices equal to the fair market value of TWC Class A common stock at the date of grant.
Generally, the TWC stock options vest ratably over a four-year vesting period and expire ten years
from the date of grant. Certain TWC 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 six months ended June 30, 2008, TWC granted approximately 4.7 million stock options at
a weighted-average grant date fair value per option of $10.25 ($6.36 net of tax). For the six
months ended June 30, 2007, TWC granted approximately 2.8 million stock options at a
weighted-average grant date fair value per option of $13.34 ($8.27 net of tax). The table below
presents the weighted-average values of the assumptions used to value TWC stock options at their
grant date.
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
| |
|
6/30/08 |
|
|
6/30/07 |
|
Expected volatility |
|
|
30.0% |
|
|
|
24.1% |
|
Expected term to exercise from grant date |
|
6.52 years |
|
6.60 years |
Risk-free rate |
|
|
3.2% |
|
|
|
4.7% |
|
Expected dividend yield |
|
|
0.0% |
|
|
|
0.0% |
|
Pursuant to the TWC 2006 Plan, TWC also granted RSU awards, which generally vest over a
four-year period from the date of grant. Certain TWC 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 of TWC 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 of TWC. For the six months ended June 30,
2008, TWC granted approximately 2.8 million RSUs at a weighted-average grant date fair value per
RSU of $27.59. For the six months ended June 30, 2007, TWC granted approximately 2.1 million RSUs
at a weighted-average grant date fair value per RSU of $37.07.
43
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Equity-Based Compensation Expense
Compensation expense and the related tax benefit recognized for equity-based compensation
plans (including the TWC 2006 Plan beginning in the second quarter of 2007) for the three and six
months ended June 30, 2008 and 2007 is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
6/30/08 |
|
|
6/30/07 |
|
|
6/30/08 |
|
|
6/30/07 |
|
Stock options |
|
$ |
28 |
|
|
$ |
43 |
|
|
$ |
82 |
|
|
$ |
92 |
|
Restricted stock, RSUs and PSUs |
|
|
33 |
|
|
|
43 |
|
|
|
87 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact on operating income |
|
$ |
61 |
|
|
$ |
86 |
|
|
$ |
169 |
|
|
$ |
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit recognized |
|
$ |
22 |
|
|
$ |
30 |
|
|
$ |
61 |
|
|
$ |
63 |
|
8. BENEFIT PLANS
Time Warner and certain of its subsidiaries have both funded and unfunded defined benefit
pension plans, the substantial majority of which are noncontributory, 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 its plans. A summary of the
components of the net periodic benefit costs from continuing operations recognized for
substantially all of Time Warner’s domestic and international defined benefit pension plans for the
three and six months ended June 30, 2008 and 2007 is as follows (millions):
Components of Net Periodic Benefit Costs
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Domestic |
|
International |
|
Domestic |
|
International |
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
6/30/08 |
|
6/30/07 |
|
6/30/08 |
|
6/30/07 |
|
6/30/08 |
|
6/30/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
40 |
|
|
$ |
35 |
|
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
88 |
|
|
$ |
75 |
|
|
$ |
11 |
|
|
$ |
11 |
|
Interest cost |
|
|
55 |
|
|
|
50 |
|
|
|
14 |
|
|
|
11 |
|
|
|
110 |
|
|
|
100 |
|
|
|
28 |
|
|
|
22 |
|
Expected
return on plan assets |
|
|
(72 |
) |
|
|
(64 |
) |
|
|
(20 |
) |
|
|
(15 |
) |
|
|
(139 |
) |
|
|
(129 |
) |
|
|
(39 |
) |
|
|
(31 |
) |
Amounts amortized |
|
|
11 |
|
|
|
9 |
|
|
|
— |
|
|
|
1 |
|
|
|
21 |
|
|
|
17 |
|
|
|
— |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs |
|
$ |
34 |
|
|
$ |
30 |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
80 |
|
|
$ |
63 |
|
|
$ |
— |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Contributions |
|
$ |
57 |
|
|
$ |
5 |
|
|
$ |
7 |
|
|
$ |
5 |
|
|
$ |
210 |
|
|
$ |
9 |
|
|
$ |
13 |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. At June 30, 2008, there were no
minimum required contributions for domestic funded plans. However, the Company anticipates making
discretionary cash contributions of at least $250 million to certain domestic funded plans in 2008,
subject to market conditions and other considerations, $200 million of which has been contributed
as of June 30, 2008. For domestic unfunded plans, contributions will continue to be made to the
extent benefits are paid. Expected benefit payments for domestic unfunded plans for 2008 are
approximately $20 million, $10 million of which has been contributed as of June 30, 2008. In
addition, the Company anticipates making an additional $20 million discretionary
contribution to its international plans in 2008.
44
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
Changes in the Company’s liability with respect to merger costs capitalized as a cost of
acquisition from December 31, 2007 to June 30, 2008 are set forth below (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee |
|
|
Other |
|
|
|
|
|
| |
|
Terminations |
|
|
Exit Costs |
|
|
Total | |
Remaining liability as of December 31, 2007 |
|
$ |
3 |
|
|
$ |
36 |
|
|
$ |
39 |
|
Noncash reductions(a) |
|
|
— |
|
|
|
(1 |
) |
|
|
(1 |
) |
Cash paid |
|
|
— |
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of June 30, 2008 |
|
$ |
3 |
|
|
$ |
30 |
|
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Noncash reductions represent an adjustment to the restructuring accrual, with a
corresponding reduction in goodwill. |
As of June 30, 2008, of the remaining liability of $33 million, $6 million was classified as a
current liability, with the remaining $27 million classified as a long-term liability on the
consolidated balance sheet. Amounts classified as long-term relating to these liabilities are
expected to be paid through 2014.
Merger, Restructuring and Shutdown Costs Expensed
Merger, restructuring and shutdown costs expensed by segment for the three and six months
ended June 30, 2008 and 2007 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
6/30/08 |
|
|
6/30/07 |
|
|
6/30/08 |
|
|
6/30/07 |
|
AOL |
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
13 |
|
|
$ |
27 |
|
Cable |
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
16 |
|
Filmed Entertainment |
|
|
(3 |
) |
|
|
— |
|
|
|
113 |
|
|
|
— |
|
Networks |
|
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
16 |
|
Publishing |
|
|
5 |
|
|
|
7 |
|
|
|
15 |
|
|
|
42 |
|
Corporate |
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger, restructuring and shutdown costs by segment |
|
$ |
6 |
|
|
$ |
33 |
|
|
$ |
148 |
|
|
$ |
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s merger, restructuring and shutdown costs primarily related to employee
termination costs that occurred at each segment and ranged from senior executives to line
personnel. For the six months ended June 30, 2008, merger, restructuring and shutdown costs were
primarily associated with the Filmed Entertainment segment’s operational reorganization of the New
Line Cinema business, related to involuntary employee terminations in connection with the
reorganization. The Company expects to incur incremental restructuring charges relating to this
operational reorganization ranging from $20 million to $30 million during the remainder of 2008.
Merger, restructuring and shutdown costs that were expensed for the three and six months ended
June 30, 2008 and 2007 are categorized as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
6/30/08 |
|
|
6/30/07 |
|
|
6/30/08 |
|
|
6/30/07 |
|
Adelphia/Comcast Transactions merger-related costs |
|
$ |
— |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
7 |
|
2008 restructuring and shutdown activity, net |
|
|
2 |
|
|
|
— |
|
|
|
138 |
|
|
|
— |
|
2007 and prior restructuring activity, net |
|
|
4 |
|
|
|
30 |
|
|
|
10 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger, restructuring and shutdown costs expensed |
|
$ |
6 |
|
|
$ |
33 |
|
|
$ |
148 |
|
|
$ |
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Selected Information
Changes in the Company’s liability with respect to merger, restructuring and shutdown costs
from December 31, 2007 to June 30, 2008 are set forth below (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee |
|
Other |
|
|
|
| |
|
Terminations |
|
Exit Costs |
|
Total |
Remaining liability as of December 31, 2007 |
|
$ |
163 |
|
|
$ |
31 |
|
|
$ |
194 |
|
Net accruals |
|
|
143 |
|
|
|
5 |
|
|
|
148 |
|
Noncash reductions(a) |
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
Cash paid(b) |
|
|
(86 |
) |
|
|
(11 |
) |
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of June 30, 2008 |
|
$ |
217 |
|
|
$ |
25 |
|
|
$ |
242 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
Noncash reductions relate to the reversal of a severance accrual related to former
employees. |
| (b) |
|
Of the $97 million paid in 2008, $31 million was paid during the three months ended
June 30, 2008. |
As of June 30, 2008, out of the remaining liability of $242 million, $203 million was
classified as a current liability, with the remaining $39 million classified as a long-term
liability on the consolidated balance sheet. Amounts classified as long-term relating to these
liabilities are expected to be paid through 2015.
10. SEGMENT INFORMATION
Time Warner classifies its operations into five reportable segments: AOL, consisting
principally of interactive consumer and advertising services; Cable, consisting principally of
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 that provide programming; and
Publishing, consisting principally of magazine publishing.
Information as to the operations of Time Warner in each of its reportable 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 June 30, 2008 |
| |
|
Subscription |
|
Advertising |
|
Content |
|
Other |
|
Total |
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
491 |
|
|
$ |
530 |
|
|
$ |
— |
|
|
$ |
36 |
|
|
$ |
1,057 |
|
Cable |
|
|
4,065 |
|
|
|
233 |
|
|
|
— |
|
|
|
— |
|
|
|
4,298 |
|
Filmed Entertainment |
|
|
10 |
|
|
|
22 |
|
|
|
2,484 |
|
|
|
48 |
|
|
|
2,564 |
|
Networks |
|
|
1,719 |
|
|
|
906 |
|
|
|
189 |
|
|
|
12 |
|
|
|
2,826 |
|
Publishing |
|
|
387 |
|
|
|
648 |
|
|
|
12 |
|
|
|
129 |
|
|
|
1,176 |
|
Intersegment elimination |
|
|
(210 |
) |
|
|
(28 |
) |
|
|
(122 |
) |
|
|
(6 |
) |
|
|
(366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
6,462 |
|
|
$ |
2,311 |
|
|
$ |
2,563 |
|
|
$ |
219 |
|
|
$ |
11,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 30, 2007 |
| |
|
Subscription |
|
Advertising |
|
Content |
|
Other |
|
Total |
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
691 |
|
|
$ |
522 |
|
|
$ |
— |
|
|
$ |
40 |
|
|
$ |
1,253 |
|
Cable |
|
|
3,788 |
|
|
|
226 |
|
|
|
— |
|
|
|
— |
|
|
|
4,014 |
|
Filmed Entertainment |
|
|
7 |
|
|
|
13 |
|
|
|
2,179 |
|
|
|
54 |
|
|
|
2,253 |
|
Networks |
|
|
1,561 |
|
|
|
817 |
|
|
|
212 |
|
|
|
11 |
|
|
|
2,601 |
|
Publishing |
|
|
383 |
|
|
|
714 |
|
|
|
13 |
|
|
|
143 |
|
|
|
1,253 |
|
Intersegment elimination |
|
|
(201 |
) |
|
|
(24 |
) |
|
|
(161 |
) |
|
|
(8 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
6,229 |
|
|
$ |
2,268 |
|
|
$ |
2,243 |
|
|
$ |
240 |
|
|
$ |
10,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Six Months Ended June 30, 2008 |
| |
|
Subscription |
|
Advertising |
|
Content |
|
Other |
|
Total |
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
1,030 |
|
|
$ |
1,082 |
|
|
$ |
— |
|
|
$ |
73 |
|
|
$ |
2,185 |
|
Cable |
|
|
8,028 |
|
|
|
430 |
|
|
|
— |
|
|
|
— |
|
|
|
8,458 |
|
Filmed Entertainment |
|
|
20 |
|
|
|
37 |
|
|
|
5,237 |
|
|
|
110 |
|
|
|
5,404 |
|
Networks |
|
|
3,414 |
|
|
|
1,645 |
|
|
|
402 |
|
|
|
24 |
|
|
|
5,485 |
|
Publishing |
|
|
752 |
|
|
|
1,198 |
|
|
|
24 |
|
|
|
247 |
|
|
|
2,221 |
|
Intersegment elimination |
|
|
(422 |
) |
|
|
(57 |
) |
|
|
(292 |
) |
|
|
(10 |
) |
|
|
(781 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
12,822 |
|
|
$ |
4,335 |
|
|
$ |
5,371 |
|
|
$ |
444 |
|
|
$ |
22,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Six Months Ended June 30, 2007 |
| |
|
Subscription |
|
Advertising |
|
Content |
|
Other |
|
Total |
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
1,564 |
|
|
$ |
1,071 |
|
|
$ |
— |
|
|
$ |
76 |
|
|
$ |
2,711 |
|
Cable |
|
|
7,450 |
|
|
|
415 |
|
|
|
— |
|
|
|
— |
|
|
|
7,865 |
|
Filmed Entertainment |
|
|
14 |
|
|
|
18 |
|
|
|
4,842 |
|
|
|
122 |
|
|
|
4,996 |
|
Networks |
|
|
3,106 |
|
|
|
1,472 |
|
|
|
412 |
|
|
|
21 |
|
|
|
5,011 |
|
Publishing |
|
|
739 |
|
|
|
1,268 |
|
|
|
26 |
|
|
|
268 |
|
|
|
2,301 |
|
Intersegment elimination |
|
|
(405 |
) |
|
|
(44 |
) |
|
|
(258 |
) |
|
|
(13 |
) |
|
|
(720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
12,468 |
|
|
$ |
4,200 |
|
|
$ |
5,022 |
|
|
$ |
474 |
|
|
$ |
22,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
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 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 impact segment results. Revenues recognized by Time
Warner’s segments on intersegment transactions are as follows:
47
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
6/30/08 |
|
6/30/07 |
| |
|
(millions) |
|
(millions) |
Intersegment Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
11 |
|
Cable |
|
|
2 |
|
|
|
5 |
|
|
|
5 |
|
|
|
8 |
|
Filmed Entertainment |
|
|
114 |
|
|
|
148 |
|
|
|
281 |
|
|
|
239 |
|
Networks |
|
|
242 |
|
|
|
229 |
|
|
|
477 |
|
|
|
448 |
|
Publishing |
|
|
7 |
|
|
|
7 |
|
|
|
13 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intersegment revenues |
|
$ |
366 |
|
|
$ |
394 |
|
|
$ |
781 |
|
|
$ |
720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
6/30/08 |
|
6/30/07 |
| |
|
(millions) |
|
(millions) |
Operating Income (Loss)
before Depreciation and
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL(a) |
|
$ |
350 |
|
|
$ |
484 |
|
|
$ |
755 |
|
|
$ |
1,695 |
|
Cable(b) |
|
|
1,525 |
|
|
|
1,444 |
|
|
|
2,927 |
|
|
|
2,751 |
|
Filmed Entertainment |
|
|
196 |
|
|
|
174 |
|
|
|
476 |
|
|
|
506 |
|
Networks(c) |
|
|
842 |
|
|
|
712 |
|
|
|
1,800 |
|
|
|
1,649 |
|
Publishing |
|
|
269 |
|
|
|
302 |
|
|
|
414 |
|
|
|
386 |
|
Corporate(d) |
|
|
(81 |
) |
|
|
(93 |
) |
|
|
(184 |
) |
|
|
(361 |
) |
Intersegment elimination |
|
|
8 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
(Loss) before
Depreciation and
Amortization |
|
$ |
3,109 |
|
|
$ |
3,022 |
|
|
$ |
6,187 |
|
|
$ |
6,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
For the three and six months ended June 30, 2007, includes a net $1 million
reduction to the gains on the sales of AOL’s German and U.K. access businesses and for the
six months ended June 30, 2007, includes a gain of approximately $670 million on the sale of
AOL’s German access business and a $1 million noncash asset impairment. |
| (b) |
|
For the three and six months ended June 30, 2008, includes a $45 million noncash
impairment of certain non-core cable systems held for sale. |
| (c) |
|
For the three and six months ended June 30, 2008, includes an $18 million noncash
impairment of GameTap as a result of Turner’s decision to sell its on-line video game
business. For the three and six months ended June 30, 2007, includes a $34 million noncash
impairment of the Court TV tradename as a result of rebranding the network’s name to truTV,
effective January 1, 2008. |
| (d) |
|
For the three and six months ended June 30, 2008, includes $4 million and $8
million, respectively, in net expenses related to securities litigation and government
investigations. For the three and six months ended June 30, 2007, includes $1 million and
$153 million, respectively, in legal reserves related to securities litigation and $3
million and $14 million, respectively, in net expenses related to securities litigation and
government investigations. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
6/30/08 |
|
6/30/07 |
| |
|
(millions) |
|
|
(millions) |
|
Depreciation of Property, Plant and Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
(79 |
) |
|
$ |
(104 |
) |
|
$ |
(162 |
) |
|
$ |
(209 |
) |
Cable |
|
|
(722 |
) |
|
|
(669 |
) |
|
|
(1,423 |
) |
|
|
(1,318 |
) |
Filmed Entertainment |
|
|
(43 |
) |
|
|
(40 |
) |
|
|
(84 |
) |
|
|
(75 |
) |
Networks |
|
|
(81 |
) |
|
|
(73 |
) |
|
|
(159 |
) |
|
|
(147 |
) |
Publishing |
|
|
(34 |
) |
|
|
(30 |
) |
|
|
(68 |
) |
|
|
(57 |
) |
Corporate |
|
|
(10 |
) |
|
|
(12 |
) |
|
|
(21 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation of property, plant and equipment |
|
$ |
(969 |
) |
|
$ |
(928 |
) |
|
$ |
(1,917 |
) |
|
$ |
(1,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
6/30/08 |
|
6/30/07 |
|
6/30/08 |
|
6/30/07 |
| |
|
(millions) |
|
(millions) |
Amortization of Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
(41 |
) |
|
$ |
(20 |
) |
|
$ |
(79 |
) |
|
$ |
(42 |
) |
Cable |
|
|
(65 |
) |
|
|
(64 |
) |
|
|
(130 |
) |
|
|
(143 |
) |
Filmed Entertainment |
|
|
(59 |
) |
|
|
(53 |
) |
|
|
(115 |
) |
|
|
(107 |
) |
Networks |
|
|
(12 |
) |
|
|
(5 |
) |
|
|
(18 |
) |
|
|
(8 |
) |
Publishing |
|
|
(17 |
) |
|
|
(16 |
) |
|
|
(35 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization of intangible assets |
|
$ |
(194 |
) |
|
$ |
(158 |
) |
|
$ |
(377 |
) |
|
$ |
(335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
48
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
| |
|
6/30/08 |
|
|
6/30/07 |
|
|
6/30/08 |
|
|
6/30/07 |
|
| |
|
(millions) |
|
|
(millions) |
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL(a) |
|
$ |
230 |
|
|
$ |
360 |
|
|
$ |
514 |
|
|
$ |
1,444 |
|
Cable(b) |
|
|
738 |
|
|
|
711 |
|
|
|
1,374 |
|
|
|
1,290 |
|
Filmed Entertainment |
|
|
94 |
|
|
|
81 |
|
|
|
277 |
|
|
|
324 |
|
Networks(c) |
|
|
749 |
|
|
|
634 |
|
|
|
1,623 |
|
|
|
1,494 |
|
Publishing |
|
|
218 |
|
|
|
256 |
|
|
|
311 |
|
|
|
294 |
|
Corporate(d) |
|
|
(91 |
) |
|
|
(105 |
) |
|
|
(205 |
) |
|
|
(384 |
) |
Intersegment elimination |
|
|
8 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) |
|
$ |
1,946 |
|
|
$ |
1,936 |
|
|
$ |
3,893 |
|
|
$ |
4,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| (a) |
|
For the three and six months ended June 30, 2007, includes a net $1 million
reduction to the gains on the sales of AOL’s German and U.K. access businesses and for the
six months ended June 30, 2007, includes a gain of approximately $670 million on the sale of
AOL’s German access business and a $1 million noncash asset impairment. |
| |
| (b) |
|
For the three and six months ended June 30, 2008, includes a $45 million noncash
impairment of certain non-core cable systems held for sale. |
| |
| (c) |
|
For the three and six months ended June 30, 2008, includes an $18 million noncash
impairment of GameTap as a result of Turner’s decision to sell its on-line video game
business. For the three and six months ended June 30, 2007, includes a $34 million noncash
impairment of the Court TV tradename as a result of rebranding the network’s name to truTV,
effective January 1, 2008. |
| |
| (d) |
|
For the three and six months ended June 30, 2008, includes $4 million and $8
million, respectively, in net expenses related to securities litigation and government
investigations. For the three and six months ended June 30, 2007, includes $1 million and
$153 million, respectively, in legal reserves related to securities litigation and $3
million and $14 million, respectively, in net expenses related to securities litigation and
government investigations. |
A summary of total assets by operating segment is set forth below (millions):
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
December 31, |
| |
|
2008 |
|
2007 |
Assets |
|
|
|
|
|
|
|
|
AOL |
|
$ |
6,748 |
|
|
$ |
5,903 |
|
Cable |
|
|
60,449 |
|
|
|
56,597 |
|
Filmed Entertainment |
|
|
17,399 |
|
|
|
18,619 |
|
Networks |
|
|
35,684 |
|
|
|
35,556 |
|
Publishing |
|
|
14,460 |
|
|
|
14,732 |
|
Corporate |
|
|
2,320 |
|
|
|
2,423 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
137,060 |
|
|
$ |
133,830 |
|
|
|
|
|
|
|
|
11. COMMITMENTS AND CONTINGENCIES
Commitments
As more fully described in the 2007 Form 10-K, the Company has a contingent commitment with
regard to its former investment in the Six Flags theme parks located in Georgia and Texas (“Six
Flags Georgia” and “Six Flags Texas,” respectively, and, collectively, the “Parks”). To date, no
payments have been made by the Company pursuant to this contingent commitment. In November 2007,
Moody’s Investors Service, Standard & Poor’s and Fitch Ratings downgraded their credit ratings for
Six Flags Inc. (“Six Flags”). In March 2008, Moody’s Investors Service changed Six Flags’ rating
outlook to negative from stable and downgraded its speculative-grade liquidity rating. In June
2008, Moody’s Investors Service and Fitch Ratings downgraded their senior unsecured credit ratings
for Six Flags.
The aggregate undiscounted estimated future cash flow requirements covered by the contingent
commitment over the remaining term of the agreements are approximately $1.4 billion. The agreements
extend through 2027 (Six Flags Georgia) and 2028 (Six Flags Texas). Six Flags has also publicly
disclosed that it has deposited approximately $15 million in an escrow account as a source of funds
in the event the Company is required to fund any portion of the contingent commitment in the
future.
Because the contingent commitment existed prior to the Company’s adoption of FASB
Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of
49
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Others (“FIN 45”), and no modifications to the arrangements have been made since the date the
contingent commitment came into existence, the recognition requirements of FIN 45 are not
applicable to the arrangements and the Company has continued to account for the contingent
commitment in accordance with FASB Statement No. 5, Accounting for Contingencies (“FAS 5”). Based
on its evaluation of the current facts and circumstances surrounding the contingent commitment
(including the recent financial performance reported for the Parks and by Six Flags), the Company
has concluded that a probable loss does not exist and, consequently, no liability for the
arrangements has been recognized at June 30, 2008. Because of the specific circumstances
surrounding the arrangements and the fact that no active or observable market exists for this type
of financial guarantee, the Company is unable to determine a current fair value for the contingent
commitment.
In connection with the Separation Agreement, Time Warner (as lender) has a commitment to lend
TWC (as borrower) $2.520 billion under the Supplemental Facility. TWC may borrow under the
Supplemental Facility at the final maturity of the 2008 Cable Bridge Facility to repay amounts then
outstanding under the 2008 Cable Bridge Facility. TWC’s obligations under the Supplemental Facility
will be guaranteed by TWE and TW NY.
Contingencies
Securities Matters
During the Summer and Fall of 2002, numerous shareholder class action lawsuits were filed
against 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, among other things, 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. All of these lawsuits were eventually
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, several lawsuits
brought under the Employee Retirement Income Security Act of 1974 (“ERISA”), and other related
matters, certain of which are described below) under the caption In re AOL Time Warner Inc.
Securities and “ERISA” Litigation. In the summer of 2005, the Company entered into a settlement
agreement to resolve this matter with the Minnesota State Board of Investment (“MSBI”), who had
been designated lead plaintiff for the consolidated securities actions, and the court granted final
approval of the settlement on April 6, 2006. The settlement fund established for the members of the
class represented in this action (the “MSBI Settlement Fund”) consisted of $2.4 billion contributed
by the Company and $100 million contributed by Ernst & Young LLP. In addition, $150 million the
Company had previously paid in connection with the settlement of the investigation by the U.S.
Department of Justice, and $300 million the Company had previously paid in connection with the
settlement of its SEC investigation, were transferred to the MSBI Settlement Fund for distribution
to investors through the MSBI settlement process. An initial distribution of these funds has been
made, and administration of the settlement is ongoing.
During the Fall of 2002 and Winter of 2003, several 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. In 2006, the parties
entered into a settlement agreement to resolve the ERISA matters, and the court granted final
approval of the settlement on September 27, 2006. The aggregate amount for which the Company
settled this lawsuit as well as the related lawsuits is described below. 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. Two of the lead
plaintiffs filed an appeal on November 26, 2007 challenging the amount of their incentive awards,
but the matter was remanded to the district court upon stipulation of the parties in January 2008,
and resolved by order of the district court dated April 9, 2008. The time to appeal that order has
expired.
50
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During the Summer and Fall of 2002, numerous shareholder derivative lawsuits were filed in
state and federal courts naming as defendants certain current and former directors and officers of
the Company, as well as the Company as a nominal defendant. The complaints alleged that defendants
breached their fiduciary duties by, among other things, causing the Company to issue corporate
statements that did not accurately represent that AOL had declining advertising revenues. Certain
of these lawsuits were later dismissed, and others were eventually consolidated in their respective
jurisdictions. In 2006, the parties entered into a settlement agreement to resolve all of the
remaining derivative matters, and the Court granted final approval of the settlement on September
6, 2006. The court has yet to rule on plaintiffs’ petition for attorneys’ fees and expenses.
During the fourth quarter of 2006, the Company established an additional reserve of $600
million related to its remaining securities litigation matters, some of which are 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. During 2007, the Company recorded
charges of approximately $153 million for these settlements. At June 30, 2008, the Company’s
remaining reserve related to these matters is $10 million, which approximates an expected
attorneys’ fee award in the previously settled derivative matter described above. The Company has
no remaining securities litigation matters as of June 30, 2008.
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 São Paulo, where WBS is based, have
challenged this position. Certain of these matters were settled in September 2007 pursuant to a
government-sponsored amnesty program. 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.
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. On March 26, 2008, the court entered an order of summary
judgment finding, among other things, that plaintiffs’ notices of termination were valid and that
plaintiffs had thereby recaptured, as of April 16, 1999, their rights to a one-half interest in the
Superman story material, as first published, but that the accounting for profits would not include
profits attributable to foreign exploitation, republication of pre-termination works and trademark
exploitation. The remaining issues in the case are scheduled for trial starting in November 2008.
The Company intends to defend against this lawsuit vigorously.
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.
51
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. On March 31, 2008, the court, among other things, denied the
Company’s summary judgment motion as moot in view of the court’s July 27, 2007 reconsideration
ruling. To the extent any issues remain, the Company intends to defend against this lawsuit
vigorously.
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 FLSA asking the court to notify former
community leaders nationwide about the lawsuit and allow those community leaders the opportunity to
join the lawsuit. On February 21, 2008, the court granted plaintiffs’ motion to issue notice to the
former community leaders nationwide, and between April and May of 2008, the parties issued that
notice. 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.
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.
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. On January 3, 2008, the court granted AOL’s motion and dismissed the complaint
with prejudice. On January 29, 2008, plaintiff filed a
52
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
notice of appeal with the U.S. Court of Appeals for the Ninth Circuit. Briefing on the appeal
began in May 2008 and is underway. The Company intends to defend against this lawsuit vigorously.
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
and/or voicemail 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. In April 2008, AOL and TWC (among
other defendants) filed motions for summary judgment, arguing that a number of claims in the
patents at issue are invalid under Section 112 of the Patent Act. On June 19, 2008, the court
issued an order granting, in part, and denying, in part, those motions. The Company intends to
defend against this lawsuit vigorously.
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 nationwide 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, but final approval of
that settlement was denied on January 26, 2007. The parties subsequently reached a revised
settlement to resolve this action on terms that are not material to the Company and submitted their
agreement to the district court on April 2, 2008. On May 8, 2008, the district court granted
preliminary approval of the settlement, but it is still subject to final approval by the district
court and there can be no assurance that the settlement will receive this approval. Absent the
issuance of final court approval of the revised settlement, the Company intends to defend against
this lawsuit vigorously.
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 (“NLC Corp.”), a wholly owned subsidiary of the Company, and its subsidiary, New
Line Productions Inc. (“NL Productions”) (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 May 2009. The Company intends to defend against these proceedings vigorously.
Other matters relating to the Trilogy have also been pursued. On February 11, 2008, trustees
of the Tolkien Trust and the J.R.R. Tolkien 1967 Discretionary Settlement Trust, as well as
HarperCollins Publishers, Ltd. and two related publishing entities, sued NLC Corp., Katja, and
other unnamed defendants in Los Angeles Superior Court. The complaint alleges that defendants
breached contracts relating to the Trilogy by, among other things, failing to make full payment to
plaintiffs for their participation in the Trilogy’s gross receipts. The suit also seeks
declarations as to the meaning of several provisions of the relevant agreements, including a
declaration that would terminate defendants’ future rights to other motion pictures based on J.R.R.
Tolkien’s works, including The Hobbit. In addition, the complaint sets forth related claims of
breach of fiduciary duty, fraud and for reformation, an accounting and imposition of a constructive
trust. Plaintiffs seek compensatory damages in excess of $150 million, unspecified punitive
damages, and other relief. On May 14, 2008, NLC Corp. moved to dismiss under California law certain
claims in the complaint and on June 24, 2008, the court granted that motion, finding that
plaintiffs had failed to state sufficient facts to support their fraud and breach of fiduciary duty
claims, and granted plaintiffs leave to amend the complaint. The Company intends to defend against
this lawsuit vigorously.
53
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AOL Europe Services SARL (“AOL Luxembourg”), a wholly owned subsidiary of AOL organized under
the laws of Luxembourg, has received two separate assessments from the French tax authorities for
French value added tax (“VAT”) related to AOL Luxembourg’s subscription revenues from French
subscribers. The first assessment, received on December 27, 2006, relates to subscription revenues
earned during the period from July 1, 2003 through December 31, 2003, and the second assessment,
received on December 5, 2007, relates to subscription revenues earned during the period from
January 1, 2004 through December 31, 2004. Together, the assessments, including interest accrued
through the respective assessment dates, total €94 million (approximately $149 million based on
the exchange rate as of June 30, 2008). The French tax authorities assert that the French
subscriber revenues are subject to French VAT, instead of Luxembourg VAT, as originally reported
and paid by AOL Luxembourg. AOL Luxembourg could receive similar assessments from the French tax
authorities in the future for subscription revenues earned in 2005 through 2006. The Company is
currently appealing these assessments at the French VAT audit level and intends to defend against
these assessments vigorously.
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 $109 million based on the exchange rate as of June 30, 2008).
The Company continues to defend this matter vigorously and has challenged the judgment by filing a
petition for review with the Supreme Court of the Republic of Indonesia on February 21, 2008. Mr.
Suharto’s heirs opposed this petition in a filing made on or about April 4, 2008. 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 June 30,
2008. 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 named as defendants several other programming content providers (collectively, the
“programmer defendants”) as well as other cable and satellite providers (collectively, the
“distributor defendants”), alleged violations of Sections 1 and 2 of the Sherman Antitrust Act.
Among other things, the complaint alleged 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. On December
3, 2007, plaintiffs filed an amended complaint in this action (the “First Amended Complaint”) that,
among other things, dropped the Section 2 claims and all allegations of horizontal coordination. On
December 21, 2007, the programmer defendants, including the Company, and the distributor
defendants, including TWC, filed motions to dismiss the First Amended Complaint. On March 10, 2008,
the court granted these motions, dismissing the First Amended Complaint with leave to amend. On
March 20, 2008, plaintiffs filed a second amended complaint (the “Second Amended Complaint”) that
modified certain aspects of the First Amended Complaint in an attempt to address the deficiencies
noted by the court in its prior dismissal order. On April 22, 2008, the programmer defendants,
including the Company, and the distributor defendants, including TWC, filed motions to dismiss the
Second Amended Complaint. On June 25, 2008, the court denied these motions, and on July 14, 2008,
the programmer defendants and the distributor defendants filed motions requesting the court to
certify its June 25 order for interlocutory appeal to the U.S. Court of Appeals for the Ninth
Circuit. The Company intends to defend against this lawsuit vigorously.
On April 4, 2007, the National Labor Relations Board (“NLRB”) issued a complaint against CNN
America Inc. (“CNN America”) and Team Video Services, LLC (“Team Video”). This administrative
proceeding relates to CNN America’s December 2003 and January 2004 terminations of its contractual
relationships with Team Video, under which Team Video had provided electronic newsgathering
services in Washington, DC and New York, NY. The National Association of Broadcast Employees and
Technicians, under which Team Video’s employees were unionized, initially filed charges of unfair
labor practices with the NLRB in February 2004, alleging that CNN America and Team Video were joint
employers, that CNN America was a successor employer to Team Video, and/or that CNN America
discriminated in its hiring practices
54
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
to avoid becoming a successor employer or due to specific individuals’ union affiliation or
activities. The NLRB investigated the charges and issued the above-noted complaint. The complaint
seeks, among other things, the reinstatement of certain union members and monetary damages. A
hearing in the matter before an NLRB Administrative Law Judge began on December 3, 2007. The
Company intends to defend against this matter vigorously.
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.
Income Tax Uncertainties
During the six months ended June 30, 2008, the Company recorded additional income tax reserves
of approximately $175 million, including reserves attributable to uncertainties associated with the
utilization of certain state and local tax attributes and taxes on foreign remittances. Of the $175
million additional income tax reserves, approximately $110 million would affect the Company’s
effective tax rate if reversed. During the six months ended June 30, 2008, the Company recorded
interest reserves related to the income tax reserves of approximately $35 million.
12. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
Additional financial information with respect to cash (payments) and receipts is as follows
(millions):
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
| |
|
6/30/08 |
|
6/30/07 |
|
Cash payments made for interest |
|
$ |
(1,113 |
) |
|
$ |
(1,135 |
) |
Interest income received |
|
|
58 |
|
|
|
44 |
|
|
|
|
|
|
|
|
Cash interest payments, net |
|
$ |
(1,055 |
) |
|
$ |
(1,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments made for income taxes |
|
$ |
(436 |
) |
|
$ |
(392 |
) |
Income tax refunds received |
|
|
105 |
|
|
|
65 |
|
|
|
|
|
|
|
|
Cash tax payments, net |
|
$ |
(331 |
) |
|
$ |
(327 |
) |
|
|
|
|
|
|
|
The consolidated statement of cash flows for the six months ended June 30, 2008 reflects
approximately $33 million of common stock repurchases that were executed in the fourth quarter of
2007 and were included in other current liabilities as of December 31, 2007, but for which payment
was not made until the first quarter of 2008.
Interest Expense, Net
Interest expense, net, consists of (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
| |
|
6/30/08 |
|
|
6/30/07 |
|
|
6/30/08 |
|
6/30/07 |
Interest income |
|
$ |
50 |
|
|
$ |
53 |
|
|
$ |
100 |
|
|
$ |
99 |
|
Interest expense |
|
|
(600 |
) |
|
|
(627 |
) |
|
|
(1,196 |
) |
|
|
(1,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense, net |
|
$ |
(550 |
) |
|
$ |
(574 |
) |
|
$ |
(1,096 |
) |
|
$ |
(1,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
55
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other Income (Loss), Net
Other income (loss), net, consists of (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
6/30/08 |
|
|
6/30/07 |
|
|
6/30/08 |
|
|
6/30/07 |
|
Investment gains (losses), net |
|
$ |
12 |
|
|
$ |
111 |
|
|
$ |
(15 |
) |
|
$ |
274 |
|
Income (loss) on equity method investees |
|
|
— |
|
|
|
9 |
|
|
|
(8 |
) |
|
|
(3 |
) |
Losses on accounts receivable securitization programs |
|
|
(7 |
) |
|
|
(14 |
) |
|
|
(20 |
) |
|
|
(27 |
) |
Other |
|
|
(10 |
) |
|
|
2 |
|
|
|
(10 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss), net |
|
$ |
(5 |
) |
|
$ |
108 |
|
|
$ |
(53 |
) |
|
$ |
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Current Liabilities
Other current liabilities consist of (millions):
| |
|
|
|
|
|
|
|
|
| |
June 30, |
|
|
December 31, |
|
| |
2008 |
|
|
2007 |
|
Accrued expenses |
|
$ |
3,730 |
|
|
$ |
3,975 |
|
Accrued compensation |
|
|
1,000 |
|
|
|
1,474 |
|
Accrued income taxes |
|
|
216 |
|
|
|
162 |
|
|
|
|
|
|
|
Total other current liabilities, net |
|
$ |
4,946 |
|
|
$ |
5,611 |
|
|
|
|
|
|
|
56
TIME
WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
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 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 intercompany 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. Interest income
(expense) is determined based on third-party debt and the relevant intercompany amounts within the
respective legal entity.
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 pretax income to the consolidated pretax income.
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 that 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.
Corporate overhead expenses have been reflected as expenses of the Parent Company and have not
been allocated to the Guarantor Subsidiaries or the Non-Guarantor Subsidiaries.
57
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Balance Sheet
June 30, 2008
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
223 |
|
|
$ |
91 |
|
|
$ |
4,871 |
|
|
$ |
— |
|
|
$ |
5,185 |
|
Receivables, net |
|
|
29 |
|
|
|
2 |
|
|
|
6,117 |
|
|
|
— |
|
|
|
6,148 |
|
Inventories |
|
|
— |
|
|
|
18 |
|
|
|
1,995 |
|
|
|
— |
|
|
|
2,013 |
|
Prepaid expenses and other current assets |
|
|
63 |
|
|
|
83 |
|
|
|
627 |
|
|
|
— |
|
|
|
773 |
|
Deferred income taxes |
|
|
732 |
|
|
|
562 |
|
|
|
554 |
|
|
|
(1,116 |
) |
|
|
732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,047 |
|
|
|
756 |
|
|
|
14,164 |
|
|
|
(1,116 |
) |
|
|
14,851 |
|
Noncurrent inventories and film costs |
|
|
— |
|
|
|
— |
|
|
|
5,240 |
|
|
|
— |
|
|
|
5,240 |
|
Investments in amounts due from consolidated
subsidiaries |
|
|
91,445 |
|
|
|
84,366 |
|
|
|
— |
|
|
|
(175,811 |
) |
|
|
— |
|
Investments, including available-for-sale securities |
|
|
74 |
|
|
|
508 |
|
|
|
1,860 |
|
|
|
(502 |
) |
|
|
1,940 |
|
Property, plant and equipment, net |
|
|
417 |
|
|
|
242 |
|
|
|
17,553 |
|
|
|
— |
|
|
|
18,212 |
|
Intangible assets subject to amortization, net |
|
|
— |
|
|
|
1 |
|
|
|
5,087 |
|
|
|
— |
|
|
|
5,088 |
|
Intangible assets not subject to amortization |
|
|
— |
|
|
|
643 |
|
|
|
46,571 |
|
|
|
— |
|
|
|
47,214 |
|
Goodwill |
|
|
— |
|
|
|
2,617 |
|
|
|
39,917 |
|
|
|
— |
|
|
|
42,534 |
|
Other assets |
|
|
111 |
|
|
|
270 |
|
|
|
1,600 |
|
|
|
— |
|
|
|
1,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
93,094 |
|
|
$ |
89,403 |
|
|
$ |
131,992 |
|
|
$ |
(177,429 |
) |
|
$ |
137,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6 |
|
|
$ |
16 |
|
|
$ |
1,195 |
|
|
$ |
— |
|
|
$ |
1,217 |
|
Participations payable |
|
|
— |
|
|
|
— |
|
|
|
2,590 |
|
|
|
— |
|
|
|
2,590 |
|
Royalties and programming costs payable |
|
|
— |
|
|
|
9 |
|
|
|
1,291 |
|
|
|
— |
|
|
|
1,300 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
1,278 |
|
|
|
— |
|
|
|
1,278 |
|
Debt due within one year |
|
|
— |
|
|
|
5 |
|
|
|
123 |
|
|
|
— |
|
|
|
128 |
|
Other current liabilities |
|
|
501 |
|
|
|
377 |
|
|
|
4,212 |
|
|
|
(144 |
) |
|
|
4,946 |
|
Current liabilities of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
507 |
|
|
|
407 |
|
|
|
10,692 |
|
|
|
(144 |
) |
|
|
11,462 |
|
Long-term debt |
|
|
17,727 |
|
|
|
5,264 |
|
|
|
16,616 |
|
|
|
— |
|
|
|
39,607 |
|
Mandatorily
redeemable preferred membership units issued by a subsidiary |
|
|
— |
|
|
|
— |
|
|
|
300 |
|
|
|
— |
|
|
|
300 |
|
Debt due (from) to affiliates |
|
|
(1,090 |
) |
|
|
— |
|
|
|
1,090 |
|
|
|
— |
|
|
|
— |
|
Deferred income taxes |
|
|
14,361 |
|
|
|
15,782 |
|
|
|
16,149 |
|
|
|
(31,931 |
) |
|
|
14,361 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
473 |
|
|
|
— |
|
|
|
473 |
|
Other liabilities |
|
|
2,215 |
|
|
|
3,079 |
|
|
|
5,943 |
|
|
|
(4,189 |
) |
|
|
7,048 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
4,056 |
|
|
|
379 |
|
|
|
4,435 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to Time Warner and subsidiaries |
|
|
— |
|
|
|
(14,215 |
) |
|
|
(31,685 |
) |
|
|
45,900 |
|
|
|
— |
|
Other shareholders’ equity |
|
|
59,374 |
|
|
|
79,086 |
|
|
|
108,358 |
|
|
|
(187,444 |
) |
|
|
59,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
59,374 |
|
|
|
64,871 |
|
|
|
76,673 |
|
|
|
(141,544 |
) |
|
|
59,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
93,094 |
|
|
$ |
89,403 |
|
|
$ |
131,992 |
|
|
$ |
(177,429 |
) |
|
$ |
137,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Balance Sheet
December 31, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
586 |
|
|
$ |
53 |
|
|
$ |
877 |
|
|
$ |
— |
|
|
$ |
1,516 |
|
Receivables, net |
|
|
32 |
|
|
|
4 |
|
|
|
7,260 |
|
|
|
— |
|
|
|
7,296 |
|
Inventories |
|
|
— |
|
|
|
5 |
|
|
|
2,100 |
|
|
|
— |
|
|
|
2,105 |
|
Prepaid expenses and other current assets |
|
|
135 |
|
|
|
88 |
|
|
|
611 |
|
|
|
— |
|
|
|
834 |
|
Deferred income taxes |
|
|
700 |
|
|
|
494 |
|
|
|
465 |
|
|
|
(959 |
) |
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,453 |
|
|
|
644 |
|
|
|
11,313 |
|
|
|
(959 |
) |
|
|
12,451 |
|
Noncurrent inventories and film costs |
|
|
— |
|
|
|
— |
|
|
|
5,304 |
|
|
|
— |
|
|
|
5,304 |
|
Investments in amounts due from consolidated
subsidiaries |
|
|
88,720 |
|
|
|
83,727 |
|
|
|
— |
|
|
|
(172,447 |
) |
|
|
— |
|
Investments, including available-for-sale securities |
|
|
57 |
|
|
|
581 |
|
|
|
1,797 |
|
|
|
(472 |
) |
|
|
1,963 |
|
Property, plant and equipment, net |
|
|
434 |
|
|
|
251 |
|
|
|
17,363 |
|
|
|
— |
|
|
|
18,048 |
|
Intangible assets subject to amortization, net |
|
|
1 |
|
|
|
1 |
|
|
|
5,165 |
|
|
|
— |
|
|
|
5,167 |
|
Intangible assets not subject to amortization |
|
|
— |
|
|
|
641 |
|
|
|
46,579 |
|
|
|
— |
|
|
|
47,220 |
|
Goodwill |
|
|
— |
|
|
|
2,617 |
|
|
|
39,132 |
|
|
|
— |
|
|
|
41,749 |
|
Other assets |
|
|
117 |
|
|
|
174 |
|
|
|
1,637 |
|
|
|
— |
|
|
|
1,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
90,782 |
|
|
$ |
88,636 |
|
|
$ |
128,290 |
|
|
$ |
(173,878 |
) |
|
$ |
133,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
4 |
|
|
$ |
16 |
|
|
$ |
1,450 |
|
|
$ |
— |
|
|
$ |
1,470 |
|
Participations payable |
|
|
— |
|
|
|
— |
|
|
|
2,547 |
|
|
|
— |
|
|
|
2,547 |
|
Royalties and programming costs payable |
|
|
— |
|
|
|
5 |
|
|
|
1,248 |
|
|
|
— |
|
|
|
1,253 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
1,178 |
|
|
|
— |
|
|
|
1,178 |
|
Debt due within one year |
|
|
— |
|
|
|
5 |
|
|
|
121 |
|
|
|
— |
|
|
|
126 |
|
Other current liabilities |
|
|
522 |
|
|
|
297 |
|
|
|
4,923 |
|
|
|
(131 |
) |
|
|
5,611 |
|
Current liabilities of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
526 |
|
|
|
323 |
|
|
|
11,475 |
|
|
|
(131 |
) |
|
|
12,193 |
|
Long-term debt |
|
|
17,840 |
|
|
|
5,434 |
|
|
|
13,730 |
|
|
|
— |
|
|
|
37,004 |
|
Mandatorily redeemable preferred membership units
issued by a subsidiary |
|
|
— |
|
|
|
— |
|
|
|
300 |
|
|
|
— |
|
|
|
300 |
|
Debt due (from) to affiliates |
|
|
(1,866 |
) |
|
|
735 |
|
|
|
1,131 |
|
|
|
— |
|
|
|
— |
|
Deferred income taxes |
|
|
13,736 |
|
|
|
15,456 |
|
|
|
15,841 |
|
|
|
(31,297 |
) |
|
|
13,736 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
522 |
|
|
|
— |
|
|
|
522 |
|
Other liabilities |
|
|
2,010 |
|
|
|
2,952 |
|
|
|
6,103 |
|
|
|
(3,848 |
) |
|
|
7,217 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
3,960 |
|
|
|
362 |
|
|
|
4,322 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to Time Warner and subsidiaries |
|
|
— |
|
|
|
(13,292 |
) |
|
|
(30,788 |
) |
|
|
44,080 |
|
|
|
— |
|
Other shareholders’ equity |
|
|
58,536 |
|
|
|
77,028 |
|
|
|
106,016 |
|
|
|
(183,044 |
) |
|
|
58,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
58,536 |
|
|
|
63,736 |
|
|
|
75,228 |
|
|
|
(138,964 |
) |
|
|
58,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
90,782 |
|
|
$ |
88,636 |
|
|
$ |
128,290 |
|
|
$ |
(173,878 |
) |
|
$ |
133,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Operations
For The Three Months Ended June 30, 2008
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
|
$ |
328 |
|
|
$ |
11,254 |
|
|
$ |
(27 |
) |
|
$ |
11,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(123 |
) |
|
|
(6,773 |
) |
|
|
26 |
|
|
|
(6,870 |
) |
Selling, general and administrative |
|
|
(80 |
) |
|
|
(72 |
) |
|
|
(2,321 |
) |
|
|
1 |
|
|
|
(2,472 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(194 |
) |
|
|
— |
|
|
|
(194 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
Merger-related, restructuring and shut-down costs |
|
|
(1 |
) |
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
(6 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(63 |
) |
|
|
— |
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(85 |
) |
|
|
133 |
|
|
|
1,898 |
|
|
|
— |
|
|
|
1,946 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
1,607 |
|
|
|
1,739 |
|
|
|
— |
|
|
|
(3,346 |
) |
|
|
— |
|
Interest income, net |
|
|
(241 |
) |
|
|
(271 |
) |
|
|
(38 |
) |
|
|
— |
|
|
|
(550 |
) |
Other income (expense), net |
|
|
23 |
|
|
|
4 |
|
|
|
(8 |
) |
|
|
(24 |
) |
|
|
(5 |
) |
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(75 |
) |
|
|
(12 |
) |
|
|
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations before income taxes |
|
|
1,304 |
|
|
|
1,605 |
|
|
|
1,777 |
|
|
|
(3,382 |
) |
|
|
1,304 |
|
Income tax provision |
|
|
(509 |
) |
|
|
(630 |
) |
|
|
(686 |
) |
|
|
1,316 |
|
|
|
(509 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
795 |
|
|
|
975 |
|
|
|
1,091 |
|
|
|
(2,066 |
) |
|
|
795 |
|
Discontinued operations, net of tax |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
6 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
792 |
|
|
$ |
972 |
|
|
$ |
1,088 |
|
|
$ |
(2,060 |
) |
|
$ |
792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Operations
For The Three Months Ended June 30, 2007
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
|
$ |
300 |
|
|
$ |
10,707 |
|
|
$ |
(27 |
) |
|
$ |
10,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(156 |
) |
|
|
(6,286 |
) |
|
|
25 |
|
|
|
(6,417 |
) |
Selling, general and administrative |
|
|
(86 |
) |
|
|
(65 |
) |
|
|
(2,248 |
) |
|
|
2 |
|
|
|
(2,397 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(158 |
) |
|
|
— |
|
|
|
(158 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
Merger-related, restructuring, and shut-down costs |
|
|
— |
|
|
|
— |
|
|
|
(33 |
) |
|
|
— |
|
|
|
(33 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(34 |
) |
|
|
— |
|
|
|
(34 |
) |
Loss on disposal of assets, net |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(90 |
) |
|
|
79 |
|
|
|
1,947 |
|
|
|
— |
|
|
|
1,936 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
1,735 |
|
|
|
2,012 |
|
|
|
— |
|
|
|
(3,747 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(266 |
) |
|
|
(366 |
) |
|
|
58 |
|
|
|
— |
|
|
|
(574 |
) |
Other income (expense), net |
|
|
— |
|
|
|
(5 |
) |
|
|
125 |
|
|
|
(12 |
) |
|
|
108 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(71 |
) |
|
|
(20 |
) |
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income
taxes |
|
|
1,379 |
|
|
|
1,720 |
|
|
|
2,059 |
|
|
|
(3,779 |
) |
|
|
1,379 |
|
Income tax provision |
|
|
(434 |
) |
|
|
(590 |
) |
|
|
(721 |
) |
|
|
1,311 |
|
|
|
(434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
945 |
|
|
|
1,130 |
|
|
|
1,338 |
|
|
|
(2,468 |
) |
|
|
945 |
|
Discontinued operations, net of tax |
|
|
122 |
|
|
|
128 |
|
|
|
67 |
|
|
|
(195 |
) |
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,067 |
|
|
$ |
1,258 |
|
|
$ |
1,405 |
|
|
$ |
(2,663 |
) |
|
$ |
1,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Operations
For The Six Months Ended June 30, 2008
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
|
$ |
643 |
|
|
$ |
22,388 |
|
|
$ |
(59 |
) |
|
$ |
22,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(235 |
) |
|
|
(13,356 |
) |
|
|
58 |
|
|
|
(13,533 |
) |
Selling, general and administrative |
|
|
(176 |
) |
|
|
(129 |
) |
|
|
(4,646 |
) |
|
|
1 |
|
|
|
(4,950 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(377 |
) |
|
|
— |
|
|
|
(377 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(8 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8 |
) |
Merger-related, restructuring and shut-down costs |
|
|
(7 |
) |
|
|
— |
|
|
|
(141 |
) |
|
|
— |
|
|
|
(148 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(63 |
) |
|
|
— |
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(191 |
) |
|
|
279 |
|
|
|
3,805 |
|
|
|
— |
|
|
|
3,893 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
3,242 |
|
|
|
3,578 |
|
|
|
— |
|
|
|
(6,820 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(504 |
) |
|
|
(610 |
) |
|
|
18 |
|
|
|
— |
|
|
|
(1,096 |
) |
Other income (expense), net |
|
|
27 |
|
|
|
(13 |
) |
|
|
(18 |
) |
|
|
(49 |
) |
|
|
(53 |
) |
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(142 |
) |
|
|
(28 |
) |
|
|
(170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income
taxes |
|
|
2,574 |
|
|
|
3,234 |
|
|
|
3,663 |
|
|
|
(6,897 |
) |
|
|
2,574 |
|
Income tax provision |
|
|
(1,008 |
) |
|
|
(1,262 |
) |
|
|
(1,422 |
) |
|
|
2,684 |
|
|
|
(1,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,566 |
|
|
|
1,972 |
|
|
|
2,241 |
|
|
|
(4,213 |
) |
|
|
1,566 |
|
Discontinued operations, net of tax |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
6 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,563 |
|
|
$ |
1,969 |
|
|
$ |
2,238 |
|
|
$ |
(4,207 |
) |
|
$ |
1,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Operations
For The Six Months Ended June 30, 2007
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
|
$ |
592 |
|
|
$ |
21,623 |
|
|
$ |
(51 |
) |
|
$ |
22,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(258 |
) |
|
|
(12,704 |
) |
|
|
49 |
|
|
|
(12,913 |
) |
Selling, general and administrative |
|
|
(202 |
) |
|
|
(118 |
) |
|
|
(4,488 |
) |
|
|
2 |
|
|
|
(4,806 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(335 |
) |
|
|
— |
|
|
|
(335 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(167 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(167 |
) |
Merger-related, restructuring, and shut-down costs |
|
|
— |
|
|
|
— |
|
|
|
(101 |
) |
|
|
— |
|
|
|
(101 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(35 |
) |
|
|
— |
|
|
|
(35 |
) |
Gains on disposal of assets, net |
|
|
— |
|
|
|
— |
|
|
|
669 |
|
|
|
— |
|
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(369 |
) |
|
|
216 |
|
|
|
4,629 |
|
|
|
— |
|
|
|
4,476 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
4,218 |
|
|
|
4,680 |
|
|
|
— |
|
|
|
(8,898 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(500 |
) |
|
|
(715 |
) |
|
|
90 |
|
|
|
— |
|
|
|
(1,125 |
) |
Other income (expense), net |
|
|
14 |
|
|
|
(6 |
) |
|
|
259 |
|
|
|
(34 |
) |
|
|
233 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(146 |
) |
|
|
(75 |
) |
|
|
(221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income
taxes |
|
|
3,363 |
|
|
|
4,175 |
|
|
|
4,832 |
|
|
|
(9,007 |
) |
|
|
3,363 |
|
Income tax provision |
|
|
(1,231 |
) |
|
|
(1,544 |
) |
|
|
(1,801 |
) |
|
|
3,345 |
|
|
|
(1,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2,132 |
|
|
|
2,631 |
|
|
|
3,031 |
|
|
|
(5,662 |
) |
|
|
2,132 |
|
Discontinued operations, net of tax |
|
|
138 |
|
|
|
145 |
|
|
|
82 |
|
|
|
(227 |
) |
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,270 |
|
|
$ |
2,776 |
|
|
$ |
3,113 |
|
|
$ |
(5,889 |
) |
|
$ |
2,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Cash Flows
For The Six Months Ended June 30, 2008
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,563 |
|
|
$ |
1,969 |
|
|
$ |
2,238 |
|
|
$ |
(4,207 |
) |
|
$ |
1,563 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
21 |
|
|
|
37 |
|
|
|
2,236 |
|
|
|
— |
|
|
|
2,294 |
|
Amortization of film and television costs |
|
|
— |
|
|
|
174 |
|
|
|
2,785 |
|
|
|
— |
|
|
|
2,959 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
63 |
|
|
|
— |
|
|
|
63 |
|
(Gain) Loss on investments and other assets, net |
|
|
(23 |
) |
|
|
2 |
|
|
|
28 |
|
|
|
— |
|
|
|
7 |
|
Deficiency of distributions over equity in
pretax income of consolidated subsidiaries |
|
|
(3,241 |
) |
|
|
(3,578 |
) |
|
|
— |
|
|
|
6,819 |
|
|
|
— |
|
Equity in losses of investee companies, net of
cash distributions |
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
|
— |
|
|
|
25 |
|
Equity-based compensation |
|
|
28 |
|
|
|
13 |
|
|
|
128 |
|
|
|
— |
|
|
|
169 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
142 |
|
|
|
28 |
|
|
|
170 |
|
Deferred income taxes |
|
|
311 |
|
|
|
182 |
|
|
|
161 |
|
|
|
(343 |
) |
|
|
311 |
|
Changes in operating assets and liabilities, net
of acquisitions |
|
|
542 |
|
|
|
1,361 |
|
|
|
(2,234 |
) |
|
|
(2,289 |
) |
|
|
(2,620 |
) |
Adjustments relating to discontinued operations |
|
|
3 |
|
|
|
3 |
|
|
|
(9 |
) |
|
|
(6 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by operations |
|
|
(796 |
) |
|
|
163 |
|
|
|
5,563 |
|
|
|
2 |
|
|
|
4,932 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
|
(6 |
) |
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
(14 |
) |
Investments and acquisitions, net of cash acquired |
|
|
(18 |
) |
|
|
(5 |
) |
|
|
(1,213 |
) |
|
|
— |
|
|
|
(1,236 |
) |
Capital expenditures and product development costs |
|
|
(3 |
) |
|
|
(28 |
) |
|
|
(2,018 |
) |
|
|
— |
|
|
|
(2,049 |
) |
Investment proceeds from available-for-sale
securities |
|
|
9 |
|
|
|
1 |
|
|
|
4 |
|
|
|
— |
|
|
|
14 |
|
Other investment proceeds |
|
|
20 |
|
|
|
34 |
|
|
|
177 |
|
|
|
— |
|
|
|
231 |
|
Advances to parent and consolidated subsidiaries |
|
|
1,261 |
|
|
|
1,697 |
|
|
|
— |
|
|
|
(2,958 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities |
|
|
1,263 |
|
|
|
1,699 |
|
|
|
(3,058 |
) |
|
|
(2,958 |
) |
|
|
(3,054 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
19,375 |
|
|
|
— |
|
|
|
5,224 |
|
|
|
— |
|
|
|
24,599 |
|
Debt repayments |
|
|
(19,483 |
) |
|
|
(166 |
) |
|
|
(2,333 |
) |
|
|
— |
|
|
|
(21,982 |
) |
Proceeds from exercise of stock options |
|
|
73 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
73 |
|
Excess tax benefit on stock options |
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
Principal payments on capital leases |
|
|
— |
|
|
|
— |
|
|
|
(20 |
) |
|
|
— |
|
|
|
(20 |
) |
Repurchases of common stock |
|
|
(332 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(332 |
) |
Dividends paid |
|
|
(450 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(450 |
) |
Other |
|
|
(16 |
) |
|
|
— |
|
|
|
(84 |
) |
|
|
— |
|
|
|
(100 |
) |
Change in due to/from parent and investment in
segment |
|
|
— |
|
|
|
(1,658 |
) |
|
|
(1,298 |
) |
|
|
2,956 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities |
|
|
(830 |
) |
|
|
(1,824 |
) |
|
|
1,489 |
|
|
|
2,956 |
|
|
|
1,791 |
|
INCREASE
(DECREASE) IN CASH AND EQUIVALENTS |
|
|
(363 |
) |
|
|
38 |
|
|
|
3,994 |
|
|
|
— |
|
|
|
3,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND
EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
586 |
|
|
|
53 |
|
|
|
877 |
|
|
|
— |
|
|
|
1,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND
EQUIVALENTS AT END OF PERIOD |
|
$ |
223 |
|
|
$ |
91 |
|
|
$ |
4,871 |
|
|
$ |
— |
|
|
$ |
5,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Cash Flows
For The Six Months Ended June 30, 2007
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,270 |
|
|
$ |
2,776 |
|
|
$ |
3,113 |
|
|
$ |
(5,889 |
) |
|
$ |
2,270 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
22 |
|
|
|
35 |
|
|
|
2,107 |
|
|
|
— |
|
|
|
2,164 |
|
Amortization of film and television costs |
|
|
— |
|
|
|
197 |
|
|
|
2,677 |
|
|
|
— |
|
|
|
2,874 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
35 |
|
|
|
— |
|
|
|
35 |
|
Gain on investments and other assets, net |
|
|
(8 |
) |
|
|
(4 |
) |
|
|
(939 |
) |
|
|
— |
|
|
|
(951 |
) |
Deficiency of distributions over equity in
pretax income of consolidated subsidiaries |
|
|
(4,218 |
) |
|
|
(4,680 |
) |
|
|
— |
|
|
|
8,898 |
|
|
|
— |
|
Equity in losses of investee companies, net of
cash distributions |
|
|
— |
|
|
|
1 |
|
|
|
27 |
|
|
|
— |
|
|
|
28 |
|
Equity-based compensation |
|
|
33 |
|
|
|
11 |
|
|
|
129 |
|
|
|
— |
|
|
|
173 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
146 |
|
|
|
75 |
|
|
|
221 |
|
Deferred income taxes |
|
|
1,014 |
|
|
|
554 |
|
|
|
550 |
|
|
|
(1,104 |
) |
|
|
1,014 |
|
Amounts related to securities litigation and
government investigations |
|
|
(743 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(743 |
) |
Changes in operating assets and liabilities, net
of acquisitions |
|
|
589 |
|
|
|
1,175 |
|
|
|
(3,440 |
) |
|
|
(2,207 |
) |
|
|
(3,883 |
) |
Adjustments relating to discontinued operations |
|
|
(138 |
) |
|
|
(145 |
) |
|
|
(27 |
) |
|
|
227 |
|
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by operations |
|
|
(1,179 |
) |
|
|
(80 |
) |
|
|
4,378 |
|
|
|
— |
|
|
|
3,119 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
|
(3 |
) |
|
|
— |
|
|
|
(86 |
) |
|
|
— |
|
|
|
(89 |
) |
Investments and acquisitions, net of cash acquired |
|
|
(25 |
) |
|
|
(11 |
) |
|
|
(276 |
) |
|
|
— |
|
|
|
(312 |
) |
Investment activities of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(26 |
) |
|
|
— |
|
|
|
(26 |
) |
Capital expenditures and product development costs |
|
|
14 |
|
|
|
(63 |
) |
|
|
(1,938 |
) |
|
|
— |
|
|
|
(1,987 |
) |
Investment proceeds from available-for-sale
securities |
|
|
10 |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
23 |
|
Other investment proceeds |
|
|
3 |
|
|
|
24 |
|
|
|
1,393 |
|
|
|
— |
|
|
|
1,420 |
|
Advances to parent and consolidated subsidiaries |
|
|
3,306 |
|
|
|
2,103 |
|
|
|
— |
|
|
|
(5,409 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities |
|
|
3,305 |
|
|
|
2,066 |
|
|
|
(933 |
) |
|
|
(5,409 |
) |
|
|
(971 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
3,645 |
|
|
|
— |
|
|
|
5,897 |
|
|
|
— |
|
|
|
9,542 |
|
Debt repayments |
|
|
(2,164 |
) |
|
|
— |
|
|
|
(6,450 |
) |
|
|
— |
|
|
|
(8,614 |
) |
Proceeds from exercise of stock options |
|
|
420 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
420 |
|
Excess tax benefit on stock options |
|
|
58 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
58 |
|
Principal payments on capital leases |
|
|
— |
|
|
|
— |
|
|
|
(32 |
) |
|
|
— |
|
|
|
(32 |
) |
Repurchases of common stock |
|
|
(3,668 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,668 |
) |
Dividends paid |
|
|
(417 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(417 |
) |
Other |
|
|
(5 |
) |
|
|
— |
|
|
|
(91 |
) |
|
|
— |
|
|
|
(96 |
) |
Change in due to/due from parent and investment
in segment |
|
|
— |
|
|
|
(2,011 |
) |
|
|
(3,398 |
) |
|
|
5,409 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by financing activities |
|
|
(2,131 |
) |
|
|
(2,011 |
) |
|
|
(4,074 |
) |
|
|
5,409 |
|
|
|
(2,807 |
) |
DECREASE IN CASH AND EQUIVALENTS |
|
|
(5 |
) |
|
|
(25 |
) |
|
|
(629 |
) |
|
|
— |
|
|
|
(659 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
207 |
|
|
|
77 |
|
|
|
1,265 |
|
|
|
— |
|
|
|
1,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
202 |
|
|
$ |
52 |
|
|
$ |
636 |
|
|
$ |
— |
|
|
$ |
890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
Part II. Other Information
Item 1. Legal Proceedings.
Securities Matters
Reference is made to the consolidated ERISA class action lawsuits described on page 50 of the
2007 Form 10-K and page 54 of the Company’s Quarterly Report on Form 10-Q
for the quarter ended
March 31, 2008 (the “March 2008 Form 10-Q). The matter of the appeal filed on November 26, 2007 by
two of the lead plaintiffs challenging the amount of their incentive awards was resolved by order
of the district court dated April 9, 2008, and the time to appeal that order has expired.
Other Matters
Reference is made to the lawsuit filed by Hallisey et al. described on pages 52-53 of the 2007
Form 10-K and page 54 of the March 2008 Form 10-Q. Between April and May 2008, the parties issued
notice to the former community leaders nationwide, pursuant to the court’s February 21, 2008 order
granting plaintiffs’ motion to issue that notice.
Reference is made to the lawsuit filed by Thomas Dreiling described on page 53 of the 2007
Form 10-K. Briefing on the plaintiff’s appeal before the Ninth
Circuit Court of Appeals began in May 2008 and is
underway.
Reference is made to the lawsuit filed by Ronald A. Katz Technology Licensing, L.P. described
on page 53 of the 2007 Form 10-K. In April 2008, AOL and TWC (among other defendants) filed motions
for summary judgment, arguing that a number of claims in the patents at issue are invalid under
Section 112 of the Patent Act. On June 19, 2008, the court issued an order granting, in part, and
denying, in part, those motions.
Reference is made to the lawsuit filed by Andrew Parker and Eric DeBrauwere, et al. described
on page 53 of the 2007 Form 10-K and page 54 of the March 2008 Form 10-Q. On May 8, 2008, the
district court granted preliminary approval of the revised settlement agreement that was submitted
to the district court on April 2, 2008. The settlement is still subject to final approval by the
district court and there can be no assurance that the settlement will receive final approval.
Reference is made to the lawsuit filed by trustees of the Tolkien Trust and the J.R.R. Tolkien
1967 Discretionary Settlement Trust, as well as HarperCollins Publishers, Ltd. and two related
publishing entities described on page 54 of the 2007 Form 10-K. On May 14, 2008, New Line Cinema
Corporation moved to dismiss under California law certain claims in the complaint and on June 24,
2008, the court granted that motion, finding that plaintiffs had failed to state sufficient facts
to support their fraud and breach of fiduciary duty claims, and granted plaintiffs leave to amend
the complaint.
Reference is made to the lawsuit filed by Brantley, et al. described on page 55 of the 2007
Form 10-K and page 54 of the March 2008 Form 10-Q. On June 25, 2008, the court denied the motions
made on April 22, 2008 by the programmer defendants, including the Company, and the distributor
defendants, including TWC, to dismiss the second amended complaint. On July 14, 2008, the
programmer defendants and the distributor defendants filed motions requesting the court to certify
its June 25 order for interlocutory appeal to the U.S. Court of Appeals for the Ninth Circuit.
Item 1A. Risk Factors.
As
discussed above, on May 20, 2008, the Company entered into a Separation Agreement with TWC,
the terms of which will govern TWC’s separation from the Company
(the “Separation”). The TWC
Separation Transactions are expected to be consummated by the end of 2008 or in early 2009.
The
following Risk Factors have been included as a result of the entry into the Separation Agreement
and should be read in conjunction with the Risk Factors set forth in Item 1A,
“Risk Factors,” in
the 2007 Form 10-K.
Risks Relating to the Separation
The Company may be unable to complete the Separation. There can be no assurance that the
Separation will be completed in the manner and timeframe contemplated, or at all. Completion of the
Separation is subject to the satisfaction of a number of conditions, including:
| |
• |
|
receipt of certain FCC approvals; |
66
| |
• |
|
receipt of certain required local franchise approvals; and |
| |
| |
• |
|
receipt of a favorable tax ruling from the Internal Revenue Service and tax opinions
from counsel as to the tax-free nature of the TWC Separation Transactions. |
The Separation Agreement may also be terminated by TWC or Time Warner prior to the payment of
the Special Dividend if there is a material adverse effect on TWC. In addition, there are various
risks that are inherent in the Separation process, such as the increased demands on management as a
result of executing the plan for the Separation in addition to fulfilling their regular
responsibilities.
If the Separation is not completed for any reason, the price of Time Warner’s common stock may
decline to the extent that the market price reflects positive assumptions that the Separation will
be completed and the related benefits will be realized. The Company will also incur substantial
costs related to the Separation (such as legal, accounting and advisory fees) that will not be
recouped in the event that the Separation does not occur.
The Company may not achieve some or all of the benefits that it expects from the Separation.
Time Warner believes that the Separation will result in several benefits to the Company, including
increased long-term strategic, financial, operational and regulatory flexibility, a more efficient
capital structure, a corporate structure that will better enable management to focus on Time
Warner’s content and other businesses and further enhancement of the efficacy of equity incentives
granted to management of those businesses. Similarly, TWC believes that the Separation will result
in several benefits to TWC, including increased long-term strategic, operational and regulatory
flexibility and a more efficient capital structure. The Company cannot predict with certainty when
these benefits will occur or the extent to which they actually will be achieved, if at all.
Furthermore, even if some or all of these benefits are achieved, they may not result in the
creation of value for Time Warner and TWC stockholders.
After the Separation, Time Warner’s businesses will be less diversified, which may adversely
affect its business and operating results. After the Separation is completed, Time Warner will have
a different operational and financial profile. Time Warner’s current diversification of revenue
sources, resulting from TWC’s businesses together with the Company’s other businesses, tends to
moderate operational volatility. The substantial majority of the revenues currently generated by
TWC are subscription revenues. Certain of the Company’s divisions other than TWC derive a
substantial portion of their revenues from the sale of advertising and content. Due to a number of
factors, advertising and content revenues are generally more variable and less predictable than
subscription revenues. Following the Separation, the Company’s diversification of revenue sources
will substantially diminish, and, as a result, Time Warner’s results of operations, cash flows,
working capital and financing requirements may be subject to increased volatility.
In addition, all of TWC’s operations are domestic, while Time Warner’s other divisions operate
and serve customers worldwide. After the Separation, Time Warner will have increased exposure to
the risks related to doing business internationally, which include, among other things, economic
volatility, currency exchange rate fluctuations and risks related to government regulation. One or
more of these risks could harm the Company’s international operations and its business and
operating results.
If the TWC Separation Transactions are determined to be taxable for U.S. federal income tax
purposes, Time Warner and Time Warner’s stockholders that are subject to U.S. federal income tax
could incur significant U.S. federal income tax liabilities. The TWC Separation Transactions are
conditioned upon Time Warner’s receipt of a private letter ruling from the Internal Revenue Service
and opinions of tax counsel confirming that the TWC Separation Transactions should generally
qualify as tax-free to Time Warner and its stockholders. The ruling and opinions will rely on
certain facts, assumptions, representations and undertakings from Time Warner and TWC regarding the
past and future conduct of the companies’ businesses and other matters. If any of these facts,
assumptions, representations or undertakings are incorrect or not otherwise satisfied, Time Warner
and its stockholders may not be able to rely on the ruling or the opinions and could be subject to
significant tax liabilities. Notwithstanding the private letter ruling and opinions, the Internal
Revenue Service could determine on audit that the TWC Separation Transactions should be treated as
taxable transactions if it determines that any of these facts, assumptions, representations or
undertakings are not correct or have been violated, or for other reasons, including as a result of
significant changes in the stock ownership of Time Warner or TWC after the Distribution. Under the
tax sharing agreement among Time Warner and TWC, TWC generally would be required to indemnify Time
Warner against its taxes resulting from the failure of any of the TWC Separation Transactions to
qualify as tax-free (“Transaction Taxes”) as a result of (i) certain actions or failures to act by
TWC or (ii) the failure of certain representations to be made by TWC to be true. However, in the
event that Transaction Taxes are incurred for any other reason, Time
67
Warner would not be entitled to indemnification. In addition, due to the potential impact of
significant stock ownership changes on the taxability of the TWC Separation Transactions, Time
Warner and TWC may determine not to enter into transactions that might otherwise be advantageous,
such as issuing equity securities to satisfy financing needs or acquiring businesses or assets with
equity securities, if such issuances would exceed certain thresholds and such actions could be
considered part of a plan or series of related transactions that include the Distribution.
As part of the Separation, TWC has incurred and will incur additional debt, which may limit
its flexibility or prevent it from taking advantage of business opportunities. In connection with
the Separation, TWC incurred $5.0 billion of indebtedness pursuant to the 2008 Cable Bond Offering
to fund, in part, the Special Dividend and is expected to incur additional indebtedness to fund the
Special Dividend through a combination of borrowings under the 2008 Cable Bridge Facility, TWC’s
existing bank credit facilities and/or the issuance of debt in the capital markets. The increased
indebtedness and the terms of TWC’s financing arrangements and any future indebtedness will impose
various restrictions and covenants on TWC that could limit its ability to respond to market
conditions, provide for its capital investment needs or take advantage of business opportunities.
In addition, as a result of TWC’s increased borrowings, its interest expense will be higher than it
has been in the past, which will affect TWC’s profitability and cash flows.
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 June 30, 2008 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) |
April 1, 2008 —
April 30, 2008 |
|
|
6,459 |
|
|
$ |
14.28 |
|
|
|
0 |
|
|
$ |
2,202,463,464 |
|
May 1, 2008 —
May 31, 2008 |
|
|
536 |
|
|
$ |
16.03 |
|
|
|
0 |
|
|
$ |
2,202,463,464 |
|
June 1, 2008 —
June 30, 2008 |
|
|
0 |
|
|
|
N/A |
|
|
|
0 |
|
|
$ |
2,202,463,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,995 |
|
|
$ |
14.41 |
|
|
|
0 |
|
|
|
|
|
|
|
|
| (1) |
|
The total number of shares purchased includes (a) shares of Common Stock purchased
by the Company under the Stock Repurchase Program 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 6,459 shares, 536 shares and 0 shares, respectively, for the months of
April, May and June. |
| |
| (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 1, 2007, the Company announced that its Board of Directors had authorized
a stock repurchase program that allows Time Warner to repurchase, from time to time, up to $5
billion of Common Stock (the “Stock Repurchase Program”). Purchases under the 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 the fees, commissions and other costs associated with
the Stock Repurchase Program. |
68
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of the Company was held on May 16, 2008 (the “2008 Annual
Meeting”). The following matters were voted on at the 2008 Annual Meeting:
| |
(i) |
|
The following individuals were elected directors of the Company for terms expiring in
2009: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker |
| |
|
|
Votes For |
|
|
|
Votes Against |
|
|
|
Abstentions |
|
|
Non-Votes |
James L. Barksdale |
|
|
2,981,086,819 |
|
|
|
176,650,795 |
|
|
|
43,500,847 |
|
|
|
0 |
|
Jeffrey L. Bewkes |
|
|
2,989,553,830 |
|
|
|
173,252,501 |
|
|
|
38,432,130 |
|
|
|
0 |
|
Stephen F. Bollenbach |
|
|
2,972,600,890 |
|
|
|
183,616,000 |
|
|
|
45,021,571 |
|
|
|
0 |
|
Frank J. Caufield |
|
|
2,973,371,812 |
|
|
|
183,806,844 |
|
|
|
44,059,805 |
|
|
|
0 |
|
Robert C. Clark |
|
|
2,981,083,081 |
|
|
|
181,328,262 |
|
|
|
38,827,118 |
|
|
|
0 |
|
Mathias Döpfner |
|
|
2,962,846,516 |
|
|
|
192,958,494 |
|
|
|
45,433,451 |
|
|
|
0 |
|
Jessica P. Einhorn |
|
|
2,987,593,795 |
|
|
|
174,657,226 |
|
|
|
38,987,440 |
|
|
|
0 |
|
Reuben Mark |
|
|
2,973,728,912 |
|
|
|
183,181,855 |
|
|
|
44,327,694 |
|
|
|
0 |
|
Michael A. Miles |
|
|
2,939,813,055 |
|
|
|
216,752,933 |
|
|
|
44,672,473 |
|
|
|
0 |
|
Kenneth J. Novack |
|
|
2,782,816,297 |
|
|
|
372,483,537 |
|
|
|
45,938,627 |
|
|
|
0 |
|
Richard D. Parsons |
|
|
2,955,522,528 |
|
|
|
203,087,368 |
|
|
|
42,628,565 |
|
|
|
0 |
|
Deborah C. Wright |
|
|
2,964,017,677 |
|
|
|
193,941,510 |
|
|
|
43,279,274 |
|
|
|
0 |
|
| |
(ii) |
|
Approval of Company proposal regarding amendment to the Company’s Restated Certificate of
Incorporation to eliminate the remaining super-majority vote requirements: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker |
|
| |
|
Votes For |
|
|
Votes Against |
|
|
Abstentions |
|
|
Non-Votes |
|
|
|
|
3,103,845,164 |
|
|
|
41,836,821 |
|
|
|
55,556,476 |
|
|
0 |
|
| |
| (iii) |
|
Approval of Company proposal regarding approval of the Amended and Restated Time Warner
Inc. Annual Bonus Plan for Executive Officers: |
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker |
|
| |
|
Votes For |
|
|
Votes Against |
|
|
Abstentions |
|
|
Non-Votes |
|
|
|
|
2,849,494,237 |
|
|
|
295,025,345 |
|
|
|
56,718,879 |
|
|
0 |
|
| |
| (iv) |
|
Ratification of appointment of Ernst & Young LLP as independent auditors of the Company: |
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker |
|
| |
|
Votes For |
|
|
Votes Against |
|
|
Abstentions |
|
|
Non-Votes |
|
|
|
|
3,112,046,132 |
|
|
|
35,087,263 |
|
|
|
54,105,066 |
|
|
0 |
|
| |
| (v) |
|
Stockholder proposal regarding separation of roles of Chairman and CEO: |
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker |
|
| |
|
Votes For |
|
|
Votes Against |
|
|
Abstentions |
|
|
Non-Votes |
|
|
|
|
1,214,600,139 |
|
|
|
1,549,339,671 |
|
|
|
55,125,762 |
|
|
382,172,889 |
|
Item 5. Other Information.
On July 31, 2008, the Board of Directors of the Company elected Herbert M. Allison, Jr., as a
director of the Company, effective July 31, 2008. Mr. Allison is former chairman, president, and
chief executive officer of TIAA-CREF. Mr. Allison was elected to a newly-created position on the
Board, bringing the total number of directors of the Company to 13. The Board has not yet elected
Mr. Allison to any committees of the Board.
Effective on July 31, 2008, Mr. Allison became eligible to participate in the Time Warner Inc.
1999 Stock Plan, the Time Warner Inc. 1988 Restricted Stock and Restricted Stock Unit Plan for
Non-Employee Directors, and the Time Warner
69
Inc. Non-Employee Directors’ Deferred Compensation Plan, which are described under the caption
“Compensation — Director Compensation” in the Company’s Proxy Statement filed with the SEC on March
31, 2008. Upon Mr. Allison’s election to the Board, he received a cash retainer of $79,180
(representing a pro-rated portion of the $100,000 annual cash retainer for non-employee directors
for the period until the 2009 annual meeting of stockholders) and an award of stock options to
purchase 8,000 shares of Time Warner common stock under the Time Warner Inc. 1999 Stock Plan.
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.
70
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: August 6, 2008 |
|
|
|
|
|
|
/s/ John K. Martin, Jr. |
|
|
|
|
John K. Martin, Jr.
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
71
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
| |
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
2.1
|
|
Separation Agreement, dated as of May 20, 2008, among the
Company, Time Warner Cable Inc. (“TWC”), Time Warner Entertainment Company, L.P. (“TWE”),
TW NY Cable Holding Inc. (“TW NY”), Warner Communications
Inc., Historic TW Inc. and American Television and
Communications Corporation (incorporated herein by reference
to Exhibit 99.1 to the Company’s Current Report on Form 8-K
dated May 20, 2008 (the “May 2008
Form 8-K”). |
|
|
|
3.1
|
|
Certificate of Amendment, dated June 4, 2008, to the Restated
Certificate of Incorporation of the Company as filed with the
Secretary of State of Delaware on June 4, 2008 (incorporated
herein by reference to Exhibit 3.1 to the Company’s Current
Report on Form 8-K dated June 4, 2008). |
|
|
|
4.1 |
|
Form of 6.20% Notes due 2013
of TWC
(incorporated herein by reference to Exhibit 4.1 to TWC’s
Current Report on Form 8-K dated June 16, 2008 (File No.
1-33335) (the “TWC June 2008 Form 8-K”)). |
|
|
|
4.2
|
|
Form of 6.75% Notes due 2018 of TWC (incorporated herein by
reference to Exhibit 4.2 to the TWC June 2008
Form 8-K). |
|
|
|
4.3
|
|
Form of 7.30% Debentures due 2038 of TWC (incorporated herein
by reference to Exhibit 4.3 to the TWC June 2008
Form 8-K). |
|
|
|
10.1
|
|
Amendment No. 1 to Registration Rights Agreement between the
Company and TWC, dated as of May 20, 2008. |
|
|
|
10.2
|
|
Amendment No. 1 to Reimbursement Agreement made by and among
TWC and the Company, dated May 20, 2008. |
|
|
|
10.3
|
|
Second Amended and Restated Tax Matters Agreement, dated as of
May 20, 2008, between the Company and TWC (incorporated herein
by reference to Exhibit 99.2 to the May 2008 Form 8-K). |
|
|
|
10.4
|
|
Amendment No. 1 to Shareholder Agreement between the Company
and TWC, dated as of May 20, 2008. |
|
|
|
10.5
|
|
Underwriting Agreement, dated June 16, 2008, among TWC, TW NY,
TWE and Banc of America Securities LLC, BNP Paribas Securities
Corp., Greenwich Capital Markets, Inc., Morgan Stanley & Co.
Incorporated and Wachovia Capital Markets, LLC on behalf of
themselves and as representatives of the other underwriters
named therein (incorporated herein by reference to Exhibit 1.1
to the TWC June 2008 Form 8-K). |
|
|
|
10.6
|
|
Credit Agreement, dated as of June 30, 2008, among TWC, as
Borrower, the Lenders from time to time party thereto,
Deutsche Bank AG New York Branch, as Administrative Agent, The
Royal Bank of Scotland plc and Fortis Bank SA/NV New York
Branch, as Tranche I Co-Syndication Agents, Mizuho Corporate
Bank, Ltd. and Sumitomo Mitsui Banking Corporation, as Tranche
I Co-Documentation Agents, Deutsche Bank Securities Inc. and
RBS Greenwich Capital, as Tranche I Joint-Lead Arrangers and
Joint Bookrunners, BNP Paribas Securities Corp., The Bank of
Tokyo-Mitsubishi UFJ, Ltd. New York Branch and Citibank, N.A.,
as Tranche II Co-Syndication Agents, Bank of America, N.A. and
Wachovia Bank, National Association, as Tranche II
Co-Documentation Agents, and BNP Paribas Securities Corp. and
The Bank of Tokyo-Mitsubishi UFJ, Ltd. New York Branch, as
Tranche II Joint-Lead Arrangers and Joint Bookrunners
(incorporated herein by reference to Exhibit 99.1 to TWC’s
Current Report on Form 8-K dated June 30, 2008 (File No.
1-33335)). |
|
|
|
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 June 30, 2008. |
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of |
72
| |
|
|
| |
|
|
2002, with respect to
the Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2008. |
|
|
|
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 June 30,
2008. † |
| |
|
|
| † |
|
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. |
73