TIME WARNER INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
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for
the quarterly period ended September 30, 2008 or
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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)
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| Delaware
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13-4099534 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification No.) |
One Time Warner Center
New York, NY 10019-8016
(Address of Principal Executive Offices) (Zip Code)
(212) 484-8000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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):
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| Large accelerated filer þ
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Accelerated filer o |
| Non-accelerated filer o (Do not check if a smaller reporting company)
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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
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Shares Outstanding |
| Description of Class |
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as of October 29, 2008 |
| Common Stock – $.01 par value
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3,587,436,253 |
TIME WARNER INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
Management’s discussion and analysis of results of operations and financial condition (“MD&A”)
is provided as a supplement to the accompanying consolidated financial statements and notes to help
provide an understanding of Time Warner Inc.’s (“Time Warner” or the “Company”) financial
condition, cash flows and results of operations. MD&A is organized as follows:
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Overview. This section provides a general description of Time Warner’s business
segments, as well as recent developments the Company believes are important in understanding
the results of operations and financial condition or in understanding anticipated future
trends. |
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Results of operations. This section provides an analysis of the Company’s results of
operations for the three and nine months ended September 30, 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. |
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Financial condition and liquidity. This section provides an analysis of the Company’s
financial condition as of September 30, 2008 and cash flows for the nine months ended
September 30, 2008. |
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Caution concerning forward-looking statements. This section provides a description of
the use of forward-looking information appearing in this report, including in MD&A and the
consolidated financial statements. Such information is based on management’s current
expectations about future events, which are inherently susceptible to uncertainty and
changes in circumstances. Refer to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007 (the “2007 Form 10-K”) and the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2008 (the “June 2008 Form 10-Q”) 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, Sex and the
City, Get Smart, Journey to the Center of the Earth and the Harry Potter films, as well as
television series, including Two and a Half Men, Without a Trace, Cold Case, The Closer and ER.
During the nine months ended September 30, 2008, the Company generated revenues of $34.678 billion
(up 2% from $33.840 billion in 2007), Operating Income of $6.229 billion (down 6% from $6.606
billion in 2007), Net Income of $2.630 billion (down 22% from $3.356 billion in 2007) and Cash
Provided by Operations of $8.094 billion (up 31% from $6.156 billion in 2007). As discussed more
fully in “Business Segment Results,” the nine months ended September 30, 2007 included the impact
of an approximate $668 million gain on the sale of AOL’s German access business.
Impact of the Current Economic Environment
The recent events affecting the U.S. and international financial markets have had a
significant and adverse impact on the broader global economies. These events have served to
severely tighten the credit markets, increase equity market volatility and reduce future
expectations for economic growth.
Despite the current economic environment, the Company believes it continues to have strong
liquidity to meet its needs for the foreseeable future. At September 30, 2008, the Company had
$17.997 billion of unused committed capacity, including cash and equivalents and credit facilities
containing commitments from a geographically diverse group of major financial institutions, with
$5.393 billion at Time Warner and $12.604 billion at Time Warner Cable Inc. (together with its
subsidiaries, “TWC”), $10.855 billion of which TWC expects to use to finance the Special Dividend,
as defined below. The only significant portion of the Company’s debt that is due before December
31, 2010 is $2.000 billion of floating rate public debt that matures on November 13, 2009. While
the Company believes it has sufficient total committed capacity and access to capital markets, any
new borrowings in the near term outside of the Company’s committed capacity would likely bear
significantly higher interest rates than those on the Company’s recent borrowings. See “Financial
Condition and Liquidity” for further details regarding the Company’s total committed capacity.
The current economic conditions are also having an adverse effect on the advertising
performance of the Company’s Publishing, AOL and Cable segments. While demand for advertising at
the Networks segment has been strong, a protracted economic downturn may negatively impact that
segment’s Advertising revenue as well. Since the end of the third quarter of 2008, the Cable
segment has seen a slowdown in growth across all revenue generating
unit categories as a result of the challenging
economic environment. In the event of a
protracted economic downturn, the Company also faces the risk of reduced consumer discretionary
spending on packaged media, including home video (e.g., DVD) and game products.
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 worldwide on both the AOL Network and third-party
Internet sites, referred to as the “Third Party
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
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 September 30, 2008, AOL had 7.5 million AOL brand Internet access
subscribers in the U.S., which does not include registrations for free AOL services. For the nine
months ended September 30, 2008, AOL generated revenues of $3.197 billion (9% of the Company’s
overall revenues), $1.144 billion in Operating Income before Depreciation and Amortization and $782
million in Operating Income.
AOL’s strategy has been to transition from a business that has relied heavily on Subscription
revenues from dial-up subscribers to one that attracts and engages more Internet users and takes
advantage of the growth in online advertising by providing advertising services on both the AOL
Network and 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 manage 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 ad serving technology to third-party websites. Platform-A offers to
advertisers a range of capabilities and solutions, including optimization and targeting
technologies, to deliver more effective advertising and reach specific audiences across the AOL
Network and the Third Party Network. During 2007 and the early part of 2008, AOL acquired various
businesses to supplement its online advertising capabilities, and these businesses contributed $110
million in Advertising revenues during the nine months ended September 30, 2008.
During the first nine months of 2008, Advertising revenues on the AOL Network were negatively
affected by certain factors and trends, including increased volume of inventory monetized through lower
priced sales channels, declines in the price of advertising inventory in certain inventory segments
and an overall increase in marketplace competition. Additionally, AOL’s Advertising revenues on
both the AOL Network and the Third Party Network were negatively impacted by weakening economic
conditions resulting in lower demand from certain advertiser categories as well as certain sales
execution and systems integration issues, including matters relating to the integration of acquired
businesses under Platform-A into a single sales force. During the early part of 2008,
the increasing usage of third-party advertising networks has had a positive impact on AOL’s Third
Party Network Advertising revenues. 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 nine months of 2008, the Company has experienced a significant decline in
Advertising revenues due in part to a decrease in business from a major customer of Platform-A Inc.
(formerly Advertising.com, Inc.). The Company anticipates that revenues from this customer will
continue to decline for the remainder of 2008 compared to the similar period in 2007. Revenues from
this relationship decreased to $25 million for the nine months ended September 30, 2008 from $162
million for the nine months ended September 30, 2007. For the full year 2007, AOL earned
Advertising revenues from this relationship of $215 million.
AOL’s Publishing business group, a unit 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 that can be accessed generally
via the Internet or via the AOL Internet access services. Specifically, the AOL Network includes
owned and operated websites, applications and services such as AOL.com, e-mail, AIM, MapQuest,
Moviefone, ICQ, Truveo (a video search engine) and international versions of the AOL portal. 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
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
the acquisition of
Bebo, Inc. (“Bebo”), a leading global social media network, which AOL continues to integrate into
its business.
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 nine 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 1.9 million for the nine months ended September 30, 2008 compared to a decline of 3.1 million
for the nine months ended September 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.
Cable. Time Warner’s cable business, 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 September 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 nine months
ended September 30, 2008, TWC generated revenues of $12.798 billion (37% of the Company’s overall
revenues), $4.481 billion in Operating Income before Depreciation and Amortization and $2.162
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 September 30, 2008, 53% of TWC’s customers subscribed to two or more of its
primary services, including 20% 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. During 2007, TWC
also began selling voice services to small- and medium-sized businesses as part of an increased
emphasis on its commercial business. TWC believes selling commercial services will provide
additional opportunities for growth in the future. In addition, TWC earns revenues by selling
advertising time to national, regional and local customers.
Video is TWC’s largest service in terms of revenues generated and, as of September 30, 2008,
TWC had approximately 13.3 million basic video subscribers, of which approximately 8.6 million
subscribed to TWC’s digital video service. 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. 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 programming rate increases on existing services, costs associated
with retransmission consent agreements, 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.
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
As of September 30, 2008, TWC had approximately 8.3 million residential high-speed data
subscribers. TWC expects continued growth in residential high-speed data subscribers and revenues
for the foreseeable future; however, the rate of growth of both subscribers and revenues is
expected to continue to slow over time as high-speed data services become
increasingly penetrated. TWC also offers commercial high-speed data services and had 295,000
commercial high-speed data subscribers as of September 30, 2008.
As of September 30, 2008, TWC had approximately 3.6 million residential Digital Phone
subscribers. TWC expects increases in Digital Phone subscribers and revenues for the foreseeable
future; however, the rate of growth of both subscribers and revenues is expected to slow over time
as Digital Phone services become increasingly penetrated. TWC 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 nine months of 2008. As of September 30, 2008, TWC had 23,000 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.
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 nine months ended September 30, 2008, the Filmed Entertainment
segment generated revenues of $8.285 billion (22% of the Company’s overall revenues), $857 million
in Operating Income before Depreciation and Amortization and $552 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 have helped it to deliver consistent long-term performance. In an effort to
increase operational efficiencies and maximize performance within the Filmed Entertainment segment,
the Company reorganized the New Line business in 2008 to be operated as a unit of Warner Bros.
while maintaining separate development, production and other operations. During the first nine
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. During the
2008-2009 broadcast season, Warner Bros. expects to produce approximately 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).
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
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
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 nine months ended September 30, 2008, the
Networks segment generated revenues of $8.216 billion (22% of the Company’s overall revenues),
$2.805 billion in Operating Income before Depreciation and Amortization and $2.532 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
receipt of monthly subscriber fees paid by cable system operators, satellite distribution services,
telephone companies and other distributors and from the sale of advertising. 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 Subscription and Advertising revenue growth, as well as strong brands and operating
efficiency.
HBO operates the HBO and Cinemax multichannel pay television programming services, with the
HBO service ranking as the nation’s most widely distributed premium pay television service. HBO
generates revenues principally from monthly subscriber fees from cable system operators, satellite
distribution services, telephone companies 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 nine months 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. During the first nine months of 2008, these acquired businesses contributed
approximately $113 million of revenues and $12 million of Operating Income before Depreciation and
Amortization. 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
Publishing segment generated revenues of $3.339 billion (10% of the Company’s overall revenues),
$625 million in Operating Income before Depreciation and Amortization and $473 million in Operating
Income for the nine months ended September 30, 2008. The Publishing segment is undertaking a
significant reorganization primarily of its U.S. publishing operations and expects to incur restructuring
charges in the fourth quarter of 2008.
As of September 30, 2008, Time Inc. published 24 magazines in the U.S., including People,
Sports Illustrated, InStyle, Southern Living, Real Simple, Time, Cooking Light and Entertainment
Weekly, and approximately 100 magazines outside the U.S., including magazines published through the
Company’s U.K. subsidiary IPC Media (“IPC”), in Mexico through Time Inc.’s subsidiary Grupo
Editorial Expansion and international editions of its U.S. magazines. The Publishing segment
generates revenues primarily from advertising (including advertising on digital properties),
magazine subscriptions and newsstand sales. Time Inc. also owns the magazine subscription marketer,
Synapse Group, Inc., and in August 2008 purchased the school and youth group fundraising company,
QSP, Inc. and its Canadian affiliate Quality Service Programs, Inc. (collectively, “QSP”). The
Publishing segment has experienced a continued decline in print advertising sales due to the
current economic environment. Time Inc. continues to invest in developing digital content,
including the launches of Health.com and the MyHomeIdeas.com network and the expansion of the
Sports Illustrated, People and InStyle digital
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
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 the three and nine months ended September 30, 2008, online
Advertising revenues were 11% and 10%, respectively, of Time Inc.’s total Advertising revenues,
compared to 8% and 6% for the three and nine months ended September 30, 2007, respectively. The
Publishing segment expects to continue to experience growth in digital advertising revenues for the
remainder of 2008 as advertisers expand their presence on the Internet, although at a slower pace
than that experienced during the first nine months of 2008. 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 and Reverse Stock Split
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.
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 early 2009. See Item 1A, “Risk Factors,” in Part II of the June 2008 Form 10-Q
for a discussion of risk factors relating to the separation of TWC from the Company.
In connection with the TWC Separation Transactions, the Company is seeking stockholder
approval for a reverse stock split of the Company’s common stock at a ratio of either 1-for-2 or
1-for-3, as determined by the Company’s Board of Directors.
In addition, in connection with the TWC Separation Transactions, and as provided for in the
Company’s equity plans, the Company contemplates that the number of stock options, restricted stock
units (“RSUs”) and target performance stock units (“PSUs”) outstanding at the separation and the
exercise prices of such stock options will be adjusted to maintain the fair value of those awards.
The changes in the number of equity awards and the exercise prices will be determined by comparing
the fair value of such awards immediately prior to the TWC Separation Transactions to the fair
value of such awards immediately after the TWC Separation Transactions. The modifications to the
outstanding equity awards will be made pursuant to existing antidilution provisions in the
Company’s equity plans.
7
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Under the terms of Time Warner’s equity plans and related award agreements, as a result of the
TWC Separation Transactions, TWC employees who hold Time Warner equity awards will be treated as if
their employment with Time Warner had been terminated without cause at the time of the separation.
This treatment will result in the forfeiture of unvested stock options and shortened exercise
periods for vested stock options and pro rata vesting of the next installment of (and forfeiture of
the remainder of) the RSU awards for those TWC employees who do not satisfy retirement-treatment
eligibility provisions in the Time Warner equity plans and related award agreements. TWC plans to
grant “make-up” TWC equity awards or make cash payments to TWC employees that are generally
intended to offset any loss of economic value in Time Warner equity awards as a result of the
separation.
Finally, in connection with the Special Dividend, and as provided for in TWC’s equity plans
and related award agreements, the number and the exercise prices of outstanding TWC stock options
will be adjusted to maintain the fair value of those awards. The changes in the number of shares
subject to options and the exercise prices will be determined by comparing the fair value of such
awards immediately prior to the Special Dividend to the fair value of such awards immediately after
the Special Dividend. The modifications to the outstanding equity awards will be made pursuant to
existing antidilution provisions in TWC’s equity plans and related award agreements.
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,
the amount of the commitments of the lenders under the 2008 Cable Bridge Facility was reduced to
$4.040 billion. As discussed in “Financial Condition and Liquidity”, the Company is not certain
whether Lehman Brothers Commercial Bank will fund its $269 million in commitments under the 2008
Cable Bridge Facility as a result of the bankruptcy of Lehman Brothers Holdings Inc., and,
therefore, the Company has included only $3.771 billion of commitments under the 2008 Cable Bridge
Facility in its total committed capacity as of September 30, 2008. 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 anticipated
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 2008,
is
8
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
subject
to certain closing conditions. 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 finance and 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. 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, a
leading global social media network, for $859 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 nine months ended
September 30, 2008 (Note 2).
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 nine months ended
September 30, 2008 (Note 2).
Impairment Testing of Goodwill and Indefinite-lived Intangible Assets
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. Except for
the TWC interim impairment test discussed below, no other interim impairment analyses of the
Company’s goodwill and indefinite-lived intangible assets have been required in 2008. In the fourth
quarter of 2008, the Company will perform its annual impairment review of goodwill and
indefinite-lived intangible assets. Because of current economic conditions and recent declines in
the value of the Company’s common stock, it is possible that the book values of one or more of the
Company’s reporting units will exceed their respective fair values, which may result in the Company
recognizing a noncash impairment of goodwill and/or indefinite-lived intangible assets in the
fourth quarter of 2008 that could be material.
As a result of entering into the Separation Agreement, the Company was required under FASB
Statement No. 142, Goodwill and Other Intangible Assets (“FAS 142”), to test goodwill and cable
franchise rights at 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 each 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,
9
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
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.
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 nine months ended September 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 |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to securities litigation and
government investigations |
|
$ |
(5 |
) |
|
$ |
(2 |
) |
|
$ |
(13 |
) |
|
$ |
(169 |
) |
Asset impairments |
|
|
(39 |
) |
|
|
(1 |
) |
|
|
(102 |
) |
|
|
(36 |
) |
Gain (loss) on disposal of assets, net |
|
|
(3 |
) |
|
|
4 |
|
|
|
(3 |
) |
|
|
673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Operating Income (Loss) |
|
|
(47 |
) |
|
|
1 |
|
|
|
(118 |
) |
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains (losses), net |
|
|
(5 |
) |
|
|
14 |
|
|
|
(20 |
) |
|
|
288 |
|
Costs related to the separation of TWC |
|
|
(55 |
) |
|
|
— |
|
|
|
(109 |
) |
|
|
— |
|
Share of equity investment gain on disposal of assets |
|
|
30 |
|
|
|
— |
|
|
|
30 |
|
|
|
— |
|
Minority interest impacts on certain of the above items |
|
|
8 |
|
|
|
— |
|
|
|
24 |
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax impact |
|
|
(69 |
) |
|
|
15 |
|
|
|
(193 |
) |
|
|
699 |
|
Income tax impact |
|
|
26 |
|
|
|
(9 |
) |
|
|
63 |
|
|
|
(330 |
) |
Other tax items affecting comparability |
|
|
(6 |
) |
|
|
12 |
|
|
|
(5 |
) |
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax impact |
|
$ |
(49 |
) |
|
$ |
18 |
|
|
$ |
(135 |
) |
|
$ |
461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the items affecting comparability above, the Company incurred merger-related,
restructuring and shutdown costs of $28 million and $182 million during the three and nine months
ended September 30, 2008, respectively, and $12 million and $113 million during the three and nine
months ended September 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 securities lawsuits, totaling $5 million and $13 million for the three and
nine months ended September 30, 2008, respectively, and $2 million and $178 million for the three
and nine months ended September 30, 2007, respectively. In addition, the Company recognized related
insurance recoveries of $9 million for the nine months ended September 30, 2007.
Asset Impairments
During the three and nine months ended September 30, 2008, the Company recorded a $30 million
noncash asset impairment at the Publishing segment related to a sub-lease with a tenant that filed
for bankruptcy in September 2008 and a $9 million noncash impairment of an office building at the
AOL segment. In addition, during the nine months ended September 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, an online video game business, at the
Networks segment as a result of Turner’s decision to sell this business.
10
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
During the three and nine months ended September 30, 2007, the Company recorded noncash
impairments of $1 million and $2 million, respectively, at the AOL segment related to asset
write-offs in connection with facility closures. In addition, during the nine months ended
September 30, 2007, the Company recorded a $34 million noncash 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.
Gain/(Loss) on Disposal of Assets, Net
For the three and nine months ended September 30, 2008, the Company recorded a $3 million loss
on the completion of the sale of GameTap at the Networks segment.
For the three and nine months ended September 30, 2007, the Company recorded a $2 million
reduction to the gain and a $668 million net pretax gain, respectively, on the sale of AOL’s German
access business and, for the nine months ended September 30, 2007, the Company recorded a $1
million reduction to the gain on the sale of AOL’s U.K. access business. In addition, for the three
and nine months ended September 30, 2007, the Company recorded a $6 million gain on the sale of
four non-strategic magazine titles at the Publishing segment.
Investment Gains (Losses), Net
For the three months ended September 30, 2008, the Company recognized $5 million of
miscellaneous investment losses. For the nine months ended September 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, partly
offset by other net miscellaneous investment gains.
For the three and nine months ended September 30, 2007, the Company recognized net gains of
$14 million and $288 million, respectively, primarily related to the sale of investments,
including, for the nine months ended September 30, 2007, a $100 million gain on the Company’s sale
in April 2007 of its 50% interest in Bookspan and 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 nine months ended September 30, 2007, investment gains, net also included a
$4 million gain to reflect market fluctuations in equity derivative instruments.
Costs Related to the Separation of TWC
During the three and nine months ended September 30, 2008, the Company incurred pretax costs
related to the separation of TWC of $55 million and $109 million, respectively, including direct
transaction costs (e.g., legal and professional fees) of $5 million and $22 million, respectively
(which have been reflected in other income, net on the Company’s consolidated statement of
operations), and financing costs of $50 million and $87 million, respectively (which have been
reflected in interest expense, net on the Company’s consolidated statement of operations). For the
three and nine months ended September 30, 2008, financing costs included $48 million and $54
million, respectively, in net interest expense (after considering the impact of the net proceeds of
the 2008 Cable Bond Offering, a portion of which was used to repay variable-rate debt with lower
interest rates and the remainder of which was invested in various short-term investments) on the
$5.0 billion principal amount of debt securities issued in the 2008 Cable Bond Offering and $2
million and $33 million, respectively, of debt issuance costs, primarily related to the portion of
the upfront loan fees for the 2008 Cable Bridge Facility that was expensed due to the reduction of
commitments under such facility as a result of the 2008 Cable Bond Offering. The Company expects to
incur additional direct transaction costs and financing costs related to the separation of TWC.
Share of Equity Investment Gain on Disposal of Assets
For the three and nine months ended September 30, 2008, the Company recognized its $30 million
share of a pretax gain on the sale of a Central European documentary channel of an equity method
investee.
11
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Minority Interest Impacts
For the three and nine months ended September 30, 2008, expenses of $8 million and $24
million, respectively, were attributed to the minority owners’ shares of the costs related to the
separation of TWC and, for the nine months ended September 20, 2008, the minority owners’ shares of
the impairment of certain non-core cable systems held for sale.
For the nine months ended September 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.
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 also includes certain other items affecting comparability. For the three
and nine months ended September 30, 2007, these items included $12 million and $92 million,
respectively, of tax benefits related primarily to the realization of tax attribute carryforwards
and changes in certain state tax laws.
Three and Nine Months Ended September 30, 2008 Compared to Three and Nine Months Ended September
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 |
|
Nine Months Ended |
| |
|
9/30/08 |
|
9/30/07 |
|
% Change |
|
9/30/08 |
|
9/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
6,490 |
|
|
$ |
6,170 |
|
|
|
5 |
% |
|
$ |
19,312 |
|
|
$ |
18,638 |
|
|
|
4 |
% |
Advertising |
|
|
2,078 |
|
|
|
2,095 |
|
|
|
(1 |
%) |
|
|
6,413 |
|
|
|
6,295 |
|
|
|
2 |
% |
Content |
|
|
2,906 |
|
|
|
3,141 |
|
|
|
(7 |
%) |
|
|
8,277 |
|
|
|
8,163 |
|
|
|
1 |
% |
Other |
|
|
232 |
|
|
|
270 |
|
|
|
(14 |
%) |
|
|
676 |
|
|
|
744 |
|
|
|
(9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
11,706 |
|
|
$ |
11,676 |
|
|
|
— |
|
|
$ |
34,678 |
|
|
$ |
33,840 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in Subscription revenues for the three and nine months ended September 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, 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 expansion. 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 nine months ended September 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 nine months ended September 30, 2008.
The decrease in Advertising revenues for the three months ended September 30, 2008 was
primarily due to declines at the Publishing and AOL segments, partly offset by an increase at the
Networks segment. The decrease at the Publishing segment was primarily due 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, partly offset by growth in online revenues. The
decrease at the AOL segment was due to a decrease in Advertising revenues generated on both the AOL
Network and the Third Party Network. The increase at the Networks segment was driven by Turner’s
domestic and international networks. For the nine months ended September 30, 2008, the increase in
Advertising revenues was primarily due to growth at the Networks segment, which was driven
primarily by Turner’s domestic and international networks, partly offset by a decline at the
Publishing segment due to declines in domestic print Advertising revenues and declines in custom
publishing revenues, as well as the impacts of the 2007 closures of LIFE and Business 2.0 magazines
and the sale of four
12
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
non-strategic magazine titles in the third quarter of 2007, partly offset by growth in online
revenues.
The decrease in Content revenues for the three months ended September 30, 2008 was primarily
related to a decline at the Filmed Entertainment segment, mainly due to decreases in both
television and theatrical product revenues, partially offset by the impact of the acquisition of TT
Games Limited in the fourth quarter of 2007. The increase in Content revenues for nine months ended
September 30, 2008 was principally related to growth at the Filmed Entertainment segment, primarily
driven by the impact of the acquisition of TT Games Limited in the fourth quarter of 2007 and an
increase in theatrical product revenues, partially offset by a decline in television 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 September 30, 2008 and 2007, costs of revenues
totaled $6.664 billion and $6.961 billion, respectively, and, as a percentage of revenues, were 57%
and 60%, respectively. For the nine months ended September 30, 2008 and 2007, costs of revenues
totaled $20.197 billion and $19.874 billion, respectively, and, as a percentage of revenues, were
58% and 59%, respectively. The segment variations are discussed in detail in “Business Segment
Results.”
Selling, General and Administrative Expenses. For the three months ended September 30, 2008,
selling, general and administrative expenses increased 1% to $2.425 billion in 2008 from $2.407
billion in 2007. For the nine months ended September 30, 2008, selling, general and administrative
expenses increased 2% to $7.369 billion in 2008 from $7.213 billion in 2007. The increase in
selling, general and administrative expenses for the three and nine months ended September 30, 2008
primarily related to increases at the Filmed Entertainment, Networks and Cable segments, partially
offset by declines at the AOL and Publishing segments. The segment variations are discussed in
detail in “Business Segment Results.”
Included in costs of revenues and selling, general and administrative expenses is depreciation
expense, which increased to $944 million and $2.861 billion for the three and nine months ended
September 30, 2008, respectively, from $943 million and $2.772 billion for the three and nine
months ended September 30, 2007, respectively. The increase in depreciation expense for the three
and nine months ended September 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 $206 million and $583 million for the
three and nine months ended September 30, 2008, respectively, from $167 million and $502 million
for the three and nine months ended September 30, 2007, respectively. The increase in amortization
expense for the three and nine months ended September 30, 2008 primarily related to increases at
the AOL, Networks and Filmed Entertainment segments primarily due to recent business acquisitions.
Amounts Related to Securities Litigation. The Company recognized legal reserves as well as
legal and other professional fees related to the defense of various securities lawsuits, totaling
$5 million and $13 million for the three and nine months ended September 30, 2008, respectively,
and $2 million and $178 million for the three and nine months ended September 30, 2007,
respectively. In addition, the Company recognized related insurance recoveries of $9 million for
the nine months ended September 30, 2007.
Merger-related, Restructuring and Shutdown Costs. The Company incurred restructuring costs
for the three and nine months ended September 30, 2008 of $28 million and $182 million,
respectively, primarily related to various employee terminations and other exit activities,
including $2 million and $15 million, respectively, at the AOL segment for the three and nine
months ended September 30, 2008, $8 million and $14 million, respectively, at the Cable segment for
the three and nine months ended September 30, 2008, $17 million and $130 million, respectively, at
the Filmed Entertainment segment for the three and nine months ended September 30, 2008, $1 million
and $16 million, respectively, at the Publishing segment for the three and nine months ended
September 30, 2008, and $7 million at the Corporate segment for the nine months ended September 30,
2008.
13
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The Company incurred restructuring costs for the three and nine months ended September 30,
2007 of $9 million and $103 million, respectively, primarily related to various employee
terminations and other exit activities, including $1 million and $10 million, respectively, at the
Cable segment for the three and nine months ended September 30, 2007, $4 million and $20 million,
respectively, at the Networks segment for the three and nine months ended September 30, 2007, $4
million and $46 million, respectively, at the Publishing segment for the three and nine months
ended September 30, 2007 and $27 million at the AOL segment for the nine months ended September 30,
2007. In addition, for the three and nine months ended September 30, 2007, the Cable segment
expensed $3 million and $10 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).
The Company expects to incur restructuring charges ranging from $100 million to $125 million
in the fourth quarter of 2008 primarily relating to the undertaking of a significant reorganization
of the Publishing segment’s U.S. publishing operations.
Operating Income. Operating Income increased to $2.336 billion for the three months ended
September 30, 2008 from $2.130 billion for the three months ended September 30, 2007. Excluding the
items previously noted under “Significant Transactions and Other Items Affecting Comparability”
totaling $47 million of expense, net and $1 million of income, net for the three months ended
September 30, 2008 and 2007, respectively, Operating Income increased $254 million, primarily
reflecting increases at the Networks, Cable and Filmed Entertainment segments, partially offset by
declines at the Publishing and AOL segments.
Operating Income decreased to $6.229 billion for the nine months ended September 30, 2008 from
$6.606 billion for the nine months ended September 30, 2007. Excluding the items previously noted
under “Significant Transactions and Other Items Affecting Comparability” totaling $118 million of
expense, net and $468 million of income, net for the nine months ended September 30, 2008 and 2007,
respectively, Operating Income increased $209 million, primarily reflecting increases at the
Networks and Cable segments, partially offset by declines at the AOL, Publishing and Filmed
Entertainment segments.
The segment variations are discussed under “Business Segment Results.”
Interest Expense, Net. Interest expense, net, decreased to $550 million and $1.646 billion
for the three and nine months ended September 30, 2008, respectively, from $589 million and $1.714
billion for the three and nine months ended September 30, 2007, respectively. The decrease in
interest expense, net for the three and nine months ended September 30, 2008 is primarily due to
lower average interest rates on net debt. In addition, for the nine months ended September 30,
2008, the decrease in interest expense, net was partially offset by $33 million of debt issuance costs primarily related to the portion of the
upfront loan fees for the 2008 Cable Bridge Facility that was 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 |
|
Nine Months Ended |
| |
|
9/30/08 |
|
9/30/07 |
|
9/30/08 |
|
9/30/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains (losses), net |
|
|
$ (5 |
) |
|
|
$ 14 |
|
|
|
$ (20 |
) |
|
|
$ 288 |
|
Income (loss) from equity method investees |
|
|
33 |
|
|
|
(18 |
) |
|
|
25 |
|
|
|
(21 |
) |
Other |
|
|
3 |
|
|
|
2 |
|
|
|
(27 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss), net |
|
|
$ 31 |
|
|
|
$ (2 |
) |
|
|
$ (22 |
) |
|
|
$ 231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in investment gains (losses), net are discussed under “Significant Transactions
and Other Items Affecting Comparability.” Excluding the impact of investment gains (losses), other
income, net increased primarily due to higher income from equity method investees for the three and
nine months ended September 30, 2008 primarily due to the Company’s recognition of its $30 million
share of a pretax gain on the sale of a Central European documentary channel of an equity method
investee.
14
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Minority Interest Expense, Net. Time Warner had $96 million and $266 million of minority
interest expense, net for the three and nine months ended September 30, 2008, respectively,
compared to $84 million and $305 million for the three and nine months ended September 30, 2007,
respectively. The increase for the three months ended September 30, 2008 was primarily related to
higher profits recorded by the Cable segment, partly offset by the costs related to the separation
of TWC. The decrease for the nine months ended September 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 and 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, partially offset by higher
profits recorded by the Cable segment during 2008.
Income Tax Provision. Income tax expense from continuing operations was $655 million for the
three months ended September 30, 2008 compared to $555 million for the three months ended September
30, 2007 and was $1.663 billion for the nine months ended September 30, 2008 compared to $1.786
billion for the nine months ended September 30, 2007. The Company’s effective tax rate for
continuing operations was 38% and 39% for the three and nine months ended September 30, 2008,
respectively, compared to 38% and 37% for the three and nine months ended September 30, 2007,
respectively. The increase for the nine months ended September 30, 2008 is primarily attributable
to tax attribute carryforwards recognized during the nine months ended September 30, 2007.
Income from Continuing Operations. Income from continuing operations was $1.066 billion for
the three months ended September 30, 2008 compared to $900 million for the three months ended
September 30, 2007. Basic and diluted net income per share from continuing operations were both
$0.30 in 2008 compared to $0.24 for both in 2007. Basic and diluted income per common share from
continuing operations for the three months ended September 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 $49 million
of expense, net and $18 million of income, net for the three months ended September 30, 2008 and
2007, respectively, income from continuing operations increased by $233 million, primarily
reflecting higher Operating Income, as noted above.
Income from continuing operations was $2.632 billion for the nine months ended September 30,
2008 compared to $3.032 billion for the nine months ended September 30, 2007. Basic and diluted net
income per share from continuing operations were both $0.73 in 2008 compared to $0.81 and $0.80,
respectively, in 2007. Basic and diluted income per common share from continuing operations for the
nine months ended September 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 $135 million of expense, net and
$461 million of income, net for the nine months ended September 30, 2008 and 2007, respectively,
income from continuing operations increased by $196 million, primarily reflecting higher Operating
Income, as noted above.
Discontinued Operations, Net of Tax. The financial results for the three and nine months
ended September 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 $1.067 billion for the three
months ended September 30, 2008 compared to $1.086 billion for the three months ended September 30,
2007. Basic and diluted net income per common share were both $0.30 in 2008 compared to $0.30 and
$0.29, respectively, in 2007. Net income was $2.630 billion for the nine months ended September 30,
2008 compared to $3.356 billion for the nine months ended September 30, 2007. Basic and diluted net
income per common share were both $0.73 in 2008 compared to $0.89 and $0.88, respectively, in 2007.
Net income per common share for the three and nine months ended September 30, 2008 reflect the
favorable impact of repurchases of shares under the Company’s stock repurchase programs.
15
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Business Segment Results
AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of
the AOL segment for the three and nine months ended September 30, 2008 and 2007 are as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/08 |
|
9/30/07 |
|
% Change |
|
9/30/08 |
|
9/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
470 |
|
|
$ |
635 |
|
|
|
(26 |
%) |
|
$ |
1,500 |
|
|
$ |
2,199 |
|
|
|
(32 |
%) |
Advertising |
|
|
507 |
|
|
|
540 |
|
|
|
(6 |
%) |
|
|
1,589 |
|
|
|
1,611 |
|
|
|
(1 |
%) |
Other |
|
|
35 |
|
|
|
44 |
|
|
|
(20 |
%) |
|
|
108 |
|
|
|
120 |
|
|
|
(10 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,012 |
|
|
|
1,219 |
|
|
|
(17 |
%) |
|
|
3,197 |
|
|
|
3,930 |
|
|
|
(19 |
%) |
Costs of revenues(a) |
|
|
(466 |
) |
|
|
(562 |
) |
|
|
(17 |
%) |
|
|
(1,540 |
) |
|
|
(1,722 |
) |
|
|
(11 |
%) |
Selling, general and administrative(a) |
|
|
(146 |
) |
|
|
(229 |
) |
|
|
(36 |
%) |
|
|
(489 |
) |
|
|
(726 |
) |
|
|
(33 |
%) |
Gain (loss) on disposal of consolidated
businesses |
|
|
— |
|
|
|
(2 |
) |
|
|
(100 |
%) |
|
|
— |
|
|
|
667 |
|
|
|
(100 |
%) |
Asset impairments |
|
|
(9 |
) |
|
|
(1 |
) |
|
NM |
|
|
|
(9 |
) |
|
|
(2 |
) |
|
NM |
|
Restructuring costs |
|
|
(2 |
) |
|
|
— |
|
|
NM |
|
|
|
(15 |
) |
|
|
(27 |
) |
|
|
(44 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
389 |
|
|
|
425 |
|
|
|
(8 |
%) |
|
|
1,144 |
|
|
|
2,120 |
|
|
|
(46 |
%) |
Depreciation |
|
|
(76 |
) |
|
|
(103 |
) |
|
|
(26 |
%) |
|
|
(238 |
) |
|
|
(312 |
) |
|
|
(24 |
%) |
Amortization |
|
|
(45 |
) |
|
|
(27 |
) |
|
|
67 |
% |
|
|
(124 |
) |
|
|
(69 |
) |
|
|
80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
268 |
|
|
$ |
295 |
|
|
|
(9 |
%) |
|
$ |
782 |
|
|
$ |
1,739 |
|
|
|
(55 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The decline in Subscription revenues for the three and nine months ended September 30, 2008
compared to the three and nine months ended September 30, 2007 was primarily due to a decrease in
the number of domestic AOL brand Internet access subscribers. In addition, the decline for the nine
months ended September 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 nine
months ended September 30, 2008.
The number of domestic AOL brand Internet access subscribers was 7.5 million, 8.1 million and
10.1 million as of September 30, 2008, June 30, 2008 and September 30, 2007, respectively. The
average revenue per domestic AOL brand subscriber (“ARPU”) was $18.60 and $18.50 for the three
months ended September 30, 2008 and 2007, respectively, and $18.29 and $18.69 for the nine months
ended September 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 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 both September 30, 2008 and June 30, 2008 and 3% as of
September 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
services, declining registrations for the paid service in response to AOL’s significantly reduced
marketing and increased competition from broadband access providers. The increase in ARPU for the
three months ended September 30, 2008 compared to the three months ended September 30, 2007 was due
primarily to an increase in the percentage of revenue-generating customers as well as a price
increase for lower-priced subscriber price plans, partially offset by a shift in the subscriber mix
to lower-priced subscriber price plans and a decrease in premium services revenues. The decrease
in ARPU for the nine months ended September 30, 2008 compared to the nine months ended September
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 and the price increase for lower-priced subscriber price plans.
16
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
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. The components of Advertising
revenues for the three and nine months ended September 30, 2008 and 2007 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/08 |
|
9/30/07 |
|
% Change |
|
9/30/08 |
|
9/30/07 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL Network: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Display |
|
$ |
181 |
|
|
$ |
214 |
|
|
|
(15 |
%) |
|
$ |
563 |
|
|
$ |
667 |
|
|
|
(16 |
%) |
Paid-search |
|
|
182 |
|
|
|
163 |
|
|
|
12 |
% |
|
|
527 |
|
|
|
486 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AOL Network |
|
|
363 |
|
|
|
377 |
|
|
|
(4 |
%) |
|
|
1,090 |
|
|
|
1,153 |
|
|
|
(5 |
%) |
| |
Third Party Network
|
|
|
144 |
|
|
|
163 |
|
|
|
(12 |
%) |
|
|
499 |
|
|
|
458 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Advertising revenues |
|
$ |
507 |
|
|
$ |
540 |
|
|
|
(6 |
%) |
|
$ |
1,589 |
|
|
$ |
1,611 |
|
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in display Advertising revenues generated on the AOL Network for the three and
nine months ended September 30, 2008 compared to the three and nine months ended September 30, 2007
was primarily due to lower demand from certain advertiser categories, the challenges of integrating
recently acquired businesses (including certain sales execution and system integration issues),
increased volume of inventory monetized through lower priced sales channels and pricing declines in certain
inventory segments, partially offset by revenues attributable to recent business acquisitions.
Display Advertising revenues generated on the AOL Network for the nine months ended September 30,
2007 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 nine months ended
September 30, 2008 compared to the three and nine months ended September 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 decline in Advertising revenues on the Third Party Network for the three months ended
September 30, 2008 compared to the three months ended September 30, 2007 was primarily due to a
decrease of $55 million due to a change in the relationship with a major customer of Platform-A
Inc., partly offset by increased revenues of $29 million attributable to recent business
acquisitions and other advertising growth of $7 million. 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 $3 million for the three months ended September 30, 2008 compared to
$58 million for the three months ended September 30, 2007. For the nine months ended September 30,
2008, Advertising revenues on the Third Party Network increased primarily due to increased revenues
of $110 million attributable to recent business acquisitions and other advertising growth of $68
million, partially offset by a decrease of $137 million, due to the change in the relationship with
the major customer of Platform-A Inc. Revenues associated with this relationship were $25 million
for the nine months ended September 30, 2008 compared to $162 million for the nine months ended
September 30, 2007. 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 September 30, 2008 decreased $23 million
from the three months ended June 30, 2008, due primarily to lower demand from certain advertiser
categories.
The Company expects Advertising revenues at the AOL segment to decrease during the remainder
of 2008 compared to the similar period in 2007 due to expected decreases on both the AOL Network
and the Third Party Network in part due to lower demand from certain advertiser categories. In
addition, expected declines on the AOL Network reflect declines in display advertising, partially
offset by increases in paid-search, while expected declines on the Third Party Network reflect
declines associated with the end of commitments from a major customer of Platform-A Inc., as
discussed above, partially offset by the impact of recent business acquisitions and other
advertising growth.
For the three and nine months ended September 30, 2008, costs of revenues decreased 17% and
11%, respectively, and as a percentage of revenues were 46% and 48%, respectively, compared to 46%
and 44% for the three and nine months ended September 30, 2007, respectively. For the nine months
ended September 30, 2008, approximately $70 million of the
17
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
decrease in costs of revenues was
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 and nine months ended September 30,
2008,
costs of revenues declined due primarily to decreases in network-related expenses,
personnel-related costs including incentive pay, 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 15% to $165 million for the three
months ended September 30, 2008 from $144 million for the three months ended September 30, 2007 and
increased 29% to $535 million for the nine months ended September 30, 2008 from $414 million for
the nine months ended September 30, 2007, due primarily to a new product distribution agreement. In
addition, the increase in TAC for the nine months ended September 30, 2008 included increased costs
associated with growth in Advertising revenues on the Third Party Network.
Selling, general and administrative expenses decreased 36% to $146 million and 33% to $489
million for the three and nine months ended September 30, 2008, respectively. For the nine months
ended September 30, 2008, approximately $30 million of the decrease was attributable to the sales
of AOL’s European access businesses. For the three and nine months ended September 30, 2008, the
remaining decrease in selling, general and administrative expenses reflects a significant reduction
in direct marketing costs of approximately $25 million and $90 million, respectively, primarily due
to reduced subscriber acquisition marketing as part of AOL’s strategy, and other cost savings,
primarily related to reduced headcount and other personnel-related costs including incentive pay.
Selling, general and administrative expenses for the three and nine months ended September 30, 2008
also included $6 million and $22 million, respectively, of external costs related to the separation
of AOL’s Access Services and Global Web Services businesses. In addition, selling, general and
administrative expenses for the three and nine months ended September 30, 2007 included a $13
million charge related to a patent infringement litigation settlement.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the three and nine months ended September 30, 2008 included a $9 million noncash
impairment of an office building and the results for the three and nine months ended September 30,
2007 included noncash impairments of $1 million and $2 million, respectively, related to asset
write-offs in connection with facility closures. In addition, the results for the three and nine
months ended September 30, 2007 included a $2 million reduction to the gain and a $668 million net
pretax gain, respectively, on the sale of AOL’s German access business. The results for the nine
months ended September 30, 2007 also included a $1 million reduction to the gain on the sale of
AOL’s U.K. access business. In addition, the results for the three and nine months ended September
30, 2008 included net restructuring charges of $2 million and $15 million, respectively, and, for
the nine months ended September 30, 2007, included net restructuring charges of $27 million,
primarily related to involuntary employee terminations and facility closures.
For the three and nine months ended September 30, 2008, Operating Income before Depreciation
and Amortization decreased compared to the three and nine months ended September 30, 2007, due
primarily to a decline in revenues, partially offset by lower costs of revenues and selling,
general and administrative expenses. In addition, for the nine months ended September 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 nine months ended September 30, 2008 compared to
the three and nine months ended September 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 associated with 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 expects a continued decline in costs of revenues,
including dial-up network and customer service expenses, and selling, general and administrative
expenses compared to the similar period in 2007.
18
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Cable. Revenues, Operating Income before Depreciation and Amortization and Operating Income
of the Cable segment for the three and nine months ended September 30, 2008 and 2007 are as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
4,116 |
|
|
$ |
3,780 |
|
|
|
9 |
% |
|
$ |
12,144 |
|
|
$ |
11,230 |
|
|
|
8 |
% |
Advertising |
|
|
224 |
|
|
|
221 |
|
|
|
1 |
% |
|
|
654 |
|
|
|
636 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
4,340 |
|
|
|
4,001 |
|
|
|
8 |
% |
|
|
12,798 |
|
|
|
11,866 |
|
|
|
8 |
% |
Costs of revenues(a) |
|
|
(2,072 |
) |
|
|
(1,890 |
) |
|
|
10 |
% |
|
|
(6,097 |
) |
|
|
(5,645 |
) |
|
|
8 |
% |
Selling, general and administrative(a) |
|
|
(706 |
) |
|
|
(679 |
) |
|
|
4 |
% |
|
|
(2,161 |
) |
|
|
(2,022 |
) |
|
|
7 |
% |
Asset impairment |
|
|
— |
|
|
|
— |
|
|
NM |
|
|
|
(45 |
) |
|
|
— |
|
|
NM |
|
Merger-related and restructuring costs |
|
|
(8 |
) |
|
|
(4 |
) |
|
|
100 |
% |
|
|
(14 |
) |
|
|
(20 |
) |
|
|
(30 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
1,554 |
|
|
|
1,428 |
|
|
|
9 |
% |
|
|
4,481 |
|
|
|
4,179 |
|
|
|
7 |
% |
Depreciation |
|
|
(700 |
) |
|
|
(683 |
) |
|
|
2 |
% |
|
|
(2,123 |
) |
|
|
(2,001 |
) |
|
|
6 |
% |
Amortization |
|
|
(66 |
) |
|
|
(64 |
) |
|
|
3 |
% |
|
|
(196 |
) |
|
|
(207 |
) |
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
788 |
|
|
$ |
681 |
|
|
|
16 |
% |
|
$ |
2,162 |
|
|
$ |
1,971 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (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
nine months ended September 30, 2008 and 2007 (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video |
|
$ |
2,639 |
|
|
$ |
2,530 |
|
|
|
4 |
% |
|
$ |
7,878 |
|
|
$ |
7,613 |
|
|
|
3 |
% |
High-speed data |
|
|
1,056 |
|
|
|
942 |
|
|
|
12 |
% |
|
|
3,082 |
|
|
|
2,760 |
|
|
|
12 |
% |
Voice(a) |
|
|
421 |
|
|
|
308 |
|
|
|
37 |
% |
|
|
1,184 |
|
|
|
857 |
|
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Subscription revenues |
|
|
4,116 |
|
|
|
3,780 |
|
|
|
9 |
% |
|
|
12,144 |
|
|
|
11,230 |
|
|
|
8 |
% |
Advertising revenues |
|
|
224 |
|
|
|
221 |
|
|
|
1 |
% |
|
|
654 |
|
|
|
636 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
4,340 |
|
|
$ |
4,001 |
|
|
|
8 |
% |
|
$ |
12,798 |
|
|
$ |
11,866 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
For the three and nine months ended September 30, 2007, voice revenues include $8
million and $33 million, respectively, of revenues associated with subscribers who received
traditional, circuit-switched telephone service. |
19
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Selected subscriber-related statistics as of September 30, 2008 and 2007 are as follows
(thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of September 30, |
| |
|
2008 |
|
2007 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic video(a) |
|
|
13,266 |
|
|
|
13,308 |
|
|
|
— |
|
Digital video(b) |
|
|
8,607 |
|
|
|
7,860 |
|
|
|
10 |
% |
Residential high-speed
data(c) |
|
|
8,339 |
|
|
|
7,412 |
|
|
|
13 |
% |
Commercial high-speed
data(c) |
|
|
295 |
|
|
|
272 |
|
|
|
8 |
% |
Residential Digital
Phone(d) |
|
|
3,621 |
|
|
|
2,608 |
|
|
|
39 |
% |
Commercial Digital Phone(d) |
|
|
23 |
|
|
|
2 |
|
|
NM |
|
Revenue generating units(e) |
|
|
34,151 |
|
|
|
31,505 |
|
|
|
8 |
% |
Customer relationships(f) |
|
|
14,750 |
|
|
|
14,637 |
|
|
|
1 |
% |
| |
|
|
| (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 September 30,
2007 exclude 43,000 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 nine months ended September 30, 2008, Subscription revenues increased,
primarily driven by the continued growth of digital video services and video price increases, 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 and nine months ended September 30, 2008 compared to 23% of video revenues for
both the three and nine months ended September 30, 2007. Advertising revenues increased slightly
for the three and nine months ended September 30, 2008 primarily due to an increase in political
advertising revenues, partially offset by a decline in Advertising revenues from national, regional
and local businesses.
The components of costs of revenues for the three and nine months ended September 30, 2008 and
2007 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video programming |
|
$ |
949 |
|
|
$ |
881 |
|
|
|
8 |
% |
|
$ |
2,817 |
|
|
$ |
2,643 |
|
|
|
7 |
% |
Employee |
|
|
597 |
|
|
|
546 |
|
|
|
9 |
% |
|
|
1,752 |
|
|
|
1,624 |
|
|
|
8 |
% |
High-speed data |
|
|
35 |
|
|
|
42 |
|
|
|
(17 |
%) |
|
|
112 |
|
|
|
125 |
|
|
|
(10 |
%) |
Voice |
|
|
144 |
|
|
|
115 |
|
|
|
25 |
% |
|
|
406 |
|
|
|
338 |
|
|
|
20 |
% |
Franchise fees |
|
|
116 |
|
|
|
108 |
|
|
|
7 |
% |
|
|
344 |
|
|
|
328 |
|
|
|
5 |
% |
Other direct operating costs |
|
|
231 |
|
|
|
198 |
|
|
|
17 |
% |
|
|
666 |
|
|
|
587 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues |
|
$ |
2,072 |
|
|
$ |
1,890 |
|
|
|
10 |
% |
|
$ |
6,097 |
|
|
$ |
5,645 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008, costs of revenues increased 10% and
8%, respectively, and, as a percentage of revenues, were 48% for both the three and nine months
ended September 30, 2008 compared to 47% and 48% for the three and nine months ended September 30,
2007, respectively. Video programming costs increased for the three and nine months ended September
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 nine months ended September 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
20
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
the three and nine months ended September 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 nine months ended September 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. High-speed data costs decreased for the three and nine months ended September 30, 2008
primarily due to a decrease in per-subscriber connectivity costs, partially offset by subscriber
growth.
The increase in selling, general and administrative expenses for the three and nine months
ended September 30, 2008 was primarily attributable to higher employee costs primarily due to
headcount and salary increases, as well as higher marketing costs primarily resulting from
intensified marketing efforts. Selling, general and administrative expenses for the three and nine
months ended September 30, 2008 also included a benefit of approximately $13 million due to changes
in estimates of previously established casualty insurance accruals.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the nine months ended September 30, 2008 included a $45 million noncash impairment
of certain non-core cable systems held for sale. For the three and nine months ended September 30,
2007, the Cable segment expensed non-capitalizable merger-related and restructuring costs
associated with the Adelphia/Comcast Transactions of $3 million and $10 million, respectively. In
addition, the results included other restructuring costs of $8 million and $14 million for the
three and nine months ended September 30, 2008, respectively, and $1 million and $10 million for
the three and nine months ended September 30, 2007, respectively.
Operating Income before Depreciation and Amortization increased for the three and nine months
ended September 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. Additionally, Operating Income before Depreciation and Amortization for
the three and nine months ended September 30, 2008 was negatively impacted by approximately $10
million as a result of the effect of Hurricane Ike on TWC’s cable systems in southeast Texas and
Ohio, and Operating Income before Depreciation and Amortization for the nine months ended September
30, 2008 was also impacted by the $45 million impairment of certain non-core cable systems held for
sale, as discussed above.
Operating Income increased for the three and nine months ended September 30, 2008 primarily
due to the increases in Operating Income before Depreciation and Amortization discussed above,
partially offset by an increase in depreciation expense. For the three and nine months ended
September 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.
21
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Filmed Entertainment. Revenues, Operating Income before Depreciation and Amortization and
Operating Income of the Filmed Entertainment segment for the three and nine months ended September
30, 2008 and 2007 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
10 |
|
|
$ |
8 |
|
|
|
25 |
% |
|
$ |
30 |
|
|
$ |
22 |
|
|
|
36 |
% |
Advertising |
|
|
20 |
|
|
|
12 |
|
|
|
67 |
% |
|
|
57 |
|
|
|
30 |
|
|
|
90 |
% |
Content |
|
|
2,797 |
|
|
|
3,100 |
|
|
|
(10 |
%) |
|
|
8,034 |
|
|
|
7,942 |
|
|
|
1 |
% |
Other |
|
|
54 |
|
|
|
58 |
|
|
|
(7 |
%) |
|
|
164 |
|
|
|
180 |
|
|
|
(9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,881 |
|
|
|
3,178 |
|
|
|
(9 |
%) |
|
|
8,285 |
|
|
|
8,174 |
|
|
|
1 |
% |
Costs of revenues(a) |
|
|
(2,015 |
) |
|
|
(2,407 |
) |
|
|
(16 |
%) |
|
|
(5,891 |
) |
|
|
(6,124 |
) |
|
|
(4 |
%) |
Selling, general and administrative(a) |
|
|
(468 |
) |
|
|
(412 |
) |
|
|
14 |
% |
|
|
(1,407 |
) |
|
|
(1,185 |
) |
|
|
19 |
% |
Restructuring costs |
|
|
(17 |
) |
|
|
— |
|
|
NM |
|
|
|
(130 |
) |
|
|
— |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
381 |
|
|
|
359 |
|
|
|
6 |
% |
|
|
857 |
|
|
|
865 |
|
|
|
(1 |
%) |
Depreciation |
|
|
(42 |
) |
|
|
(37 |
) |
|
|
14 |
% |
|
|
(126 |
) |
|
|
(112 |
) |
|
|
13 |
% |
Amortization |
|
|
(64 |
) |
|
|
(54 |
) |
|
|
19 |
% |
|
|
(179 |
) |
|
|
(161 |
) |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
275 |
|
|
$ |
268 |
|
|
|
3 |
% |
|
$ |
552 |
|
|
$ |
592 |
|
|
|
(7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
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 nine months ended
September 30, 2008 and 2007 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical film |
|
$ |
785 |
|
|
$ |
820 |
|
|
|
(4 |
%) |
|
$ |
1,580 |
|
|
$ |
1,615 |
|
|
|
(2 |
%) |
Home video and electronic delivery |
|
|
592 |
|
|
|
788 |
|
|
|
(25 |
%) |
|
|
2,168 |
|
|
|
2,144 |
|
|
|
1 |
% |
Television licensing |
|
|
358 |
|
|
|
324 |
|
|
|
10 |
% |
|
|
1,179 |
|
|
|
1,057 |
|
|
|
12 |
% |
Consumer products and other |
|
|
42 |
|
|
|
51 |
|
|
|
(18 |
%) |
|
|
124 |
|
|
|
118 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total theatrical product |
|
|
1,777 |
|
|
|
1,983 |
|
|
|
(10 |
%) |
|
|
5,051 |
|
|
|
4,934 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television licensing |
|
|
531 |
|
|
|
784 |
|
|
|
(32 |
%) |
|
|
1,742 |
|
|
|
2,111 |
|
|
|
(17 |
%) |
Home video and electronic delivery |
|
|
207 |
|
|
|
183 |
|
|
|
13 |
% |
|
|
557 |
|
|
|
494 |
|
|
|
13 |
% |
Consumer products and other |
|
|
38 |
|
|
|
64 |
|
|
|
(41 |
%) |
|
|
144 |
|
|
|
176 |
|
|
|
(18 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total television product |
|
|
776 |
|
|
|
1,031 |
|
|
|
(25 |
%) |
|
|
2,443 |
|
|
|
2,781 |
|
|
|
(12 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
244 |
|
|
|
86 |
|
|
|
184 |
% |
|
|
540 |
|
|
|
227 |
|
|
|
138 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Content revenues |
|
$ |
2,797 |
|
|
$ |
3,100 |
|
|
|
(10 |
%) |
|
$ |
8,034 |
|
|
$ |
7,942 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline in theatrical film revenues for the three and nine months ended September 30, 2008
was due primarily to difficult comparisons for the three months ended September 30, 2008 compared
to the similar period in the prior year. Revenues for the three months ended September 30, 2008
included The Dark Knight and Journey to the Center of the Earth while revenues for the three months
ended September 30, 2007 included Harry Potter and the Order of the Phoenix, Rush Hour 3 and
Hairspray. For the nine months ended September 30, 2008, revenues also included Sex and the City,
10,000 B.C., Get Smart and Speed Racer and the prior year period also included 300 and Ocean’s 13.
Theatrical product revenues from home video and electronic delivery decreased for the three
months ended September 30, 2008 due primarily to difficult comparisons to the prior year period.
Revenues for the three months ended September 30, 2008 included Sex and the City, 10,000 B.C. and
Speed Racer compared to 2007, which included 300, We Are Marshall and TMNT. Theatrical product
revenues from home video and electronic delivery were essentially flat for the nine months ended
September 30, 2008, as the decline for the three months ended September 30, 2008 was offset by the
greater number
22
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
of significant titles in the first six months of 2008, including I Am Legend, 10,000 B.C., The
Bucket List 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 nine months ended
September 30, 2008 due primarily to the timing and number of availabilities.
The decrease in television product licensing fees for the three months ended September 30,
2008 was primarily due to the initial off-network availabilities in 2007 of Two and a Half Men,
Cold Case and The George Lopez Show, with no comparable availabilities in 2008. In addition, for
the nine months ended September 30, 2008, the decline included the impact of the Writers Guild of
America (East and West) strike, which was settled in February 2008, 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 nine months ended September 30, 2008 primarily reflected the
timing of releases, including new season releases of The Closer, Gossip Girl, One Tree Hill,
Terminator: The Sarah Connor Chronicles and Two and a Half Men.
The increase in other Content revenues for the three and nine months ended September 30, 2008
was due primarily to the impact of the acquisition of TT Games Limited in the fourth quarter of
2007, which included revenues from the second-quarter 2008 release of LEGO Indiana Jones and the
third-quarter 2008 release of LEGO Batman, as well as the expansion of the distribution of
interactive video games.
The decrease in costs of revenues for the three and nine months ended September 30, 2008
resulted primarily from lower film costs ($1.184 billion and $3.410 billion for the three and nine
months ended September 30, 2008, respectively, compared to $1.454 billion and $3.540 billion for
the three and nine months ended September 30, 2007, respectively) and 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 $10 million for the three
months ended September 30, 2008 from $100 million for the three months ended September 30, 2007 and
decreased to $28 million for the nine months ended September 30, 2008 from $204 million for the
nine months ended September 30, 2007. In addition, during the nine months ended September 30, 2008,
the Company recognized approximately $40 million in participation expense, related to current
claims on films released in prior periods. Costs of revenues as a percentage of revenues decreased
to 70% for the three months ended September 30, 2008 from 76% for the three months ended September
30, 2007, and to 71% for the nine months ended September 30, 2008 from 75% for the nine months
ended September 30, 2007, reflecting the quantity and mix of products released.
The increase in selling, general and administrative expenses for the three and nine months
ended September 30, 2008 was primarily the result of higher employee costs, which includes
additional headcount to support the expansion of games distribution, digital platforms and other
initiatives, partially offset by cost reductions realized in connection with the operational
reorganization of the New Line business. The increase also reflects higher distribution costs
attributable to the increase in games revenues.
The results for the three and nine months ended September 30, 2008 included restructuring
charges of $17 million and $130 million, respectively, related to involuntary employee terminations
in connection with the operational reorganization of the New Line business. The Company expects to
incur incremental restructuring charges of approximately $5 million during the remainder of 2008.
Operating Income before Depreciation and Amortization and Operating Income increased for the
three months ended September 30, 2008 primarily due to lower costs of revenues, partially offset by
lower revenues, an increase in selling, general and administrative expenses and higher
restructuring charges. Operating Income before Depreciation and Amortization and Operating Income
for the nine months ended September 30, 2008 decreased primarily due to higher restructuring
charges and an increase in selling, general and administrative expenses, partially offset by an
increase in revenues and lower costs of revenues.
23
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Networks. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Networks segment for the three and nine months ended September 30, 2008 and 2007 are
as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
1,722 |
|
|
$ |
1,566 |
|
|
|
10 |
% |
|
$ |
5,136 |
|
|
$ |
4,672 |
|
|
|
10 |
% |
Advertising |
|
|
772 |
|
|
|
709 |
|
|
|
9 |
% |
|
|
2,417 |
|
|
|
2,181 |
|
|
|
11 |
% |
Content |
|
|
224 |
|
|
|
270 |
|
|
|
(17 |
%) |
|
|
626 |
|
|
|
682 |
|
|
|
(8 |
%) |
Other |
|
|
13 |
|
|
|
10 |
|
|
|
30 |
% |
|
|
37 |
|
|
|
31 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,731 |
|
|
|
2,555 |
|
|
|
7 |
% |
|
|
8,216 |
|
|
|
7,566 |
|
|
|
9 |
% |
Costs of revenues(a) |
|
|
(1,199 |
) |
|
|
(1,253 |
) |
|
|
(4 |
%) |
|
|
(3,915 |
) |
|
|
(3,693 |
) |
|
|
6 |
% |
Selling, general and administrative(a) |
|
|
(524 |
) |
|
|
(468 |
) |
|
|
12 |
% |
|
|
(1,475 |
) |
|
|
(1,340 |
) |
|
|
10 |
% |
Loss on disposal of consolidated business |
|
|
(3 |
) |
|
|
— |
|
|
NM |
|
|
|
(3 |
) |
|
|
— |
|
|
NM |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(18 |
) |
|
|
(34 |
) |
|
|
(47 |
%) |
Restructuring costs |
|
|
— |
|
|
|
(4 |
) |
|
|
(100 |
%) |
|
|
— |
|
|
|
(20 |
) |
|
|
(100 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
1,005 |
|
|
|
830 |
|
|
|
21 |
% |
|
|
2,805 |
|
|
|
2,479 |
|
|
|
13 |
% |
Depreciation |
|
|
(82 |
) |
|
|
(75 |
) |
|
|
9 |
% |
|
|
(241 |
) |
|
|
(222 |
) |
|
|
9 |
% |
Amortization |
|
|
(14 |
) |
|
|
(4 |
) |
|
NM |
|
|
|
(32 |
) |
|
|
(12 |
) |
|
|
167 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
909 |
|
|
$ |
751 |
|
|
|
21 |
% |
|
$ |
2,532 |
|
|
$ |
2,245 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The increase in Subscription revenues for the three and nine months ended September 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
expansion.
The increase in Advertising revenues for the three and nine months ended September 30, 2008
was driven primarily by Turner’s domestic networks, reflecting mainly higher CPMs (advertising
rates per thousand viewers) and audience delivery, as well as Turner’s international networks,
reflecting primarily an increase in the number of units sold.
The decrease in Content revenues for the three and nine months ended September 30, 2008
reflects lower ancillary sales of HBO’s original programming as well as lower syndication revenues
associated with HBO’s Everybody Loves Raymond.
For the three months ended September 30, 2008, costs of revenues decreased due primarily to
lower programming and content distribution costs, offset in part by higher election-related newsgathering
costs. For the three months ended September 30, 2008, programming costs declined 4% to $854 million
from $888 million for the three months ended September 30, 2007. The decrease in programming costs
was due primarily to lower original programming costs at both HBO and Turner and lower sports
programming costs at Turner, offset in part by programming costs associated with international
expansion and higher licensed programming costs at both HBO and Turner.
For the nine months ended September 30, 2008, costs of revenues increased due primarily to
increases in programming costs and election-related newsgathering
costs, offset in part by lower content distribution costs. For the nine months ended September 30, 2008, programming costs increased 8% to
$2.870 billion from $2.656 billion for the nine months ended September 30, 2007. The increase in
programming costs for the nine months ended September 30, 2008 was due primarily to programming
costs associated with international expansion, higher licensed programming costs and an increase in
sports programming costs at Turner, particularly related to NBA programming. Programming costs for
the nine months ended September 30, 2008 also included $26 million ($5 million for the three months
ended September 30, 2008) of charges related to HBO’s decisions to not proceed with certain
original series.
Costs of revenues as a percentage of revenues were 44% and 48% for the three and nine months
ended September 30, 2008, respectively, compared to 49% for both the three and nine months ended
September 30, 2007.
24
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 nine months
ended September 30, 2008
reflected, in part, increased marketing expenses and higher costs related to international
expansion.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the three months ended September 30, 2008 included a $3 million loss on the sale of
GameTap, an on-line video game business, and the nine months ended September 30, 2008 also included
an $18 million noncash impairment of GameTap. The results for the three and nine months ended
September 30, 2007 included $4 million and $20 million, respectively, of restructuring charges and
severance related to senior management changes at HBO. In addition, the results for the nine months
ended September 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.
Operating Income before Depreciation and Amortization increased for the three months ended
September 30, 2008 primarily due to an increase in revenues, lower costs of revenue and the absence
of restructuring costs, partially offset by increases in selling, general and administrative
expenses. The increase in Operating Income before Depreciation and Amortization for the nine
months ended September 30, 2008 was primarily due to an increase in revenues, the absence of
restructuring costs and the absence of the tradename impairment, partially offset by increases in
costs of revenues, selling, general and administrative expenses and the impairment of GameTap.
Operating Income increased for the three and nine months ended September 30, 2008 due primarily to
the increase in Operating Income before Depreciation and Amortization described above, offset in
part by increased depreciation and amortization related to the impact of international expansion.
Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Publishing segment for the three and nine months ended September 30, 2008 and 2007
are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
382 |
|
|
$ |
385 |
|
|
|
(1 |
%) |
|
$ |
1,134 |
|
|
$ |
1,124 |
|
|
|
1 |
% |
Advertising |
|
|
585 |
|
|
|
636 |
|
|
|
(8 |
%) |
|
|
1,783 |
|
|
|
1,904 |
|
|
|
(6 |
%) |
Content |
|
|
16 |
|
|
|
13 |
|
|
|
23 |
% |
|
|
40 |
|
|
|
39 |
|
|
|
3 |
% |
Other |
|
|
135 |
|
|
|
165 |
|
|
|
(18 |
%) |
|
|
382 |
|
|
|
433 |
|
|
|
(12 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,118 |
|
|
|
1,199 |
|
|
|
(7 |
%) |
|
|
3,339 |
|
|
|
3,500 |
|
|
|
(5 |
%) |
Costs of revenues(a) |
|
|
(449 |
) |
|
|
(456 |
) |
|
|
(2 |
%) |
|
|
(1,330 |
) |
|
|
(1,367 |
) |
|
|
(3 |
%) |
Selling, general and administrative(a) |
|
|
(427 |
) |
|
|
(441 |
) |
|
|
(3 |
%) |
|
|
(1,338 |
) |
|
|
(1,403 |
) |
|
|
(5 |
%) |
Gain on sale of assets |
|
|
— |
|
|
|
6 |
|
|
|
(100 |
%) |
|
|
— |
|
|
|
6 |
|
|
|
(100 |
%) |
Asset impairments |
|
|
(30 |
) |
|
|
— |
|
|
NM |
|
|
(30 |
) |
|
|
— |
|
|
NM |
Restructuring costs |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(75 |
%) |
|
|
(16 |
) |
|
|
(46 |
) |
|
|
(65 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and
Amortization |
|
|
211 |
|
|
|
304 |
|
|
|
(31 |
%) |
|
|
625 |
|
|
|
690 |
|
|
|
(9 |
%) |
Depreciation |
|
|
(32 |
) |
|
|
(35 |
) |
|
|
(9 |
%) |
|
|
(100 |
) |
|
|
(92 |
) |
|
|
9 |
% |
Amortization |
|
|
(17 |
) |
|
|
(18 |
) |
|
|
(6 |
%) |
|
|
(52 |
) |
|
|
(53 |
) |
|
|
(2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
162 |
|
|
$ |
251 |
|
|
|
(35 |
%) |
|
$ |
473 |
|
|
$ |
545 |
|
|
|
(13 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
For the three months ended September 30, 2008, Subscription revenues decreased primarily due
to decreases at IPC, resulting in part from the impact of foreign exchange rates, and lower
domestic subscription sales, partly offset by higher newsstand sales for certain domestic magazine
titles. For the nine months ended September 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”) and lower domestic subscription sales.
For the three and nine months ended September 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 (the “2007
magazine closures”), partly offset by growth in online revenues, led by contributions from
People.com, CNNMoney.com and Time.com. For the nine months ended September 30, 2008,
25
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Advertising
revenues also declined due to the impact of the 2007 magazine sales. The Company expects continued
declines in print Advertising revenues for the remainder of 2008 compared to the similar period in
the prior year, primarily
reflecting expected continued difficult advertising market conditions as a result of the
current economic environment.
For the three and nine months ended September 30, 2008, Other revenues decreased due primarily
to decreases at Synapse, Southern Living At Home and Oxmoor House, partially offset by the impact
of the acquisition of QSP in August 2008.
Costs of revenues decreased 2% for the three months ended September 30, 2008 and, as a
percentage of revenues, were 40% and 38% for the three months ended September 30, 2008 and 2007,
respectively. Costs of revenues decreased 3% for the nine months ended September 30, 2008 and, as a
percentage of revenues, were 40% and 39%, respectively, for the nine months ended September 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 were essentially
flat at $388 million for the three months ended September 30, 2008 and decreased 1% to $1.168
billion for the nine months ended September 30, 2008, primarily due to cost savings initiatives and
the impact of the 2007 magazine closures and, for the nine months ended September 30, 2008, the
2007 magazine sales. For the three and nine months ended September 30, 2008, paper cost savings
realized primarily as a result of lower volumes were offset by higher paper prices. The decrease
in costs of revenues 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-related costs, as well as
operating costs associated with the acquisition of QSP.
Selling, general and administrative expenses decreased for the three and nine months ended
September 30, 2008 primarily due to cost savings initiatives and the impact of the 2007 magazine
closures, partially offset by costs associated with investments in digital properties and costs
associated with the acquisition of QSP. Selling, general and administrative expenses also
decreased for the nine months ended September 30, 2008 due to the impact of the 2007 magazine
sales.
The results for the three and nine months ended September 30, 2008 included restructuring
costs of $1 million and $16 million, respectively, primarily consisting of severance associated
with continuing efforts to streamline operations. The results for the three and nine months ended
September 30, 2007 included restructuring costs of $4 million and $46 million, respectively,
primarily consisting of severance associated with efforts to streamline operations and costs
related to the shutdown of LIFE magazine in the first quarter of 2007. In addition, the results
for the three and nine months ended September 30, 2008, included a $30 million noncash asset
impairment related to a sub-lease with a tenant that filed for bankruptcy in September 2008, and
the results for the three and nine months ended September 30, 2007 included a $6 million gain on
the 2007 magazine sales.
The
Publishing segment is undertaking a significant reorganization
primarily of its U.S. publishing
operations and expects to incur restructuring charges in the fourth quarter of 2008.
Operating Income before Depreciation and Amortization decreased for the three and nine months
ended September 30, 2008 due primarily to a decline in revenues and the asset impairment, discussed
above, partially offset by decreases in costs of revenues, selling, general and administrative
expenses and restructuring costs. Operating Income decreased for the three and nine months ended
September 30, 2008 due primarily to the decline in Operating Income before Depreciation and
Amortization discussed above, and, for the nine months ended September 30, 2008, 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 the restructuring charges discussed above and
expected declines in print Advertising revenues.
26
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Corporate. Operating Loss before Depreciation and Amortization and Operating Loss of the
Corporate segment for the three and nine months ended September 30, 2008 and 2007 are as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
9/30/08 |
|
|
9/30/07 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to securities litigation and
government investigations |
|
$ |
(5 |
) |
|
$ |
(2 |
) |
|
|
150 |
% |
|
$ |
(13 |
) |
|
$ |
(169 |
) |
|
|
(92 |
%) |
Selling, general and administrative(a) |
|
|
(68 |
) |
|
|
(87 |
) |
|
|
(22 |
%) |
|
|
(237 |
) |
|
|
(281 |
) |
|
|
(16 |
%) |
Restructuring costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss before Depreciation and
Amortization |
|
|
(73 |
) |
|
|
(89 |
) |
|
|
(18 |
%) |
|
|
(257 |
) |
|
|
(450 |
) |
|
|
(43 |
%) |
Depreciation |
|
|
(12 |
) |
|
|
(10 |
) |
|
|
20 |
% |
|
|
(33 |
) |
|
|
(33 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
$ |
(85 |
) |
|
$ |
(99 |
) |
|
|
(14 |
%) |
|
$ |
(290 |
) |
|
$ |
(483 |
) |
|
|
(40 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (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 securities lawsuits, totaling $5 million and
$13 million for the three and nine months ended September 30, 2008, respectively, and $2 million
and $178 million for the three and nine months ended September 30, 2007, respectively. In addition,
the Company recognized related insurance recoveries of $9 million for the nine months ended
September 30, 2007. 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.
The results for the nine months ended September 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 nine months ended September 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 September 30, 2008 (not including amounts at
TWC) was $5.393 billion, including $1.265 billion of cash and equivalents. At the same date, TWC’s
unused committed capacity was $12.604 billion, including $3.090 billion of cash and equivalents and
$3.771 billion under the 2008 Cable Bridge Facility. 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 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. See “Lehman
Brothers Commitments” below for a discussion regarding the Company’s decision to exclude funding
commitments from subsidiaries of Lehman Brothers Holdings Inc. in determining the amount of its
unused committed capacity.
Current Financial Condition
At September 30, 2008, Time Warner had $37.992 billion of debt, $4.355 billion of cash and
equivalents (net debt of $33.637 billion, defined as total debt less cash and equivalents), $300
million of mandatorily redeemable preferred membership units at a subsidiary and $59.936 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.
27
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The following table shows the significant items contributing to the decrease in net debt from
December 31, 2007 to September 30, 2008 (millions):
| |
|
|
|
|
Balance at December 31, 2007 |
|
$ |
35,614 |
|
Cash provided by operations |
|
|
(8,094 |
) |
Proceeds from exercise of stock options |
|
|
(125 |
) |
Capital expenditures and product development costs |
|
|
3,137 |
|
Dividends paid to common stockholders |
|
|
675 |
|
Repurchases of common stock |
|
|
332 |
|
Investments and acquisitions, net(a) (b) |
|
|
2,247 |
|
Proceeds from the sale of investments(b) |
|
|
(272 |
) |
All other, net |
|
|
123 |
|
|
|
|
|
Balance at September 30, 2008(c)(d) |
|
$ |
33,637 |
|
|
|
|
|
| |
|
|
| (a) |
|
Includes the Company’s approximately $820 million investment in The Reserve Fund.
See below for further discussion. |
| (b) |
|
Refer to the “Investing Activities” section for further detail. |
| (c) |
|
Included in the net debt balance is $165 million that represents the net unamortized
fair value adjustment recognized as a result of the merger of AOL and Historic TW Inc. |
| (d) |
|
Net debt includes $20.979 billion at Time Warner and $12.658 billion at TWC at
September 30, 2008 and $22.269 billion at Time Warner and $13.345 billion at TWC at December
31, 2007. |
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 $9.25 billion from the dividend
immediately prior to the Distribution.
The Company has historically invested a portion of its cash on hand in money market funds,
including The Reserve Fund’s Primary Fund (“The Reserve Fund”). On the morning of September
15, 2008, the Company requested a full redemption of its approximately $820 million investment
in The Reserve Fund, but the redemption request was not honored. Approximately $330 million of
such investment was made by Time Warner and approximately $490 million was made by TWC. On
September 22, 2008, The Reserve Fund announced that redemptions of shares were suspended pursuant
to an SEC order requested by The Reserve Fund so that an orderly liquidation could be effected. On
October 31, 2008, the Company received $416 million from The Reserve Fund representing its pro rata
share of a partial distribution. The Company has not been informed as to when the remaining amount
will be returned. However, the Company believes its remaining receivable is recoverable and will
be distributed in the next twelve months as The Reserve Fund’s investments mature. As a result of
the status of The Reserve Fund, the Company has classified the approximately $820 million
receivable from The Reserve Fund at September 30, 2008 as other current assets on the Company’s
consolidated balance sheet and within investments and acquisitions, net of cash acquired, on the
Company’s consolidated statement of cash flows.
As noted under “Recent Developments,” TWC is a participant in the Sprint/Clearwire Joint
Venture, which is expected to close by the end of 2008. 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 November 4, 2008, the Company has repurchased approximately 154 million shares of common
stock for
28
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
approximately $2.8 billion, which included approximately 19 million shares of common stock
purchased for approximately $299 million during the nine months ended September 30, 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, and TWE’s 7.25% notes due September 1, 2008
(aggregate principal amount of $600 million) matured and were retired on September 1, 2008.
Cash and equivalents increased by $2.839 billion and $324 million for the nine months ended
September 30, 2008 and 2007, respectively. Components of these changes are discussed below in more
detail.
Details of cash provided by operations are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
| |
|
9/30/08 |
|
9/30/07 |
| |
Operating Income |
|
$ |
6,229 |
|
|
$ |
6,606 |
|
Depreciation and amortization |
|
|
3,444 |
|
|
|
3,274 |
|
Amounts related to securities litigation and government investigations: |
|
|
|
|
|
|
|
|
Net expenses |
|
|
13 |
|
|
|
169 |
|
Cash payments, net of recoveries |
|
|
(13 |
) |
|
|
(919 |
) |
(Gain) loss on disposal of assets, net |
|
|
3 |
|
|
|
(673 |
) |
Noncash asset impairments |
|
|
102 |
|
|
|
36 |
|
Net interest payments(a) |
|
|
(1,368 |
) |
|
|
(1,516 |
) |
Net income taxes paid(b) |
|
|
(474 |
) |
|
|
(395 |
) |
Noncash equity-based compensation |
|
|
232 |
|
|
|
230 |
|
Net cash flows from discontinued operations(c) |
|
|
(11 |
) |
|
|
33 |
|
Domestic pension plan contributions |
|
|
(291 |
) |
|
|
(13 |
) |
Merger-related and restructuring payments, net of accruals(d) |
|
|
(4 |
) |
|
|
(103 |
) |
All other, net, including working capital changes |
|
|
232 |
|
|
|
(573 |
) |
|
|
|
|
|
|
|
Cash provided by operations |
|
$ |
8,094 |
|
|
$ |
6,156 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Includes interest income received of $104 million and $77 million in 2008 and 2007,
respectively. |
| (b) |
|
Includes income tax refunds received of $111 million and $84 million in 2008 and
2007, respectively. |
| (c) |
|
Reflects net income (loss) from discontinued operations of $(2) million and $324
million in 2008 and 2007, respectively, net of noncash gains and expenses and working
capital-related adjustments of $(9) million and $(291) 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 $8.094 billion in 2008 from $6.156 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 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. The
Company’s U.S. federal income tax payments have increased by approximately $110 million during the
first nine months of 2008 as compared to the prior year period. This increase was primarily due to
the utilization of a majority of the Company’s U.S. federal tax attribute carryforwards in 2007,
partially offset by the benefits from the Economic Stimulus Act of 2008, which provides for a
special 50% depreciation deduction in 2008 for certain qualifying property.
As of December 31, 2007, the Company’s funded domestic defined benefit pension plans were funded by
assets in a pension trust totaling $3.355 billion. Between January 1, 2008 and October 31, 2008,
the Company’s plan assets have experienced market losses of approximately 30%. The impact to the
funded status of the defined benefit pension plans from these 2008 market losses is partially
offset by contributions made during the year and increases, through October 31, 2008, in discount
rates that reduce the projected benefit obligation. The Company has made $275 million of
discretionary cash contributions to its funded defined benefit pension plans during the nine months
ended September 30, 2008 and, subject to market conditions and other considerations, the Company
expects to make additional discretionary cash contributions during the remainder of the year
ranging from $400 million to $500 million.
29
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Details of cash used by investing activities are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
| |
|
9/30/08 |
|
9/30/07 |
| |
Investments in available-for-sale securities |
|
$ |
(17 |
) |
|
$ |
(93 |
) |
Investments and acquisitions, net of cash acquired: |
|
|
|
|
|
|
|
|
Bebo |
|
|
(851 |
) |
|
|
— |
|
buy.at |
|
|
(125 |
) |
|
|
— |
|
The Reserve Fund |
|
|
(820 |
) |
|
|
— |
|
TACODA |
|
|
— |
|
|
|
(274 |
) |
Third Screen Media |
|
|
— |
|
|
|
(104 |
) |
Wireless joint venture |
|
|
(3 |
) |
|
|
(30 |
) |
All other |
|
|
(431 |
) |
|
|
(281 |
) |
Investment activities of discontinued operations |
|
|
— |
|
|
|
(26 |
) |
Capital expenditures and product development costs |
|
|
(3,137 |
) |
|
|
(3,100 |
) |
Proceeds from the sale of available-for-sale securities |
|
|
15 |
|
|
|
33 |
|
Proceeds from the sale of AOL’s German access business |
|
|
— |
|
|
|
850 |
|
Proceeds from the sale of Tegic |
|
|
— |
|
|
|
265 |
|
Proceeds from the sale of the Parenting Group and most of the
Time4 Media magazine titles |
|
|
— |
|
|
|
220 |
|
Proceeds from the sale of the Company’s 50% interest in Bookspan |
|
|
— |
|
|
|
145 |
|
All other investment and asset sale proceeds |
|
|
257 |
|
|
|
326 |
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
$ |
(5,112 |
) |
|
$ |
(2,069 |
) |
|
|
|
|
|
|
|
Cash used by investing activities increased to $5.112 billion in 2008 from $2.069 billion 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.
Details of cash used by financing activities are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
| |
|
9/30/08 |
|
9/30/07 |
| |
Borrowings |
|
$ |
30,922 |
|
|
$ |
12,728 |
|
Debt repayments |
|
|
(30,049 |
) |
|
|
(10,551 |
) |
Proceeds from exercise of stock options |
|
|
125 |
|
|
|
484 |
|
Excess tax benefit on stock options |
|
|
3 |
|
|
|
74 |
|
Principal payments on capital leases |
|
|
(31 |
) |
|
|
(45 |
) |
Repurchases of common stock |
|
|
(332 |
) |
|
|
(5,714 |
) |
Dividends paid |
|
|
(675 |
) |
|
|
(645 |
) |
Other financing activities |
|
|
(106 |
) |
|
|
(94 |
) |
|
|
|
|
|
|
|
Cash used by financing activities |
|
$ |
(143 |
) |
|
$ |
(3,763 |
) |
|
|
|
|
|
|
|
Cash used by financing activities was $143 million in 2008 compared to $3.763 billion in 2007.
The change in cash 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, offset by a
decrease in net borrowings (defined as borrowings less repayments).
30
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Outstanding Debt and Other Financing Arrangements
Outstanding Debt and Committed Financial Capacity
At September 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 $56.195
billion, including $3.771 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, $17.997 billion was unused and $37.992 billion
was outstanding as debt. The $17.997 billion of unused committed capacity includes $5.393 billion
at Time Warner and $12.604 billion at TWC, $10.855 billion of which TWC expects to use to finance
the Special Dividend. At September 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 |
|
|
Credit(a) |
|
|
Paper |
|
|
Debt(b) |
|
|
Capacity(c) |
|
Cash and equivalents |
|
$ |
4,355 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,355 |
|
Bank credit agreements and commercial paper programs |
|
|
21,617 |
|
|
|
205 |
|
|
|
1 |
|
|
|
7,769 |
|
|
|
13,642 |
|
Floating-rate public debt |
|
|
2,000 |
|
|
|
— |
|
|
|
— |
|
|
|
2,000 |
|
|
|
— |
|
Fixed-rate public debt |
|
|
27,920 |
|
|
|
— |
|
|
|
— |
|
|
|
27,920 |
|
|
|
— |
|
Other fixed-rate obligations(d) |
|
|
303 |
|
|
|
— |
|
|
|
— |
|
|
|
303 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
56,195 |
|
|
$ |
205 |
|
|
$ |
1 |
|
|
$ |
37,992 |
|
|
$ |
17,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Represents the portion of committed capacity reserved for outstanding and undrawn
letters of credit. |
| (b) |
|
Represents principal amounts adjusted for premiums and discounts. |
| (c) |
|
Includes $12.604 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 $3.771 billion under the 2008 Cable Bridge Facility (described below). 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. |
| (d) |
|
Amount includes capital lease and other obligations. |
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 10.8 years as of September 30, 2008. The Company’s outstanding debt
includes other fixed-rate obligations due within one year of $125 million. The Company’s public
debt matures as follows: $2.000 billion in the fourth quarter of 2009, $0 in 2010, $2.000 billion
in 2011, $4.100 billion in 2012, $2.800 billion in 2013 and $19.031 billion thereafter. In
addition, all of the $7.770 billion of outstanding debt under
the Company’s bank credit agreements, including those that
support its commercial paper programs, matures in 2011.
The funding commitments under the Company’s various bank credit agreements, including the 2008 Cable
Bridge Facility, are provided by a
geographically diverse group of major financial institutions based in the United States, Canada,
France, Germany, Japan and the United Kingdom. The Company’s bank credit agreements do not contain
borrowing restrictions due to material adverse changes in the Company’s business or market
disruption. For a discussion of the terms of the Company’s bank credit agreements, see Note 7 to
the Company’s consolidated financial statements included in the 2007 Form 10-K.
Lehman Brothers Commitments
On September 15, 2008, Lehman Brothers Holdings Inc. (“Lehman”) filed a petition under Chapter
11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York
(the “Lehman Bankruptcy”). Lehman Commercial Paper Inc. (“LCPI”), a subsidiary of Lehman, is one
of the lenders under the Company’s $7.0 billion senior unsecured five-year revolving credit
facility (the “TW Revolving Facility”), with an undrawn commitment of $74 million. In addition,
Lehman Brothers Commercial Bank (“LBCB”) and Lehman Brothers Bank, FSB (“LBB”), also subsidiaries
of Lehman, are lenders under the 2008 Cable Bridge Facility and the Cable Revolving Facility,
respectively, with undrawn commitments of $269 million and $125 million, respectively. On October
5, 2008, LCPI filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S.
Bankruptcy Court for the Southern District of New York (the “LCPI Bankruptcy”). After the Lehman
Bankruptcy and prior to the LCPI Bankruptcy, LCPI failed to fund its portion of
31
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
two borrowing requests by Time Warner under the TW Revolving Facility. The Company does not
expect LCPI to fund its portion of future borrowing requests under the TW Revolving Facility. TWC
has not requested to borrow under either the 2008 Cable Bridge Facility or the Cable Revolving
Facility since the Lehman Bankruptcy, and neither LBCB nor LBB has been placed in receivership or a
similar proceeding as of November 4, 2008. While the Company believes that LBCB and LBB are
contractually obligated under the 2008 Cable Bridge Facility and the Cable Revolving Facility,
respectively, it is uncertain whether LBCB or LBB would fund its respective portion of any future
borrowing requests or whether another lender might assume such commitments. Accordingly, the
Company’s total committed capacity as of September 30, 2008 excludes the undrawn commitments of
LCPI, LBCB and LBB. The Company believes that it continues to have sufficient liquidity to meet its
needs for the foreseeable future, even if LCPI, LBCB and/or LBB fails to fund its portion of any
future borrowing requests.
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. Pending the
payment of the Special Dividend, a portion of the net proceeds of the 2008 Cable Bond Offering was
used by TWC to repay variable-rate debt with lower interest rates and the remainder was invested in
various short-term investments. The 2008 Cable Debt Securities are guaranteed by TWE and TW NY (the
“Guarantors”).
2008 Cable Bridge Facility
In addition to issuing 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, the amount of the commitments of the lenders under the 2008 Cable Bridge Facility
was reduced to $4.040 billion. As discussed above, the Company is not certain whether LBCB will
fund its $269 million in commitments under the 2008 Cable Bridge Facility as a result of the Lehman
Bankruptcy, and, therefore, the Company has included only $3.771 billion of commitments under the
2008 Cable Bridge Facility in its total committed capacity as of September 30, 2008. 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.
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
32
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
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. After the date of borrowing under the Supplemental
Facility, subject to certain limited exceptions, TWC is required to use the net cash proceeds from
any 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 Supplemental Facility. In addition, (i) on any date on which the commitments
under the Cable Revolving Facility are increased in excess of the current $6.0 billion amount or
(ii) on the last day of each fiscal quarter on which availability under the Cable Revolving
Facility exceeds $2.0 billion, TWC must use 100% of the excess amounts to prepay amounts
outstanding under the Supplemental Facility. TWC may prepay amounts outstanding under the
Supplemental Facility at any time without penalty or premium, subject to minimum amounts.
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.
Backlog Securitization Facility
During the third quarter of 2008, Time Warner terminated its $300 million backlog
securitization facility, which had provided for the accelerated receipt of cash on theatrical and
television licensing contracts.
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 $4.3 billion and $3.7
billion at September 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 $911 million and $700 million at September 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 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 and the June 2008 Form 10-Q,
which should be read in conjunction with 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
33
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
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 the June 2008 Form 10-Q, as well as:
| |
• |
|
a continuation of the current economic slowdown or further deterioration in the economy; |
| |
| |
• |
|
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. |
34
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
During the quarter ended September 30, 2008, the Company’s HBO division implemented a new
accounting system that included a new general ledger system and other financial information
systems. Except for the described systems implementation at the HBO division, there have not been
any changes in the Company’s internal control over financial reporting during the quarter ended
September 30, 2008 that have materially affected, or are reasonably likely to materially affect,
its internal control over financial reporting.
35
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
December 31, |
| |
|
2008 |
|
2007 |
| |
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
4,355 |
|
|
$ |
1,516 |
|
Receivables, less allowances of $1,942 and $2,410 |
|
|
5,894 |
|
|
|
7,296 |
|
Inventories |
|
|
2,061 |
|
|
|
2,105 |
|
Prepaid expenses and other current assets |
|
|
1,623 |
|
|
|
834 |
|
Deferred income taxes |
|
|
759 |
|
|
|
700 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
14,692 |
|
|
|
12,451 |
|
|
|
|
|
|
|
|
|
|
Noncurrent inventories and film costs |
|
|
5,376 |
|
|
|
5,304 |
|
Investments, including available-for-sale securities |
|
|
1,907 |
|
|
|
1,963 |
|
Property, plant and equipment, net |
|
|
18,270 |
|
|
|
18,048 |
|
Intangible assets subject to amortization, net |
|
|
4,939 |
|
|
|
5,167 |
|
Intangible assets not subject to amortization |
|
|
47,181 |
|
|
|
47,220 |
|
Goodwill |
|
|
42,450 |
|
|
|
41,749 |
|
Other assets |
|
|
1,913 |
|
|
|
1,928 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
136,728 |
|
|
$ |
133,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,179 |
|
|
$ |
1,470 |
|
Participations payable |
|
|
2,807 |
|
|
|
2,547 |
|
Royalties and programming costs payable |
|
|
1,303 |
|
|
|
1,253 |
|
Deferred revenue |
|
|
1,247 |
|
|
|
1,178 |
|
Debt due within one year |
|
|
125 |
|
|
|
126 |
|
Other current liabilities |
|
|
5,306 |
|
|
|
5,611 |
|
Current liabilities of discontinued operations |
|
|
3 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
11,970 |
|
|
|
12,193 |
|
Long-term debt |
|
|
37,867 |
|
|
|
37,004 |
|
Mandatorily redeemable preferred membership units issued by a subsidiary |
|
|
300 |
|
|
|
300 |
|
Deferred income taxes |
|
|
14,884 |
|
|
|
13,736 |
|
Deferred revenue |
|
|
275 |
|
|
|
522 |
|
Other liabilities |
|
|
6,972 |
|
|
|
7,217 |
|
Minority interests |
|
|
4,524 |
|
|
|
4,322 |
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Time Warner common stock, $0.01 par value, 4.890 and 4.877 billion
shares issued and 3.587 and 3.593 billion shares outstanding |
|
|
49 |
|
|
|
49 |
|
Paid-in-capital |
|
|
172,609 |
|
|
|
172,443 |
|
Treasury stock, at cost (1.303 and 1.284 billion shares) |
|
|
(25,836 |
) |
|
|
(25,526 |
) |
Accumulated other comprehensive income (loss), net |
|
|
(249 |
) |
|
|
149 |
|
Accumulated deficit |
|
|
(86,637 |
) |
|
|
(88,579 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
59,936 |
|
|
|
58,536 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
136,728 |
|
|
$ |
133,830 |
|
|
|
|
|
|
|
|
36
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/08 |
|
9/30/07 |
|
9/30/08 |
|
9/30/07 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
6,490 |
|
|
$ |
6,170 |
|
|
$ |
19,312 |
|
|
$ |
18,638 |
|
Advertising |
|
|
2,078 |
|
|
|
2,095 |
|
|
|
6,413 |
|
|
|
6,295 |
|
Content |
|
|
2,906 |
|
|
|
3,141 |
|
|
|
8,277 |
|
|
|
8,163 |
|
Other |
|
|
232 |
|
|
|
270 |
|
|
|
676 |
|
|
|
744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(a) |
|
|
11,706 |
|
|
|
11,676 |
|
|
|
34,678 |
|
|
|
33,840 |
|
Costs of revenues(a) |
|
|
(6,664 |
) |
|
|
(6,961 |
) |
|
|
(20,197 |
) |
|
|
(19,874 |
) |
Selling, general and administrative(a) |
|
|
(2,425 |
) |
|
|
(2,407 |
) |
|
|
(7,369 |
) |
|
|
(7,213 |
) |
Amortization of intangible assets |
|
|
(206 |
) |
|
|
(167 |
) |
|
|
(583 |
) |
|
|
(502 |
) |
Amounts related to securities litigation and government
investigations |
|
|
(5 |
) |
|
|
(2 |
) |
|
|
(13 |
) |
|
|
(169 |
) |
Merger-related, restructuring and shutdown costs |
|
|
(28 |
) |
|
|
(12 |
) |
|
|
(182 |
) |
|
|
(113 |
) |
Asset impairments |
|
|
(39 |
) |
|
|
(1 |
) |
|
|
(102 |
) |
|
|
(36 |
) |
Gain (loss) on disposal of assets, net |
|
|
(3 |
) |
|
|
4 |
|
|
|
(3 |
) |
|
|
673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,336 |
|
|
|
2,130 |
|
|
|
6,229 |
|
|
|
6,606 |
|
Interest expense, net(a) |
|
|
(550 |
) |
|
|
(589 |
) |
|
|
(1,646 |
) |
|
|
(1,714 |
) |
Other income (loss), net |
|
|
31 |
|
|
|
(2 |
) |
|
|
(22 |
) |
|
|
231 |
|
Minority interest expense, net |
|
|
(96 |
) |
|
|
(84 |
) |
|
|
(266 |
) |
|
|
(305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
1,721 |
|
|
|
1,455 |
|
|
|
4,295 |
|
|
|
4,818 |
|
Income tax provision |
|
|
(655 |
) |
|
|
(555 |
) |
|
|
(1,663 |
) |
|
|
(1,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,066 |
|
|
|
900 |
|
|
|
2,632 |
|
|
|
3,032 |
|
Discontinued operations, net of tax |
|
|
1 |
|
|
|
186 |
|
|
|
(2 |
) |
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,067 |
|
|
$ |
1,086 |
|
|
$ |
2,630 |
|
|
$ |
3,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share from continuing operations |
|
$ |
0.30 |
|
|
$ |
0.24 |
|
|
$ |
0.73 |
|
|
$ |
0.81 |
|
Discontinued operations |
|
|
— |
|
|
|
0.06 |
|
|
|
— |
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.73 |
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic common shares outstanding |
|
|
3,584.4 |
|
|
|
3,673.7 |
|
|
|
3,581.1 |
|
|
|
3,756.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share from continuing
operations |
|
$ |
0.30 |
|
|
$ |
0.24 |
|
|
$ |
0.73 |
|
|
$ |
0.80 |
|
Discontinued operations |
|
|
— |
|
|
|
0.05 |
|
|
|
— |
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.30 |
|
|
$ |
0.29 |
|
|
$ |
0.73 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted common shares outstanding |
|
|
3,606.1 |
|
|
|
3,714.3 |
|
|
|
3,602.7 |
|
|
|
3,803.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash dividends declared per share of common stock |
|
$ |
0.0625 |
|
|
$ |
0.0625 |
|
|
$ |
0.1875 |
|
|
$ |
0.1725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Includes the following income (expenses) resulting from transactions with related
companies: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
103 |
|
|
$ |
47 |
|
|
$ |
280 |
|
|
$ |
238 |
|
Costs of revenues |
|
|
(54 |
) |
|
|
(47 |
) |
|
|
(169 |
) |
|
|
(160 |
) |
Selling, general and administrative |
|
|
— |
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
37
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited; millions)
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
| |
OPERATIONS |
|
|
|
|
|
|
|
|
Net income(a) |
|
$ |
2,630 |
|
|
$ |
3,356 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,444 |
|
|
|
3,274 |
|
Amortization of film and television costs |
|
|
4,331 |
|
|
|
4,497 |
|
Asset impairments |
|
|
102 |
|
|
|
36 |
|
(Gain) loss on investments and other assets, net |
|
|
18 |
|
|
|
(971 |
) |
Equity in losses of investee companies, net of cash distributions |
|
|
23 |
|
|
|
53 |
|
Equity-based compensation |
|
|
232 |
|
|
|
230 |
|
Minority interests |
|
|
266 |
|
|
|
305 |
|
Deferred income taxes |
|
|
743 |
|
|
|
1,406 |
|
Amounts related to securities litigation and government investigations |
|
|
— |
|
|
|
(750 |
) |
Changes in operating assets and liabilities, net of acquisitions |
|
|
(3,686 |
) |
|
|
(4,989 |
) |
Adjustments relating to discontinued operations(a) |
|
|
(9 |
) |
|
|
(291 |
) |
|
|
|
|
|
|
|
Cash provided by operations(b) |
|
|
8,094 |
|
|
|
6,156 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
|
(17 |
) |
|
|
(93 |
) |
Investments and acquisitions, net of cash acquired |
|
|
(2,227 |
) |
|
|
(659 |
) |
Investment in a wireless joint venture |
|
|
(3 |
) |
|
|
(30 |
) |
Investment activities of discontinued operations |
|
|
— |
|
|
|
(26 |
) |
Capital expenditures and product development costs |
|
|
(3,137 |
) |
|
|
(3,100 |
) |
Investment proceeds from available-for-sale securities |
|
|
15 |
|
|
|
33 |
|
Other investment proceeds |
|
|
257 |
|
|
|
1,806 |
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
|
(5,112 |
) |
|
|
(2,069 |
) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Borrowings |
|
|
30,922 |
|
|
|
12,728 |
|
Debt repayments |
|
|
(30,049 |
) |
|
|
(10,551 |
) |
Proceeds from exercise of stock options |
|
|
125 |
|
|
|
484 |
|
Excess tax benefit on stock options |
|
|
3 |
|
|
|
74 |
|
Principal payments on capital leases |
|
|
(31 |
) |
|
|
(45 |
) |
Repurchases of common stock |
|
|
(332 |
) |
|
|
(5,714 |
) |
Dividends paid |
|
|
(675 |
) |
|
|
(645 |
) |
Other financing activities |
|
|
(106 |
) |
|
|
(94 |
) |
|
|
|
|
|
|
|
Cash used by financing activities |
|
|
(143 |
) |
|
|
(3,763 |
) |
|
|
|
|
|
|
|
INCREASE IN CASH AND EQUIVALENTS |
|
|
2,839 |
|
|
|
324 |
|
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
1,516 |
|
|
|
1,549 |
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
4,355 |
|
|
$ |
1,873 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The nine months ended September 30, 2008 and September 30, 2007 include net income
(loss) from discontinued operations of $(2) million and $324 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 $(11)
million and $33 million for the nine months ended September 30, 2008 and 2007, respectively. |
| (b) |
|
The nine months ended September 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. |
38
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Nine Months Ended September 30,
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
| |
BALANCE AT BEGINNING OF PERIOD |
|
$ |
58,536 |
|
|
$ |
60,389 |
|
Net income |
|
|
2,630 |
|
|
|
3,356 |
|
Other comprehensive income (loss) (a) |
|
|
(398 |
) |
|
|
192 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
2,232 |
|
|
|
3,548 |
|
Cash dividends ($0.1875 and $0.1725 per common share) |
|
|
(675 |
) |
|
|
(645 |
) |
Common stock repurchases |
|
|
(299 |
) |
|
|
(6,033 |
) |
Impact of adopting new accounting pronouncements(b) |
|
|
(13 |
) |
|
|
386 |
|
Amounts related primarily to stock option, restricted stock and restricted stock unit activity |
|
|
155 |
|
|
|
501 |
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD |
|
$ |
59,936 |
|
|
$ |
58,146 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Amounts primarily reflect foreign currency translation adjustments. |
| (b) |
|
For the nine months ended September 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 nine months ended
September 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. |
39
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND OTHER INFORMATION
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.
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.
Certain reclassifications have been made to the prior year financial information to conform to
the September 30, 2008 presentation.
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.
40
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Interim Financial Statements
The consolidated financial statements are unaudited; however, in the opinion of management,
they contain all the adjustments (consisting of those of a normal recurring nature) considered
necessary to present fairly the financial position, the results of operations and cash flows for
the periods presented in conformity with GAAP applicable to interim periods. The consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements of Time Warner included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007 (the “2007 Form 10-K”).
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 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 |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
Income from continuing operations — basic and diluted |
|
$ |
1,066 |
|
|
$ |
900 |
|
|
$ |
2,632 |
|
|
$ |
3,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding — basic |
|
|
3,584.4 |
|
|
|
3,673.7 |
|
|
|
3,581.1 |
|
|
|
3,756.6 |
|
Dilutive effect of equity awards |
|
|
21.7 |
|
|
|
40.6 |
|
|
|
21.6 |
|
|
|
47.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding — diluted |
|
|
3.606.1 |
|
|
|
3,714.3 |
|
|
|
3.602.7 |
|
|
|
3,803.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.30 |
|
|
$ |
0.24 |
|
|
$ |
0.73 |
|
|
$ |
0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.30 |
|
|
$ |
0.24 |
|
|
$ |
0.73 |
|
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share for the three months ended September 30, 2008 and 2007 and the
nine months ended September 30, 2008 and 2007 exclude approximately 383 million and 294 million,
respectively, and 391 million and 291 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
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
41
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 retrospectively 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.
Impairment Testing of Goodwill and Indefinite-lived Intangible Assets
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. Except for
the Time Warner Cable Inc. (“TWC”) interim impairment test discussed below, no other interim
impairment analyses of the Company’s goodwill and indefinite-lived intangible assets have been
required in 2008. In the fourth quarter of 2008, the Company will perform its annual impairment
review of goodwill and indefinite-lived intangible assets. Because of current economic conditions
and recent declines in the value of the Company’s common stock, it is possible that the book values
of one or more of the Company’s reporting units will exceed their respective fair values, which may
result in the Company recognizing a noncash impairment of goodwill and/or indefinite-lived
intangible assets in the fourth quarter of 2008 that could be material.
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 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 each
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
42
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
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 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 anticipated
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 2008,
is subject to certain closing conditions. 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 finance and 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. The Company expects that the Sprint/Clearwire Joint
Venture would incur losses in its early periods of operation.
On May 14, 2008, the Company, through its AOL segment, completed the acquisition of Bebo, Inc.
(“Bebo”), a leading global social media network, for $859 million, net of cash acquired, $8 million
of which will be paid by the Company in the first quarter of 2009. As of September 30, 2008, $767
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 nine months ended September 30, 2008.
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 nine months ended
September 30, 2008.
43
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During the nine months ended September 30, 2008, the Company recorded a $45 million noncash
impairment of certain non-core cable systems held for sale at the Cable segment.
Summary of Discontinued Operations
Discontinued operations for the three and nine months ended September 30, 2008 reflect income
of $1 million and a loss of $2 million, respectively, related to Warner Music Group tax
indemnifications. Discontinued operations for the three and nine months ended September 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 nine months ended September 30, 2007 is as follows (millions, except
per share amounts):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/07 |
|
|
9/30/07 |
|
Total revenues |
|
$ |
10 |
|
|
$ |
133 |
|
|
|
|
|
|
|
|
|
|
Pretax income |
|
|
194 |
|
|
|
225 |
|
Income tax benefit (provision) |
|
|
(8 |
) |
|
|
99 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
186 |
|
|
$ |
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share from discontinued operations |
|
$ |
0.06 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
Average basic common shares outstanding |
|
|
3,673.7 |
|
|
|
3,756.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share from discontinued operations |
|
$ |
0.05 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
Average diluted common shares outstanding |
|
|
3,714.3 |
|
|
|
3,803.8 |
|
|
|
|
|
|
|
|
44
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
3. INVENTORIES AND FILM COSTS
Inventories and film costs consist of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Inventories: |
|
|
|
|
|
|
|
|
Programming costs, less amortization |
|
$ |
3,452 |
|
|
$ |
3,536 |
|
DVDs, books, paper and other merchandise |
|
|
491 |
|
|
|
450 |
|
|
|
|
|
|
|
|
Total inventories(a) |
|
|
3,943 |
|
|
|
3,986 |
|
Less: current portion of inventory |
|
|
(2,061 |
) |
|
|
(2,105 |
) |
|
|
|
|
|
|
|
Total noncurrent inventories |
|
|
1,882 |
|
|
|
1,881 |
|
|
|
|
|
|
|
|
Film costs — Theatrical: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
637 |
|
|
|
814 |
|
Completed and not released |
|
|
501 |
|
|
|
165 |
|
In production |
|
|
959 |
|
|
|
1,017 |
|
Development and pre-production |
|
|
70 |
|
|
|
96 |
|
Film costs — Television: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
615 |
|
|
|
680 |
|
Completed and not released |
|
|
244 |
|
|
|
140 |
|
In production |
|
|
466 |
|
|
|
508 |
|
Development and pre-production |
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total film cost |
|
|
3,494 |
|
|
|
3,423 |
|
|
|
|
|
|
|
|
Total noncurrent inventories and film costs |
|
$ |
5,376 |
|
|
$ |
5,304 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Does not include $2.319 billion and $2.477 billion of net film library costs as of
September 30, 2008 and December 31, 2007, respectively, which are included in intangible
assets subject to amortization on the consolidated balance sheet. |
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 September 30, 2008
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fair Value Measurements as of September 30, 2008 Using |
|
| |
|
|
|
|
|
Quoted Market Prices |
|
|
|
|
|
Significant |
|
| |
|
|
|
|
|
in Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
| |
|
Fair Value |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
| Description |
|
as of 9/30/08 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
$ |
311 |
|
|
$ |
306 |
|
|
$ |
5 |
|
|
$ |
— |
|
Available-for-sale securities |
|
|
125 |
|
|
|
74 |
|
|
|
51 |
|
|
|
— |
|
Derivatives |
|
|
93 |
|
|
|
11 |
|
|
|
82 |
|
|
|
— |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
(101 |
) |
|
|
— |
|
|
|
(101 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
428 |
|
|
$ |
391 |
|
|
$ |
37 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company primarily applies the market approach for recurring fair value measurements.
45
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 nine months
ended September 30, 2008 on such assets and liabilities that were included in the balance as of
September 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 September 30, 2008 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Total loss for the nine months ended September 30,
2008 included in net income related to assets still
held as of September 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).
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(c) |
|
| |
|
September 30, |
|
|
|
|
|
|
Committed |
|
|
of |
|
|
Commercial |
|
|
Committed |
|
|
September 30, |
|
|
December 31, |
|
| |
|
2008 |
|
|
Maturities |
|
|
Capacity |
|
|
Credit(a) |
|
|
Paper |
|
|
Capacity(b) |
|
|
2008 |
|
|
2007 |
|
Cash and equivalents |
|
|
|
|
|
|
|
|
|
$ |
4,355 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,355 |
|
|
|
|
|
|
|
|
|
Bank credit agreements debt and
commercial paper programs |
|
|
3.24% |
|
|
|
2011 |
|
|
|
21,617 |
|
|
|
205 |
|
|
|
1 |
|
|
|
13,642 |
|
|
$ |
7,769 |
|
|
$ |
11,124 |
|
Floating-rate public debt |
|
|
3.03% |
|
|
|
2009 |
|
|
|
2,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,000 |
|
|
|
2,000 |
|
Fixed-rate public debt |
|
|
6.93% |
|
|
|
2011-2038 |
|
|
|
27,920 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27,920 |
|
|
|
23,705 |
|
Other fixed-rate obligations(d) |
|
|
7.20% |
|
|
|
— |
|
|
|
303 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
303 |
|
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
56,195 |
|
|
|
205 |
|
|
|
1 |
|
|
|
17,997 |
|
|
|
37,992 |
|
|
|
37,130 |
|
Debt due within one year |
|
|
|
|
|
|
|
|
|
|
(125 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(125 |
) |
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
56,070 |
|
|
$ |
205 |
|
|
$ |
1 |
|
|
$ |
17,997 |
|
|
$ |
37,867 |
|
|
$ |
37,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Represents the portion of committed capacity reserved for outstanding and undrawn
letters of credit. |
| (b) |
|
Includes $12.604 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 $3.771 billion under the 2008 Cable Bridge Facility (described below). 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. |
| (c) |
|
Represents principal amounts adjusted for premiums and discounts. |
| (d) |
|
Amount includes capital lease and other obligations. |
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 10.8 years as of September 30, 2008. The Company’s outstanding debt
includes other fixed-rate obligations due within one year of $125 million. The Company’s public
debt matures as follows: $2.000 billion in the fourth quarter of 2009, $0 in 2010, $2.000 billion
in 2011, $4.100 billion in 2012, $2.800 billion in 2013 and $19.031 billion thereafter. In
addition, all of the $7.770 billion of outstanding debt under
the Company’s bank credit agreements, including those that
support its commercial paper programs, matures in 2011.
46
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
Lehman Brothers Commitments
On September 15, 2008, Lehman Brothers Holdings Inc. (“Lehman”) filed a petition under Chapter
11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York
(the “Lehman Bankruptcy”). Lehman Commercial Paper Inc. (“LCPI”), a subsidiary of Lehman, is one
of the lenders under the Company’s $7.0 billion senior unsecured five-year revolving credit
facility (the “TW Revolving Facility”), with an undrawn commitment of $74 million. In addition,
Lehman Brothers Commercial Bank (“LBCB”) and Lehman Brothers Bank, FSB (“LBB”), also subsidiaries
of Lehman, are lenders under the 2008 Cable Bridge Facility and the Cable Revolving Facility,
respectively, with undrawn commitments of $269 million and $125 million, respectively. On October
5, 2008, LCPI filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S.
Bankruptcy Court for the Southern District of New York (the “LCPI Bankruptcy”). After the Lehman
Bankruptcy and prior to the LCPI Bankruptcy, LCPI failed to fund its portion of two borrowing
requests by Time Warner under the TW Revolving Facility. The Company does not expect LCPI to fund
its portion of future borrowing requests under the TW Revolving Facility. TWC has not requested to
borrow under either the 2008 Cable Bridge Facility or the Cable Revolving Facility since the Lehman
Bankruptcy, and neither LBCB nor LBB has been placed in receivership or a similar proceeding as of
November 4, 2008. While the Company believes that LBCB and LBB are contractually obligated under
the 2008 Cable Bridge Facility and the Cable Revolving Facility, respectively, it is uncertain
whether LBCB or LBB would fund its respective portion of any future borrowing requests or whether
another lender might assume such commitments. Accordingly, the Company’s total committed capacity
as of September 30, 2008 excludes the undrawn commitments of LCPI, LBCB and LBB. The Company
believes that it continues to have sufficient liquidity to meet its needs for the foreseeable
future, even if LCPI, LBCB and/or LBB fails to fund its portion of any future borrowing requests.
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. Pending the
payment of the Special Dividend, a portion of the net proceeds of the 2008 Cable Bond Offering have
been used by TWC to repay variable rate debt with lower interest rates and the remainder was
invested in various short-term investments. 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.
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.
47
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 issuing 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, the amount of the
commitments of the lenders under the 2008 Cable Bridge Facility was reduced to $4.040 billion. As
discussed above, the Company is not certain whether LBCB will fund its $269 million in commitments
under the 2008 Cable Bridge Facility as a result of the Lehman Bankruptcy, and, therefore, the
Company has included only $3.771 billion of commitments under the 2008 Cable Bridge Facility in its
total committed capacity as of September 30, 2008. 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 also 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.
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 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.
48
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. After the date of borrowing under the Supplemental
Facility, subject to certain limited exceptions, TWC is required to use the net cash proceeds from
any 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 Supplemental Facility. In addition, (i) on any date on which the commitments
under the Cable Revolving Facility are increased in excess of the current $6.0 billion amount or
(ii) on the last day of each fiscal quarter on which availability under the Cable Revolving
Facility exceeds $2.0 billion, TWC must use 100% of the excess amounts to prepay amounts
outstanding under the Supplemental Facility. TWC may prepay amounts outstanding under the
Supplemental Facility at any time without penalty or premium, subject to minimum amounts.
Backlog Securitization Facility
During the third quarter of 2008, Time Warner terminated its $300 million backlog
securitization facility, which had provided for the accelerated receipt of cash on theatrical and
television licensing contracts.
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 September 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 nine months ended September 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 nine months ended September
30, 2008, the Company granted approximately 29 million stock options at a weighted-average grant
date fair value per option of $4.12 ($2.55 net of tax). For the nine months ended September 30,
2007, the Company granted approximately 28 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.
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
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
49
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 nine months ended September
30, 2008, the Company granted approximately 11 million RSUs at a weighted-average grant date fair
value per RSU of $14.92. For the nine months ended September 30, 2007, the Company granted
approximately 9 million RSUs at a weighted-average grant date fair value per RSU of $19.99.
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 nine months ended
September 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 nine months ended September 30, 2007, the Company
granted approximately 1.1 million target PSUs at a weighted-average grant date fair value per PSU
of $19.47.
In connection with the TWC Separation Transactions, and as provided for in the Company’s
equity plans, the Company contemplates that the number of stock options, RSUs and target PSUs
outstanding at the separation and the exercise prices of such stock options will be adjusted to
maintain the fair value of those awards. The changes in the number of equity awards and the
exercise prices will be determined by comparing the fair value of such awards immediately prior to
the TWC Separation Transactions to the fair value of such awards immediately after the TWC
Separation Transactions. The modifications to the outstanding equity awards will be made pursuant
to existing antidilution provisions in the Company’s equity plans.
Under the terms of Time Warner’s equity plans and related award agreements, as a result of the
TWC Separation Transactions, TWC employees who hold Time Warner equity awards will be treated as if
their employment with Time Warner had been terminated without cause at the time of the separation.
This treatment will result in the forfeiture of unvested stock options and shortened exercise
periods for vested stock options and pro rata vesting of the next installment of (and forfeiture of
the remainder of) the RSU awards for those TWC employees who do not satisfy retirement-treatment
eligibility provisions in the Time Warner equity plans and related award agreements.
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 nine months ended September 30, 2008, TWC granted approximately
4.8 million stock options at a weighted-average grant date fair value per option of $10.26 ($6.36
net of tax). For the nine months ended September 30, 2007, TWC granted approximately 2.9 million
stock options at a weighted-average grant date fair value per option of $13.33 ($8.26 net of tax).
50
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The table below presents the weighted-average values of the assumptions used to value TWC
stock options at their grant date.
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
Expected volatility |
|
|
30.0 |
% |
|
|
24.1 |
% |
Expected term to exercise from grant date |
|
6.51 years |
|
6.59years |
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 nine months ended September
30, 2008, TWC granted approximately 2.9 million RSUs at a weighted-average grant date fair value
per RSU of $27.57. For the nine months ended September 30, 2007, TWC granted approximately 2.1
million RSUs at a weighted-average grant date fair value per RSU of $37.07.
In connection with the Special Dividend, and as provided for in TWC’s equity plans and related
award agreements, the number and the exercise prices of outstanding TWC stock options will be
adjusted to maintain the fair value of those awards. The changes in the number of shares subject
to options and the exercise prices will be determined by comparing the fair value of such awards
immediately prior to the Special Dividend to the fair value of such awards immediately after the
Special Dividend. The modifications to the outstanding equity awards will be made pursuant to
existing antidilution provisions in TWC’s equity plans and related award agreements. TWC plans to
grant “make-up” TWC equity awards or make cash payments to TWC employees that are generally
intended to offset any loss of economic value in Time Warner equity awards as a result of the
separation.
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 nine
months ended September 30, 2008 and 2007 is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
Stock options |
|
$ |
31 |
|
|
$ |
33 |
|
|
$ |
113 |
|
|
$ |
125 |
|
Restricted stock, RSUs and PSUs |
|
|
32 |
|
|
|
24 |
|
|
|
119 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact on operating income |
|
$ |
63 |
|
|
$ |
57 |
|
|
$ |
232 |
|
|
$ |
230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit recognized |
|
$ |
23 |
|
|
$ |
21 |
|
|
$ |
84 |
|
|
$ |
84 |
|
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 nine months ended September 30, 2008 and 2007 is as follows (millions):
51
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Components of Net Periodic Benefit Costs
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Domestic |
|
|
International |
|
|
Domestic |
|
|
International |
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
Service cost |
|
$ |
45 |
|
|
$ |
39 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
133 |
|
|
$ |
114 |
|
|
$ |
16 |
|
|
$ |
17 |
|
Interest cost |
|
|
55 |
|
|
|
50 |
|
|
|
13 |
|
|
|
10 |
|
|
|
165 |
|
|
|
150 |
|
|
|
41 |
|
|
|
32 |
|
Expected return on plan
assets |
|
|
(70 |
) |
|
|
(64 |
) |
|
|
(19 |
) |
|
|
(16 |
) |
|
|
(209 |
) |
|
|
(193 |
) |
|
|
(58 |
) |
|
|
(47 |
) |
Amounts amortized |
|
|
10 |
|
|
|
8 |
|
|
|
— |
|
|
|
1 |
|
|
|
31 |
|
|
|
25 |
|
|
|
— |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs |
|
$ |
40 |
|
|
$ |
33 |
|
|
$ |
(1 |
) |
|
$ |
1 |
|
|
$ |
120 |
|
|
$ |
96 |
|
|
$ |
(1 |
) |
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions |
|
$ |
81 |
|
|
$ |
4 |
|
|
$ |
— |
|
|
$ |
5 |
|
|
$ |
291 |
|
|
$ |
13 |
|
|
$ |
13 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2008, there were no
minimum required contributions for domestic funded plans. As of December 31, 2007, the Company’s funded domestic defined benefit pension plans were funded by
assets in a pension trust totaling $3.355 billion. Between January 1, 2008 and October 31, 2008,
the Company’s plan assets have experienced market losses of approximately 30%. The impact to the
funded status of the defined benefit pension plans from these 2008 market losses is partially
offset by contributions made during the year and increases, through October 31, 2008, in discount
rates that reduce the projected benefit obligation. The Company has made $275 million of
discretionary cash contributions to its funded defined benefit pension plans during the nine months
ended September 30, 2008 and, subject to market conditions and other considerations, the Company
expects to make additional discretionary cash contributions during the remainder of the year
ranging from $400 million to $500 million. 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, $16 million of which has been contributed as of September 30, 2008. In
addition, the Company anticipates making an additional $20 million discretionary contribution to
its international plans in the fourth quarter of 2008.
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 September 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 |
|
|
— |
|
|
|
(7 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of September 30, 2008 |
|
$ |
3 |
|
|
$ |
28 |
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Noncash reductions represent an adjustment to the restructuring accrual, with a
corresponding reduction in goodwill. |
As of September 30, 2008, of the remaining liability of $31 million, $4 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.
52
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Merger, Restructuring and Shutdown Costs Expensed
Merger, restructuring and shutdown costs expensed by segment for the three and nine months
ended September 30, 2008 and 2007 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
AOL |
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
15 |
|
|
$ |
27 |
|
Cable |
|
|
8 |
|
|
|
4 |
|
|
|
14 |
|
|
|
20 |
|
Filmed Entertainment |
|
|
17 |
|
|
|
— |
|
|
|
130 |
|
|
|
— |
|
Networks |
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
20 |
|
Publishing |
|
|
1 |
|
|
|
4 |
|
|
|
16 |
|
|
|
46 |
|
Corporate |
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger, restructuring and shutdown costs by segment |
|
$ |
28 |
|
|
$ |
12 |
|
|
$ |
182 |
|
|
$ |
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended September 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 of approximately $5
million during the remainder of 2008.
Merger, restructuring and shutdown costs that were expensed for the three and nine months
ended September 30, 2008 and 2007 are categorized as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
Adelphia/Comcast Transactions merger-related costs |
|
$ |
— |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
10 |
|
2008 restructuring and shutdown activity, net |
|
|
30 |
|
|
|
— |
|
|
|
174 |
|
|
|
— |
|
2007 and prior restructuring activity, net |
|
|
(2 |
) |
|
|
9 |
|
|
|
8 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger, restructuring and shutdown costs expensed |
|
$ |
28 |
|
|
$ |
12 |
|
|
$ |
182 |
|
|
$ |
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Information
Changes in the Company’s liability with respect to merger, restructuring and shutdown costs
from December 31, 2007 to September 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 |
|
|
174 |
|
|
|
8 |
|
|
|
182 |
|
Noncash reductions(a) |
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
Cash paid(b) |
|
|
(162 |
) |
|
|
(17 |
) |
|
|
(179 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of September 30, 2008 |
|
$ |
172 |
|
|
$ |
22 |
|
|
$ |
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Noncash reductions relate to the reversal of a severance accrual related to former
employees. |
| (b) |
|
Of the $179 million paid in 2008, $77 million was paid during the three months ended
September 30, 2008. |
As of September 30, 2008, out of the remaining liability of $194 million, $145 million was
classified as a current liability, with the remaining $49 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
53
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 September 30, 2008 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
470 |
|
|
$ |
507 |
|
|
$ |
— |
|
|
$ |
35 |
|
|
$ |
1,012 |
|
Cable |
|
|
4,116 |
|
|
|
224 |
|
|
|
— |
|
|
|
— |
|
|
|
4,340 |
|
Filmed Entertainment |
|
|
10 |
|
|
|
20 |
|
|
|
2,797 |
|
|
|
54 |
|
|
|
2,881 |
|
Networks |
|
|
1,722 |
|
|
|
772 |
|
|
|
224 |
|
|
|
13 |
|
|
|
2,731 |
|
Publishing |
|
|
382 |
|
|
|
585 |
|
|
|
16 |
|
|
|
135 |
|
|
|
1,118 |
|
Intersegment elimination |
|
|
(210 |
) |
|
|
(30 |
) |
|
|
(131 |
) |
|
|
(5 |
) |
|
|
(376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
6,490 |
|
|
$ |
2,078 |
|
|
$ |
2,906 |
|
|
$ |
232 |
|
|
$ |
11,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, 2007 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
635 |
|
|
$ |
540 |
|
|
$ |
— |
|
|
$ |
44 |
|
|
$ |
1,219 |
|
Cable |
|
|
3,780 |
|
|
|
221 |
|
|
|
— |
|
|
|
— |
|
|
|
4,001 |
|
Filmed Entertainment |
|
|
8 |
|
|
|
12 |
|
|
|
3,100 |
|
|
|
58 |
|
|
|
3,178 |
|
Networks |
|
|
1,566 |
|
|
|
709 |
|
|
|
270 |
|
|
|
10 |
|
|
|
2,555 |
|
Publishing |
|
|
385 |
|
|
|
636 |
|
|
|
13 |
|
|
|
165 |
|
|
|
1,199 |
|
Intersegment elimination |
|
|
(204 |
) |
|
|
(23 |
) |
|
|
(242 |
) |
|
|
(7 |
) |
|
|
(476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
6,170 |
|
|
$ |
2,095 |
|
|
$ |
3,141 |
|
|
$ |
270 |
|
|
$ |
11,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, 2008 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
1,500 |
|
|
$ |
1,589 |
|
|
$ |
— |
|
|
$ |
108 |
|
|
$ |
3,197 |
|
Cable |
|
|
12,144 |
|
|
|
654 |
|
|
|
— |
|
|
|
— |
|
|
|
12,798 |
|
Filmed Entertainment |
|
|
30 |
|
|
|
57 |
|
|
|
8,034 |
|
|
|
164 |
|
|
|
8,285 |
|
Networks |
|
|
5,136 |
|
|
|
2,417 |
|
|
|
626 |
|
|
|
37 |
|
|
|
8,216 |
|
Publishing |
|
|
1,134 |
|
|
|
1,783 |
|
|
|
40 |
|
|
|
382 |
|
|
|
3,339 |
|
Intersegment elimination |
|
|
(632 |
) |
|
|
(87 |
) |
|
|
(423 |
) |
|
|
(15 |
) |
|
|
(1,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
19,312 |
|
|
$ |
6,413 |
|
|
$ |
8,277 |
|
|
$ |
676 |
|
|
$ |
34,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, 2007 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
2,199 |
|
|
$ |
1,611 |
|
|
$ |
— |
|
|
$ |
120 |
|
|
$ |
3,930 |
|
Cable |
|
|
11,230 |
|
|
|
636 |
|
|
|
— |
|
|
|
— |
|
|
|
11,866 |
|
Filmed Entertainment |
|
|
22 |
|
|
|
30 |
|
|
|
7,942 |
|
|
|
180 |
|
|
|
8,174 |
|
Networks |
|
|
4,672 |
|
|
|
2,181 |
|
|
|
682 |
|
|
|
31 |
|
|
|
7,566 |
|
Publishing |
|
|
1,124 |
|
|
|
1,904 |
|
|
|
39 |
|
|
|
433 |
|
|
|
3,500 |
|
Intersegment elimination |
|
|
(609 |
) |
|
|
(67 |
) |
|
|
(500 |
) |
|
|
(20 |
) |
|
|
(1,196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
18,638 |
|
|
$ |
6,295 |
|
|
$ |
8,163 |
|
|
$ |
744 |
|
|
$ |
33,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
| |
|
(millions) |
|
|
(millions) |
|
Intersegment Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
7 |
|
|
$ |
16 |
|
Cable |
|
|
2 |
|
|
|
2 |
|
|
|
7 |
|
|
|
10 |
|
Filmed Entertainment |
|
|
130 |
|
|
|
230 |
|
|
|
411 |
|
|
|
469 |
|
Networks |
|
|
233 |
|
|
|
233 |
|
|
|
710 |
|
|
|
681 |
|
Publishing |
|
|
9 |
|
|
|
6 |
|
|
|
22 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intersegment revenues |
|
$ |
376 |
|
|
$ |
476 |
|
|
$ |
1,157 |
|
|
$ |
1,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
| |
|
(millions) |
|
|
(millions) |
|
Operating Income (Loss)
before Depreciation and
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL(a) |
|
$ |
389 |
|
|
$ |
425 |
|
|
$ |
1,144 |
|
|
$ |
2,120 |
|
Cable(b) |
|
|
1,554 |
|
|
|
1,428 |
|
|
|
4,481 |
|
|
|
4,179 |
|
Filmed Entertainment |
|
|
381 |
|
|
|
359 |
|
|
|
857 |
|
|
|
865 |
|
Networks(c) |
|
|
1,005 |
|
|
|
830 |
|
|
|
2,805 |
|
|
|
2,479 |
|
Publishing(d) |
|
|
211 |
|
|
|
304 |
|
|
|
625 |
|
|
|
690 |
|
Corporate(e) |
|
|
(73 |
) |
|
|
(89 |
) |
|
|
(257 |
) |
|
|
(450 |
) |
Intersegment elimination |
|
|
19 |
|
|
|
(17 |
) |
|
|
18 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
(Loss) before
Depreciation and
Amortization |
|
$ |
3,486 |
|
|
$ |
3,240 |
|
|
$ |
9,673 |
|
|
$ |
9,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For the three and nine months ended September 30, 2008, includes a $9 million
noncash impairment of an office building. For the three and nine months ended September 30,
2007, includes a $2 million reduction to the gain and an approximately $668 million net
pretax gain, respectively, on the sale of AOL’s German access business, and for the nine
months ended September 30, 2007, includes a net $1 million reduction to the gain on the sale
of AOL’s U.K. access business. For the three and nine months ended September 30, 2007, also
includes noncash asset impairments of $1 million and $2 million, respectively. |
(b) |
|
For the nine months ended September 30, 2008, includes a $45 million noncash
impairment of certain non-core cable systems held for sale. |
(c) |
|
For the three and nine months ended September 30, 2008, includes a $3 million loss
on the sale of GameTap, an on-line video game business, and for the nine months ended
September 30, 2008, includes an $18 million noncash impairment of GameTap. For the nine
months ended September 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 nine months ended September 30, 2008, includes a $30 million
noncash asset impairment related to a sub-lease with a tenant that filed for bankruptcy in
September 2008. For the three and nine months ended September 30, 2007, includes a $6
million gain on the sale of four non-strategic magazine titles. |
(e) |
|
For the three and nine months ended September 30, 2008, includes $5 million and
$13 million, respectively, in net expenses related to securities litigation and government
investigations. For the three and nine months ended September 30, 2007, includes $2 million
and $16 million, respectively, in net expenses related to securities litigation and
government investigations. For the nine months ended September 30, 2007, includes $153
million in legal reserves related to securities litigation. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
| |
|
(millions) |
|
|
(millions) |
|
Depreciation of Property, Plant and Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
(76 |
) |
|
$ |
(103 |
) |
|
$ |
(238 |
) |
|
$ |
(312 |
) |
Cable |
|
|
(700 |
) |
|
|
(683 |
) |
|
|
(2,123 |
) |
|
|
(2,001 |
) |
Filmed Entertainment |
|
|
(42 |
) |
|
|
(37 |
) |
|
|
(126 |
) |
|
|
(112 |
) |
Networks |
|
|
(82 |
) |
|
|
(75 |
) |
|
|
(241 |
) |
|
|
(222 |
) |
Publishing |
|
|
(32 |
) |
|
|
(35 |
) |
|
|
(100 |
) |
|
|
(92 |
) |
Corporate |
|
|
(12 |
) |
|
|
(10 |
) |
|
|
(33 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation of property, plant and equipment |
|
$ |
(944 |
) |
|
$ |
(943 |
) |
|
$ |
(2,861 |
) |
|
$ |
(2,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
| |
|
(millions) |
|
|
(millions) |
|
Amortization of Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
(45 |
) |
|
$ |
(27 |
) |
|
$ |
(124 |
) |
|
$ |
(69 |
) |
Cable |
|
|
(66 |
) |
|
|
(64 |
) |
|
|
(196 |
) |
|
|
(207 |
) |
Filmed Entertainment |
|
|
(64 |
) |
|
|
(54 |
) |
|
|
(179 |
) |
|
|
(161 |
) |
Networks |
|
|
(14 |
) |
|
|
(4 |
) |
|
|
(32 |
) |
|
|
(12 |
) |
Publishing |
|
|
(17 |
) |
|
|
(18 |
) |
|
|
(52 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization of intangible assets |
|
$ |
(206 |
) |
|
$ |
(167 |
) |
|
$ |
(583 |
) |
|
$ |
(502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
56
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
| |
|
(millions) |
|
|
(millions) |
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL(a) |
|
$ |
268 |
|
|
$ |
295 |
|
|
$ |
782 |
|
|
$ |
1,739 |
|
Cable(b) |
|
|
788 |
|
|
|
681 |
|
|
|
2,162 |
|
|
|
1,971 |
|
Filmed Entertainment |
|
|
275 |
|
|
|
268 |
|
|
|
552 |
|
|
|
592 |
|
Networks(c) |
|
|
909 |
|
|
|
751 |
|
|
|
2,532 |
|
|
|
2,245 |
|
Publishing(d) |
|
|
162 |
|
|
|
251 |
|
|
|
473 |
|
|
|
545 |
|
Corporate(e) |
|
|
(85 |
) |
|
|
(99 |
) |
|
|
(290 |
) |
|
|
(483 |
) |
Intersegment elimination |
|
|
19 |
|
|
|
(17 |
) |
|
|
18 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) |
|
$ |
2,336 |
|
|
$ |
2,130 |
|
|
$ |
6,229 |
|
|
$ |
6,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the three and nine months ended September 30, 2008, includes a $9 million
noncash impairment of an office building. For the three and nine months ended September 30,
2007, includes a $2 million reduction to the gain and an approximately $668 million net
pretax gain, respectively, on the sale of AOL’s German access business, and for the nine
months ended September 30, 2007, includes a net $1 million reduction to the gain on the sale
of AOL’s U.K. access business. For the three and nine months ended September 30, 2007, also
includes noncash asset impairments of $1 million and $2 million, respectively |
| (b) |
|
For the nine months ended September 30, 2008, includes a $45 million noncash
impairment of certain non-core cable systems held for sale. |
| (c) |
|
For the three and nine months ended September 30, 2008, includes a $3 million loss
on the sale of GameTap, an on-line video game business, and for the nine months ended
September 30, 2008, includes an $18 million noncash impairment of GameTap. For the nine
months ended September 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 nine months ended September 30, 2008, includes a $30 million
noncash asset impairment related to a sub-lease with a tenant that filed for bankruptcy in
September 2008. For the three and nine months ended September 30, 2007, includes a $6
million gain on the sale of four non-strategic magazine titles. |
| (e) |
|
For the three and nine months ended September 30, 2008, includes $5 million and
$13 million, respectively, in net expenses related to securities litigation and government
investigations. For the three and nine months ended September 30, 2007, includes $2 million
and $16 million, respectively, in net expenses related to securities litigation and
government investigations. For the nine months ended September 30, 2007, includes $153
million in legal reserves related to securities litigation. |
A summary of total assets by operating segment is set forth below (millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
AOL |
|
$ |
6,490 |
|
|
$ |
5,903 |
|
Cable |
|
|
60,408 |
|
|
|
56,597 |
|
Filmed Entertainment |
|
|
17,251 |
|
|
|
18,619 |
|
Networks |
|
|
35,491 |
|
|
|
35,556 |
|
Publishing |
|
|
14,350 |
|
|
|
14,732 |
|
Corporate |
|
|
2,738 |
|
|
|
2,423 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
136,728 |
|
|
$ |
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. In September 2008, Moody’s Investors Service downgraded Six Flags’ corporate family
rating.
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
57
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 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 September 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
58
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
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 September 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 September 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. On October 6, 2008, the court dismissed plaintiffs’ Lanham Act and “wasting” claims
with prejudice. In orders issued on October 14, 2008, the court determined that the remaining
claims in the case will be subject to phased non-jury trials starting in January and March of 2009.
The Company intends to defend against this lawsuit vigorously.
59
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
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. The parties subsequently reached an agreement to issue supplemental notice to newly
identified members as well as previously notified members of the putative class and submitted this
agreement to the court for approval in August 2008. 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
60
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 notice of appeal with the U.S. Court of Appeals for the Ninth
Circuit. Briefing on the appeal began in May 2008 and was completed in August 2008. 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, TWC and other
defendants filed “common” motions for summary judgment, which argued, among other things, that a
number of claims in the patents at issue are invalid under Sections 112 and 103 of the Patent Act.
On June 19 and August 4, 2008, the court issued orders granting, in part, and denying, in part,
those motions. Defendants filed additional “individual” motions for summary judgment in August
2008, which argued, among other things, that defendants’ respective products do not infringe the
surviving claims in plaintiff’s patents. Those motions have been fully briefed. 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. In September 2008, the parties
reached an agreement in principle to settle these matters on terms that are not material to the
Company.
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
61
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. On July 14, 2008,
plaintiffs filed an amended complaint, adding a cause of action for reformation of the underlying
contracts. NLC Corp. again moved to dismiss certain claims and, on September 22, 2008, the court
granted that motion, dismissing the plaintiffs’ claims for reformation and punitive damages without
leave to amend. On October 3, 2008, plaintiffs moved for reconsideration of that decision. The
Company intends to defend against this lawsuit vigorously.
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 $136 million based on the
exchange rate as of September 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 $105 million based on the exchange rate as of September 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
September 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
62
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, which motions were denied by the court on June 25, 2008. 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,
which motions were denied by the district court on August 4, 2008. 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 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 and ended on July 21, 2008. No decision has yet been issued, and procedural
matters related to the case are ongoing. The Company intends to defend against this matter
vigorously.
On June 6, 2005, David McDavid and certain related entities filed a complaint against Turner
Broadcasting System, Inc. (“Turner”) and the Company in Georgia state court. The complaint
asserted, among other things, claims for breach of contract, breach of fiduciary duty, promissory
estoppel and fraud relating to an alleged oral agreement between plaintiffs and Turner for the sale
of the Atlanta Hawks and Thrashers sports franchises and certain operating rights to the Philips
Arena. On August 20, 2008, the court issued an order dismissing all claims against the Company. The
court also dismissed certain claims against Turner for breach of an alleged oral exclusivity
agreement, for promissory estoppel based on the alleged exclusivity agreement and for breach of
fiduciary duty. A trial as to the remaining claims against Turner commenced on October 8, 2008 and
is ongoing. Plaintiffs seek approximately $500 million in compensatory damages and as yet
unspecified punitive damages. The Company intends to defend against this lawsuit 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 nine months ended September 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 $100 million would affect the
Company’s effective tax rate if reversed. During the nine months ended September 30, 2008, the
Company recorded interest reserves related to the income tax reserves of approximately $55 million.
63
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
12. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
Additional financial information with respect to cash (payments) and receipts is as follows
(millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
Cash payments made for interest |
|
$ |
(1,472 |
) |
|
$ |
(1,593 |
) |
Interest income received |
|
|
104 |
|
|
|
77 |
|
|
|
|
|
|
|
|
Cash interest payments, net |
|
$ |
(1,368 |
) |
|
$ |
(1,516 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments made for income taxes |
|
$ |
(585 |
) |
|
$ |
(479 |
) |
Income tax refunds received |
|
|
111 |
|
|
|
84 |
|
|
|
|
|
|
|
|
Cash tax payments, net |
|
$ |
(474 |
) |
|
$ |
(395 |
) |
|
|
|
|
|
|
|
The consolidated statement of cash flows for the nine months ended September 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 |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
Interest income |
|
$ |
73 |
|
|
$ |
55 |
|
|
$ |
173 |
|
|
$ |
154 |
|
Interest expense |
|
|
(623 |
) |
|
|
(644 |
) |
|
|
(1,819 |
) |
|
|
(1,868 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense, net |
|
$ |
(550 |
) |
|
$ |
(589 |
) |
|
$ |
(1,646 |
) |
|
$ |
(1,714 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Loss), Net
Other income (loss), net, consists of (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/07 |
|
|
9/30/08 |
|
|
9/30/07 |
|
Investment gains (losses), net |
|
$ |
(5 |
) |
|
$ |
14 |
|
|
$ |
(20 |
) |
|
$ |
288 |
|
Income (loss) on equity method investees |
|
|
33 |
|
|
|
(18 |
) |
|
|
25 |
|
|
|
(21 |
) |
Losses on accounts receivable securitization programs |
|
|
(5 |
) |
|
|
(13 |
) |
|
|
(25 |
) |
|
|
(40 |
) |
Other |
|
|
8 |
|
|
|
15 |
|
|
|
(2 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss), net |
|
$ |
31 |
|
|
$ |
(2 |
) |
|
$ |
(22 |
) |
|
$ |
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets
The Company has historically invested a portion of its cash on hand in money market funds,
including The Reserve Fund’s Primary Fund (“The Reserve Fund”). On the morning of September
15, 2008, the Company requested a full redemption of its approximately $820 million investment
in The Reserve Fund, but the redemption request was not honored. Approximately $330 million of
such investment was made by Time Warner and approximately $490 million was made by TWC. On
September 22, 2008, The Reserve Fund announced that redemptions of shares were suspended pursuant
to an SEC order requested by The Reserve Fund so that an orderly liquidation could be effected. On
October 31, 2008, the Company received $416 million from The Reserve Fund representing its pro rata
share of a partial distribution. The Company has not been informed as to when the remaining amount
will be returned. However, the Company believes its remaining receivable is recoverable and will
be distributed in the next twelve months as The Reserve Fund’s investments mature. As a result of
the status of The Reserve Fund, the Company has classified the approximately $820 million
receivable from The Reserve Fund at September 30, 2008 as other current assets on the Company’s
consolidated balance sheet and within investments and acquisitions, net of cash acquired, on the
Company’s consolidated statement of cash flows.
64
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other Current Liabilities
Other current liabilities consist of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
Accrued expenses |
|
$ |
3,875 |
|
|
$ |
3,975 |
|
Accrued compensation |
|
|
1,178 |
|
|
|
1,474 |
|
Accrued income taxes |
|
|
253 |
|
|
|
162 |
|
|
|
|
|
|
|
|
Total other current liabilities, net |
|
$ |
5,306 |
|
|
$ |
5,611 |
|
|
|
|
|
|
|
|
65
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.
66
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Balance Sheet
September 30, 2008
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
235 |
|
|
$ |
90 |
|
|
$ |
4,030 |
|
|
$ |
— |
|
|
$ |
4,355 |
|
Receivables, net |
|
|
19 |
|
|
|
3 |
|
|
|
5,872 |
|
|
|
— |
|
|
|
5,894 |
|
Inventories |
|
|
— |
|
|
|
16 |
|
|
|
2,045 |
|
|
|
— |
|
|
|
2,061 |
|
Prepaid expenses and other current assets |
|
|
379 |
|
|
|
75 |
|
|
|
1,169 |
|
|
|
— |
|
|
|
1,623 |
|
Deferred income taxes |
|
|
759 |
|
|
|
598 |
|
|
|
570 |
|
|
|
(1,168 |
) |
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,392 |
|
|
|
782 |
|
|
|
13,686 |
|
|
|
(1,168 |
) |
|
|
14,692 |
|
Noncurrent inventories and film costs |
|
|
— |
|
|
|
— |
|
|
|
5,376 |
|
|
|
— |
|
|
|
5,376 |
|
Investments in amounts due from consolidated
subsidiaries |
|
|
91,512 |
|
|
|
84,605 |
|
|
|
— |
|
|
|
(176,117 |
) |
|
|
— |
|
Investments, including available-for-sale securities |
|
|
69 |
|
|
|
489 |
|
|
|
1,864 |
|
|
|
(515 |
) |
|
|
1,907 |
|
Property, plant and equipment, net |
|
|
412 |
|
|
|
240 |
|
|
|
17,618 |
|
|
|
— |
|
|
|
18,270 |
|
Intangible assets subject to amortization, net |
|
|
— |
|
|
|
1 |
|
|
|
4,938 |
|
|
|
— |
|
|
|
4,939 |
|
Intangible assets not subject to amortization |
|
|
— |
|
|
|
643 |
|
|
|
46,538 |
|
|
|
— |
|
|
|
47,181 |
|
Goodwill |
|
|
— |
|
|
|
2,616 |
|
|
|
39,834 |
|
|
|
— |
|
|
|
42,450 |
|
Other assets |
|
|
107 |
|
|
|
266 |
|
|
|
1,540 |
|
|
|
— |
|
|
|
1,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
93,492 |
|
|
$ |
89,642 |
|
|
$ |
131,394 |
|
|
$ |
(177,800 |
) |
|
$ |
136,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
5 |
|
|
$ |
13 |
|
|
$ |
1,161 |
|
|
$ |
— |
|
|
$ |
1,179 |
|
Participations payable |
|
|
— |
|
|
|
— |
|
|
|
2,807 |
|
|
|
— |
|
|
|
2,807 |
|
Royalties and programming costs payable |
|
|
— |
|
|
|
8 |
|
|
|
1,295 |
|
|
|
— |
|
|
|
1,303 |
|
Deferred revenue |
|
|
— |
|
|
|
1 |
|
|
|
1,246 |
|
|
|
— |
|
|
|
1,247 |
|
Debt due within one year |
|
|
— |
|
|
|
5 |
|
|
|
120 |
|
|
|
— |
|
|
|
125 |
|
Other current liabilities |
|
|
738 |
|
|
|
365 |
|
|
|
4,338 |
|
|
|
(135 |
) |
|
|
5,306 |
|
Current liabilities of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
743 |
|
|
|
392 |
|
|
|
10,970 |
|
|
|
(135 |
) |
|
|
11,970 |
|
Long-term debt |
|
|
16,699 |
|
|
|
5,262 |
|
|
|
15,906 |
|
|
|
— |
|
|
|
37,867 |
|
Mandatorily redeemable preferred membership units
issued by a subsidiary |
|
|
— |
|
|
|
— |
|
|
|
300 |
|
|
|
— |
|
|
|
300 |
|
Debt due (from) to affiliates |
|
|
(1,002 |
) |
|
|
— |
|
|
|
1,002 |
|
|
|
— |
|
|
|
— |
|
Deferred income taxes |
|
|
14,884 |
|
|
|
16,231 |
|
|
|
16,586 |
|
|
|
(32,817 |
) |
|
|
14,884 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
275 |
|
|
|
— |
|
|
|
275 |
|
Other liabilities |
|
|
2,232 |
|
|
|
3,078 |
|
|
|
5,872 |
|
|
|
(4,210 |
) |
|
|
6,972 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
4,140 |
|
|
|
384 |
|
|
|
4,524 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to Time Warner and subsidiaries |
|
|
— |
|
|
|
(15,440 |
) |
|
|
(33,160 |
) |
|
|
48,600 |
|
|
|
— |
|
Other shareholders’ equity |
|
|
59,936 |
|
|
|
80,119 |
|
|
|
109,503 |
|
|
|
(189,622 |
) |
|
|
59,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
59,936 |
|
|
|
64,679 |
|
|
|
76,343 |
|
|
|
(141,022 |
) |
|
|
59,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
93,492 |
|
|
$ |
89,642 |
|
|
$ |
131,394 |
|
|
$ |
(177,800 |
) |
|
$ |
136,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Operations
For The Three Months Ended September 30, 2008
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
|
$ |
317 |
|
|
$ |
11,415 |
|
|
$ |
(26 |
) |
|
$ |
11,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(131 |
) |
|
|
(6,558 |
) |
|
|
25 |
|
|
|
(6,664 |
) |
Selling, general and administrative |
|
|
(74 |
) |
|
|
(68 |
) |
|
|
(2,284 |
) |
|
|
1 |
|
|
|
(2,425 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(206 |
) |
|
|
— |
|
|
|
(206 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
Merger-related, restructuring and shutdown costs |
|
|
— |
|
|
|
— |
|
|
|
(28 |
) |
|
|
— |
|
|
|
(28 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(39 |
) |
|
|
— |
|
|
|
(39 |
) |
Loss on disposal of assets, net |
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(79 |
) |
|
|
118 |
|
|
|
2,297 |
|
|
|
— |
|
|
|
2,336 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
2,045 |
|
|
|
2,163 |
|
|
|
— |
|
|
|
(4,208 |
) |
|
|
— |
|
Interest expense, net |
|
|
(236 |
) |
|
|
(250 |
) |
|
|
(64 |
) |
|
|
— |
|
|
|
(550 |
) |
Other income (expense), net |
|
|
(9 |
) |
|
|
(6 |
) |
|
|
65 |
|
|
|
(19 |
) |
|
|
31 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(80 |
) |
|
|
(16 |
) |
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income
taxes |
|
|
1,721 |
|
|
|
2,025 |
|
|
|
2,218 |
|
|
|
(4,243 |
) |
|
|
1,721 |
|
Income tax provision |
|
|
(655 |
) |
|
|
(767 |
) |
|
|
(845 |
) |
|
|
1,612 |
|
|
|
(655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,066 |
|
|
|
1,258 |
|
|
|
1,373 |
|
|
|
(2,631 |
) |
|
|
1,066 |
|
Discontinued operations, net of tax |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,067 |
|
|
$ |
1,259 |
|
|
$ |
1,374 |
|
|
$ |
(2,633 |
) |
|
$ |
1,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Operations
For The Three Months Ended September 30, 2007
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
|
$ |
297 |
|
|
$ |
11,415 |
|
|
$ |
(36 |
) |
|
$ |
11,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(153 |
) |
|
|
(6,844 |
) |
|
|
36 |
|
|
|
(6,961 |
) |
Selling, general and administrative |
|
|
(90 |
) |
|
|
(67 |
) |
|
|
(2,250 |
) |
|
|
— |
|
|
|
(2,407 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(167 |
) |
|
|
— |
|
|
|
(167 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
Merger-related, restructuring and shutdown costs |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
|
(12 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Gain on disposal of assets, net |
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(92 |
) |
|
|
77 |
|
|
|
2,145 |
|
|
|
— |
|
|
|
2,130 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
1,817 |
|
|
|
2,101 |
|
|
|
— |
|
|
|
(3,918 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(278 |
) |
|
|
(374 |
) |
|
|
63 |
|
|
|
— |
|
|
|
(589 |
) |
Other income (expense), net |
|
|
8 |
|
|
|
8 |
|
|
|
(8 |
) |
|
|
(10 |
) |
|
|
(2 |
) |
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(67 |
) |
|
|
(17 |
) |
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income
taxes |
|
|
1,455 |
|
|
|
1,812 |
|
|
|
2,133 |
|
|
|
(3,945 |
) |
|
|
1,455 |
|
Income tax provision |
|
|
(555 |
) |
|
|
(688 |
) |
|
|
(823 |
) |
|
|
1,511 |
|
|
|
(555 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
900 |
|
|
|
1,124 |
|
|
|
1,310 |
|
|
|
(2,434 |
) |
|
|
900 |
|
Discontinued operations, net of tax |
|
|
186 |
|
|
|
176 |
|
|
|
194 |
|
|
|
(370 |
) |
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,086 |
|
|
$ |
1,300 |
|
|
$ |
1,504 |
|
|
$ |
(2,804 |
) |
|
$ |
1,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Operations
For The Nine Months Ended September 30, 2008
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
|
$ |
960 |
|
|
$ |
33,803 |
|
|
$ |
(85 |
) |
|
$ |
34,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(366 |
) |
|
|
(19,914 |
) |
|
|
83 |
|
|
|
(20,197 |
) |
Selling, general and administrative |
|
|
(250 |
) |
|
|
(197 |
) |
|
|
(6,924 |
) |
|
|
2 |
|
|
|
(7,369 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(583 |
) |
|
|
— |
|
|
|
(583 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(13 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(13 |
) |
Merger-related, restructuring and shutdown costs |
|
|
(7 |
) |
|
|
— |
|
|
|
(175 |
) |
|
|
— |
|
|
|
(182 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(102 |
) |
|
|
— |
|
|
|
(102 |
) |
Loss on disposal of assets, net |
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(270 |
) |
|
|
397 |
|
|
|
6,102 |
|
|
|
— |
|
|
|
6,229 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
5,287 |
|
|
|
5,741 |
|
|
|
— |
|
|
|
(11,028 |
) |
|
|
— |
|
Interest expense, net |
|
|
(740 |
) |
|
|
(860 |
) |
|
|
(46 |
) |
|
|
— |
|
|
|
(1,646 |
) |
Other income (expense), net |
|
|
18 |
|
|
|
(19 |
) |
|
|
47 |
|
|
|
(68 |
) |
|
|
(22 |
) |
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(222 |
) |
|
|
(44 |
) |
|
|
(266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income
taxes |
|
|
4,295 |
|
|
|
5,259 |
|
|
|
5,881 |
|
|
|
(11,140 |
) |
|
|
4,295 |
|
Income tax provision |
|
|
(1,663 |
) |
|
|
(2,029 |
) |
|
|
(2,267 |
) |
|
|
4,296 |
|
|
|
(1,663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2,632 |
|
|
|
3,230 |
|
|
|
3,614 |
|
|
|
(6,844 |
) |
|
|
2,632 |
|
Discontinued operations, net of tax |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
4 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,630 |
|
|
$ |
3,228 |
|
|
$ |
3,612 |
|
|
$ |
(6,840 |
) |
|
$ |
2,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Operations
For The Nine Months Ended September 30, 2007
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
|
$ |
889 |
|
|
$ |
33,038 |
|
|
$ |
(87 |
) |
|
$ |
33,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(411 |
) |
|
|
(19,548 |
) |
|
|
85 |
|
|
|
(19,874 |
) |
Selling, general and administrative |
|
|
(292 |
) |
|
|
(185 |
) |
|
|
(6,738 |
) |
|
|
2 |
|
|
|
(7,213 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(502 |
) |
|
|
— |
|
|
|
(502 |
) |
Amounts related to securities litigation and
government investigations |
|
|
(169 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(169 |
) |
Merger-related, restructuring and shutdown costs |
|
|
— |
|
|
|
— |
|
|
|
(113 |
) |
|
|
— |
|
|
|
(113 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(36 |
) |
|
|
— |
|
|
|
(36 |
) |
Gains on disposal of assets, net |
|
|
— |
|
|
|
— |
|
|
|
673 |
|
|
|
— |
|
|
|
673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(461 |
) |
|
|
293 |
|
|
|
6,774 |
|
|
|
— |
|
|
|
6,606 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
6,035 |
|
|
|
6,781 |
|
|
|
— |
|
|
|
(12,816 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(778 |
) |
|
|
(1,089 |
) |
|
|
153 |
|
|
|
— |
|
|
|
(1,714 |
) |
Other income (expense), net |
|
|
22 |
|
|
|
2 |
|
|
|
251 |
|
|
|
(44 |
) |
|
|
231 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
(213 |
) |
|
|
(92 |
) |
|
|
(305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income
taxes |
|
|
4,818 |
|
|
|
5,987 |
|
|
|
6,965 |
|
|
|
(12,952 |
) |
|
|
4,818 |
|
Income tax provision |
|
|
(1,786 |
) |
|
|
(2,232 |
) |
|
|
(2,624 |
) |
|
|
4,856 |
|
|
|
(1,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
3,032 |
|
|
|
3,755 |
|
|
|
4,341 |
|
|
|
(8,096 |
) |
|
|
3,032 |
|
Discontinued operations, net of tax |
|
|
324 |
|
|
|
321 |
|
|
|
276 |
|
|
|
(597 |
) |
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,356 |
|
|
$ |
4,076 |
|
|
$ |
4,617 |
|
|
$ |
(8,693 |
) |
|
$ |
3,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Cash Flows
For The Nine Months Ended September 30, 2008
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,630 |
|
|
$ |
3,228 |
|
|
$ |
3,612 |
|
|
$ |
(6,840 |
) |
|
$ |
2,630 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
33 |
|
|
|
55 |
|
|
|
3,356 |
|
|
|
— |
|
|
|
3,444 |
|
Amortization of film and television costs |
|
|
— |
|
|
|
276 |
|
|
|
4,055 |
|
|
|
— |
|
|
|
4,331 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
102 |
|
|
|
— |
|
|
|
102 |
|
(Gain) Loss on investments and other assets, net |
|
|
(22 |
) |
|
|
3 |
|
|
|
37 |
|
|
|
— |
|
|
|
18 |
|
Deficiency of distributions over equity in
pretax income of consolidated subsidiaries |
|
|
(5,287 |
) |
|
|
(5,741 |
) |
|
|
— |
|
|
|
11,028 |
|
|
|
— |
|
Equity in losses of investee companies, net of
cash distributions |
|
|
— |
|
|
|
— |
|
|
|
23 |
|
|
|
— |
|
|
|
23 |
|
Equity-based compensation |
|
|
37 |
|
|
|
19 |
|
|
|
176 |
|
|
|
— |
|
|
|
232 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
222 |
|
|
|
44 |
|
|
|
266 |
|
Deferred income taxes |
|
|
743 |
|
|
|
533 |
|
|
|
503 |
|
|
|
(1,036 |
) |
|
|
743 |
|
Changes in operating assets and liabilities, net
of acquisitions |
|
|
1,091 |
|
|
|
2,228 |
|
|
|
(3,819 |
) |
|
|
(3,186 |
) |
|
|
(3,686 |
) |
Adjustments relating to discontinued operations |
|
|
2 |
|
|
|
2 |
|
|
|
(10 |
) |
|
|
(3 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by operations |
|
|
(773 |
) |
|
|
603 |
|
|
|
8,257 |
|
|
|
7 |
|
|
|
8,094 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
|
(9 |
) |
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
(17 |
) |
Investments and acquisitions, net of cash acquired |
|
|
(349 |
) |
|
|
(9 |
) |
|
|
(1,869 |
) |
|
|
— |
|
|
|
(2,227 |
) |
Investment in a wireless joint venture |
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
Capital expenditures and product development costs |
|
|
(11 |
) |
|
|
(44 |
) |
|
|
(3,082 |
) |
|
|
— |
|
|
|
(3,137 |
) |
Investment proceeds from available-for-sale
securities |
|
|
10 |
|
|
|
1 |
|
|
|
4 |
|
|
|
— |
|
|
|
15 |
|
Other investment proceeds |
|
|
21 |
|
|
|
39 |
|
|
|
197 |
|
|
|
— |
|
|
|
257 |
|
Advances to parent and consolidated subsidiaries |
|
|
2,058 |
|
|
|
2,496 |
|
|
|
— |
|
|
|
(4,554 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities |
|
|
1,720 |
|
|
|
2,483 |
|
|
|
(4,761 |
) |
|
|
(4,554 |
) |
|
|
(5,112 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
25,700 |
|
|
|
— |
|
|
|
5,222 |
|
|
|
— |
|
|
|
30,922 |
|
Debt repayments |
|
|
(26,836 |
) |
|
|
(166 |
) |
|
|
(3,047 |
) |
|
|
— |
|
|
|
(30,049 |
) |
Proceeds from exercise of stock options |
|
|
125 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
125 |
|
Excess tax benefit on stock options |
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
Principal payments on capital leases |
|
|
— |
|
|
|
— |
|
|
|
(31 |
) |
|
|
— |
|
|
|
(31 |
) |
Repurchases of common stock |
|
|
(332 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(332 |
) |
Dividends paid |
|
|
(675 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(675 |
) |
Other financing activities |
|
|
(18 |
) |
|
|
— |
|
|
|
(88 |
) |
|
|
— |
|
|
|
(106 |
) |
Change in due to/from parent and investment in
segment |
|
|
735 |
|
|
|
(2,883 |
) |
|
|
(2,399 |
) |
|
|
4,547 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities |
|
|
(1,298 |
) |
|
|
(3,049 |
) |
|
|
(343 |
) |
|
|
4,547 |
|
|
|
(143 |
) |
INCREASE (DECREASE) IN CASH AND EQUIVALENTS |
|
|
(351 |
) |
|
|
37 |
|
|
|
3,153 |
|
|
|
— |
|
|
|
2,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
586 |
|
|
|
53 |
|
|
|
877 |
|
|
|
— |
|
|
|
1,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
235 |
|
|
$ |
90 |
|
|
$ |
4,030 |
|
|
$ |
— |
|
|
$ |
4,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Cash Flows
For The Nine Months Ended September 30, 2007
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,356 |
|
|
$ |
4,076 |
|
|
$ |
4,617 |
|
|
$ |
(8,693 |
) |
|
$ |
3,356 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
33 |
|
|
|
51 |
|
|
|
3,190 |
|
|
|
— |
|
|
|
3,274 |
|
Amortization of film and television costs |
|
|
— |
|
|
|
321 |
|
|
|
4,176 |
|
|
|
— |
|
|
|
4,497 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
36 |
|
|
|
— |
|
|
|
36 |
|
Gain on investments and other assets, net |
|
|
(9 |
) |
|
|
(13 |
) |
|
|
(949 |
) |
|
|
— |
|
|
|
(971 |
) |
Deficiency of distributions over equity in
pretax income of consolidated subsidiaries |
|
|
(6,035 |
) |
|
|
(6,781 |
) |
|
|
— |
|
|
|
12,816 |
|
|
|
— |
|
Equity in losses of investee companies, net of
cash distributions |
|
|
— |
|
|
|
1 |
|
|
|
52 |
|
|
|
— |
|
|
|
53 |
|
Equity-based compensation |
|
|
42 |
|
|
|
16 |
|
|
|
172 |
|
|
|
— |
|
|
|
230 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
213 |
|
|
|
92 |
|
|
|
305 |
|
Deferred income taxes |
|
|
1,406 |
|
|
|
193 |
|
|
|
195 |
|
|
|
(388 |
) |
|
|
1,406 |
|
Amounts related to securities litigation and
government investigations |
|
|
(750 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(750 |
) |
Changes in operating assets and liabilities, net
of acquisitions |
|
|
1,149 |
|
|
|
2,581 |
|
|
|
(4,286 |
) |
|
|
(4,433 |
) |
|
|
(4,989 |
) |
Adjustments relating to discontinued operations |
|
|
(323 |
) |
|
|
(322 |
) |
|
|
(243 |
) |
|
|
597 |
|
|
|
(291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by operations |
|
|
(1,131 |
) |
|
|
123 |
|
|
|
7,173 |
|
|
|
(9 |
) |
|
|
6,156 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
|
(6 |
) |
|
|
— |
|
|
|
(87 |
) |
|
|
— |
|
|
|
(93 |
) |
Investments and acquisitions, net of cash acquired |
|
|
(1 |
) |
|
|
(17 |
) |
|
|
(641 |
) |
|
|
— |
|
|
|
(659 |
) |
Investment in a wireless joint venture |
|
|
— |
|
|
|
— |
|
|
|
(30 |
) |
|
|
— |
|
|
|
(30 |
) |
Investment activities of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(26 |
) |
|
|
— |
|
|
|
(26 |
) |
Capital expenditures and product development costs |
|
|
12 |
|
|
|
(85 |
) |
|
|
(3,027 |
) |
|
|
— |
|
|
|
(3,100 |
) |
Investment proceeds from available-for-sale
securities |
|
|
10 |
|
|
|
23 |
|
|
|
— |
|
|
|
— |
|
|
|
33 |
|
Other investment proceeds |
|
|
1 |
|
|
|
28 |
|
|
|
1,777 |
|
|
|
— |
|
|
|
1,806 |
|
Advances to parent and consolidated subsidiaries |
|
|
4,494 |
|
|
|
3,525 |
|
|
|
— |
|
|
|
(8,019 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities |
|
|
4,510 |
|
|
|
3,474 |
|
|
|
(2,034 |
) |
|
|
(8,019 |
) |
|
|
(2,069 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
6,042 |
|
|
|
— |
|
|
|
6,686 |
|
|
|
— |
|
|
|
12,728 |
|
Debt repayments |
|
|
(3,056 |
) |
|
|
(546 |
) |
|
|
(6,949 |
) |
|
|
— |
|
|
|
(10,551 |
) |
Proceeds from exercise of stock options |
|
|
484 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
484 |
|
Excess tax benefit on stock options |
|
|
68 |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
74 |
|
Principal payments on capital leases |
|
|
— |
|
|
|
(3 |
) |
|
|
(42 |
) |
|
|
— |
|
|
|
(45 |
) |
Repurchases of common stock |
|
|
(5,714 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,714 |
) |
Dividends paid |
|
|
(645 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(645 |
) |
Other financing activities |
|
|
(5 |
) |
|
|
— |
|
|
|
(89 |
) |
|
|
— |
|
|
|
(94 |
) |
Change in due to/due from parent and investment
in segment |
|
|
— |
|
|
|
(3,074 |
) |
|
|
(4,954 |
) |
|
|
8,028 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by financing activities |
|
|
(2,826 |
) |
|
|
(3,623 |
) |
|
|
(5,342 |
) |
|
|
8,028 |
|
|
|
(3,763 |
) |
INCREASE (DECREASE) IN CASH AND EQUIVALENTS |
|
|
553 |
|
|
|
(26 |
) |
|
|
(203 |
) |
|
|
— |
|
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
207 |
|
|
|
77 |
|
|
|
1,265 |
|
|
|
— |
|
|
|
1,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
760 |
|
|
$ |
51 |
|
|
$ |
1,062 |
|
|
$ |
— |
|
|
$ |
1,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
Part II. Other Information
Item 1. Legal Proceedings.
Other Matters
Reference is made to the lawsuit filed by certain heirs of Jerome Siegel relating to the
“Superman” character described on page 52 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”).
On October 6, 2008, the court dismissed plaintiffs’ Lanham Act and “wasting” claims with prejudice.
In orders issued on October 14, 2008, the court determined that the remaining claims in the case
will be subject to phased non-jury trials starting in January and March of 2009.
Reference is made to the lawsuit filed by Hallisey et al. in the U.S. District Court for the
Southern District of New York that was brought as a collective action under the Fair Labor
Standards Act and as a class action under New York state law, which is described on page 54 of the
2007 Form 10-K, page 54 of the March 2008 Form 10-Q and page 66 of the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2008 (the “June 2008 Form 10-Q”). The parties reached
an agreement to issue supplemental notice to newly identified members of the putative class as well
as previously notified members and submitted this agreement to the court for approval in August
2008.
Reference is made to the lawsuit filed by Thomas Dreiling described on page 53 of the 2007
Form 10-K and page 66 of the June 2008 Form 10-Q. Briefing on the plaintiff’s appeal was completed
in August 2008.
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 and page 66 of the June 2008 Form 10-Q. Defendants filed
additional “individual” motions for summary judgment in August 2008, which argued, among other
things, that defendants’ respective products do not infringe the surviving claims in plaintiff’s
patents. Those motions have been fully briefed.
Reference is made to the three related actions filed by a group of syndicate participants,
including BNZ Investments Limited, described on page 53 of the 2007 Form 10-K. In September 2008,
the parties reached an agreement in principle to settle these matters on terms that are not
material to the Company.
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 and page 66 of the June 2008 Form
10-Q. On July 14, 2008, plaintiffs filed an amended complaint, adding a cause of action for
reformation of the underlying contracts. New Line Cinema Corporation again moved to dismiss
certain claims and, on September 22, 2008, the court granted that motion, dismissing the
plaintiffs’ claims for reformation and punitive damages without leave to amend. On October 3, 2008,
plaintiffs moved for reconsideration of that decision.
Reference is made to the lawsuit filed by Brantley, et al. described on page 55 of the 2007
Form 10-K, page 54 of the March 2008 Form 10-Q and page 66 of the June 2008 Form 10-Q. On August
4, 2008, the district court denied the motions the programmer defendants and the distributor
defendants had filed requesting the court to certify its June 25, 2008 order for interlocutory
appeal to the U.S. Court of Appeals for the Ninth Circuit.
Reference is made to the National Labor Relations Board (“NLRB”) administrative proceeding
described on page 55 of the 2007 Form 10-K. The hearing in the matter before the NLRB
Administrative Law Judge ended on July 21, 2008. No decision has yet been issued, and procedural
matters related to the case are ongoing.
On June 6, 2005, David McDavid and certain related entities filed a complaint against Turner
Broadcasting System, Inc. (“Turner”) and the Company in Georgia state court. The complaint
asserted, among other things, claims for breach of contract, breach of fiduciary duty, promissory
estoppel and fraud relating to an alleged oral agreement between plaintiffs and Turner for the sale
of the Atlanta Hawks and Thrashers sports franchises and certain operating rights to the Philips
Arena. On August 20, 2008, the court issued an order dismissing all claims against the Company. The
court also dismissed certain claims against Turner for breach of an alleged oral exclusivity
agreement, for promissory estoppel based on the alleged exclusivity agreement and for breach of
fiduciary duty. A trial as to the remaining claims against Turner commenced on October 8, 2008 and
is ongoing. Plaintiffs seek approximately $500 million in compensatory damages and as yet
unspecified punitive damages. The Company intends to defend against this lawsuit vigorously.
75
Item 1A. Risk Factors.
There have been no material changes in the Company’s risk factors from those disclosed in Part
I, Item 1A of the 2007 Form 10-K and Part II, Item 1A of the June 2008 Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Company Purchases of Equity Securities
The following table provides information about purchases by the Company during the quarter
ended September 30, 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) |
July 1, 2008 —
July 31, 2008 |
|
|
5,072 |
|
|
$ |
14.58 |
|
|
|
0 |
|
|
$ |
2,202,463,464 |
|
August 1, 2008 —
August 31, 2008 |
|
|
668 |
|
|
$ |
16.09 |
|
|
|
0 |
|
|
$ |
2,202,463,464 |
|
September 1, 2008 —
September 30, 2008 |
|
|
3,582 |
|
|
$ |
13.60 |
|
|
|
0 |
|
|
$ |
2,202,463,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
9,322 |
|
|
$ |
14.31 |
|
|
|
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 and
the exercise of stock options, which are repurchased by the Company based on their fair market
value on the vesting date or exercise date, as applicable. The number of shares of Common
Stock purchased by the Company in connection with the vesting of such awards and exercise of
stock options totaled 5,072 shares, 668 shares and 3,582 shares, respectively, for the months
of July, August and September. |
| |
| (2) |
|
The calculation of the average price paid per share does not give effect to any
fees, commissions or other costs associated with the repurchase of such shares. |
| |
| (3) |
|
On August 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. |
Item 5. Other Information.
Amendment of Equity Plans
The Company amended its equity plans effective October 1, 2008 to change the definition of
“Fair Market Value” from the average of the high and low sale price of Time Warner common stock on
the New York Stock Exchange to the closing sale price of shares of Time Warner common stock as
reported on the New York Stock Exchange Composite Tape. These amendments do not amend or affect
the exercise price of any stock options granted under the applicable plans prior to October 1,
2008.
New Employment Agreement
On November 3, 2008, the
Company and Patricia Fili-Krushel, the Company’s Executive Vice
President, Administration, entered into a new employment agreement,
effective as of July 1, 2008, which supersedes her prior employment
agreement with the Company. The new employment agreement with Ms.
Fili-Krushel provides for a term ending on June 30, 2011, subject to
earlier termination, and compensation for Ms. Fili-Krushel consisting of (a) minimum
annual salary of $850,000; (b) annual discretionary
cash bonus with a target amount of 200% of her base salary; and (c) annual long-term
incentive compensation with a target value of $1.35 million, which may include stock options,
restricted stock units, performance stock units or other long-term incentive awards as determined by the
Compensation and Human Development Committee of the Board of Directors.
76
In the event of a termination of
Ms. Fili-Krushel’s employment by the Company “without cause,” subject to a release of claims, Ms. Fili-Krushel would
receive her salary plus an annual cash bonus for a severance period
of two years. The
annual cash bonus would be calculated as the average of the two highest annual
bonuses paid by the Company to Ms. Fili-Krushel during the most recent three calendar years.
In addition, consistent with her prior employment agreement, all stock options held by Ms. Fili-Krushel would continue
to vest during the severance period. Because she qualifies for
retirement treatment under the terms of the applicable stock option
agreements, all of the stock options held by Ms. Fili-Krushel would vest and become immediately exercisable at the end of
the severance period or the date on which Ms. Fili-Krushel commences employment at another for-profit entity, if earlier.
All vested stock options held by Ms. Fili-Krushel would remain exercisable for a period of five years after the end of the
severance period or, if earlier, the date on which Ms. Fili-Krushel commences employment elsewhere (but in no event beyond the original term of the
options). With respect to restricted stock units (“RSUs”) held by Ms. Fili-Krushel at the effective date of termination, the treatment of the RSUs would be determined in accordance with the terms
of the applicable award agreement, and because Ms. Fili-Krushel is
eligible for retirement treatment, the vesting of the RSUs would accelerate upon the effective date of a termination of employment “without cause,” but
release of the shares may be delayed for six months due to Section 409A of the Internal Revenue Code.
Ms. Fili-Krushel is also restricted from competing with the Company by providing services to, serving in any capacity for or owning certain interests in competitors of the Company while she is employed by the
Company and for a period of one year following the termination of her employment.
A copy of the new employment agreement with Ms. Fili-Krushel is filed as an exhibit to this document.
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.
77
TIME WARNER INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
| |
TIME WARNER INC.
(Registrant)
|
|
| Date: November 5, 2008 |
|
|
| |
| |
/s/ John K. Martin, Jr. |
|
| |
John K. Martin, Jr. |
|
| |
Executive Vice President and Chief Financial Officer |
|
| |
78
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
| |
|
|
| Exhibit No. |
|
Description of Exhibit |
|
|
|
10.1
|
|
Amendment to the AOL Time Warner Inc. 1994 Stock Option Plan,
dated September 10, 2008 and effective October 1, 2008. |
|
|
|
10.2
|
|
Amendment to the Time Warner Corporate Group Stock Incentive
Plan, dated September 10, 2008 and effective October 1, 2008. |
|
|
|
10.3
|
|
Amendment to the Time Warner 1997 Stock Option Plan, dated
September 10, 2008 and effective October 1, 2008. |
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10.4
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Amendment to the America Online, Inc. 1992 Employee, Director
and Consultant Stock Option Plan, dated September 10, 2008 and
effective October 1, 2008. |
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10.5
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Amendment to the Time Warner Inc. 1999 Stock Plan, dated
September 10, 2008 and effective October 1, 2008. |
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10.6
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Amendment to the Time Warner Inc. 2003 Stock Incentive Plan,
dated September 10, 2008 and effective October 1, 2008. |
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10.7
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Amendment to the Time Warner Inc. 2006 Stock Incentive Plan,
dated September 10, 2008 and effective October 1, 2008. |
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10.8
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Amendment to the Time Warner 1996 Stock Option Plan for
Non-Employee Directors, dated September 10, 2008 and effective
October 1, 2008. |
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10.9
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Employment Agreement made November 3, 2008, effective as of July 1, 2008, between the
Company and Patricia Fili-Krushel. |
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31.1
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Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, with respect to
the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2008. |
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31.2
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Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, with respect to
the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2008. |
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32
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Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, with respect to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September
30, 2008. † |
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| † |
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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. |
79