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 March 31, 2009 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 |
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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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes o 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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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 April 21, 2009 |
Common Stock – $.01 par value
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1,196,452,535 |
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 a supplement to the accompanying consolidated financial statements and provides additional
information on Time Warner Inc.’s (“Time Warner” or the “Company”) businesses, current
developments, 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 months ended March 31, 2009. 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 March 31, 2009 and cash flows for the three months ended March 31,
2009. |
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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, 2008 (the “2008 Form 10-K”) for a discussion of the risk factors
applicable to the Company. |
On March 12, 2009, the Company completed the legal and structural separation of Time Warner
Cable Inc. (“TWC”) from the Company. With the completion of the separation, the Company disposed of
the Cable segment in its entirety and ceased to consolidate the financial condition and results of
operations of TWC in its consolidated financial statements. Accordingly, the Company has presented
the financial condition and results of operations of the Cable segment as discontinued operations
in the accompanying consolidated financial statements for all periods presented.
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 and Time. The Company produces and distributes films through
Warner Bros. and New Line Cinema, including The Dark Knight, Gran Torino, The Curious Case of
Benjamin Button and the Harry Potter films, as well as television series, including Two and a Half
Men, The Mentalist, The Big Bang Theory, Gossip Girl and The Closer. During the three months ended
March 31, 2009, the Company generated revenues of $6.945 billion (down 7% from $7.470 billion in
2008), Operating Income of $1.198 billion (down 9% from $1.311 billion in 2008), Net Income of $661
million (down 14% from $771 million in 2008) and Cash Provided by Operations from Continuing
Operations of $1.425 billion (down 12% from $1.616 billion in 2008).
Impact of the Current Economic Environment
The current global economic recession has reduced the Company’s visibility into long-term
business trends and has adversely affected its businesses in the first quarter of 2009 and is
currently expected to continue to adversely affect them during the remainder of 2009. For example,
during the first quarter of 2009, the Company’s Advertising revenues declined 16% compared to the
similar period in the prior year. The Company currently expects Advertising revenues to continue to
decline during the remainder of 2009 as compared to the similar period in 2008. Additionally, the
current economic environment is adversely affecting the Company’s Content
revenues due to, among other things, reduced consumer spending on DVDs.
The significant losses in the market value of the Company’s pension plan assets in 2008 has
resulted in an increase in pension expense of approximately $30 million in the first quarter of
2009 and is expected to result in an approximately $130 million increase in pension expense for the
full year of 2009. Additionally, the strengthening of the U.S. Dollar relative to significant
foreign currencies to which the Company is exposed has negatively affected the Company’s revenues
and Operating Income by approximately $240 million and $70 million, respectively, for the three
months ended March 31, 2009. If exchange rates remain at levels similar to those in the first
quarter of 2009, the Company expects a continued negative impact on revenues and Operating Income
during the remainder of 2009.
The Company continues to have strong liquidity to meet its needs for the foreseeable future.
At March 31, 2009, the Company had $13.955 billion of unused committed capacity, including cash and
equivalents and a credit facility containing commitments from a geographically diverse group of
major financial institutions. See “Financial Condition and Liquidity” for further details regarding
the Company’s total committed capacity.
Time Warner Businesses
Time Warner classifies its operations into four reportable segments: Networks, Filmed
Entertainment, Publishing and AOL.
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 noncash depreciation of tangible assets and
amortization of certain intangible assets, primarily intangible assets 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 11, “Segment Information.”
Networks. Time Warner’s Networks segment is comprised of Turner Broadcasting System, Inc.
(“Turner”) and Home
Box Office, Inc. (“HBO”). For the three months ended March 31, 2009, the Networks segment
generated revenues of $2.808 billion (40% of the Company’s overall revenues), $1.064 billion in
Operating Income before Depreciation and Amortization and $960 million in Operating Income.
2
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The Turner networks — including such recognized brands as TNT, TBS, CNN, Cartoon Network,
truTV and HLN (formerly CNN Headline News) — are among the leaders in advertising-supported cable
TV networks. For seven 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 revenue growth, as well as strong brands and
operating efficiencies.
HBO operates the HBO and Cinemax multichannel premium 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 Sex and the City,
The Sopranos, Entourage, Rome and True Blood.
The Company’s Networks segment recently has focused on international expansion, including
Turner’s fourth quarter 2007 acquisition of seven pay networks operating principally in Latin
America and HBO’s acquisitions of additional equity interests in HBO Asia and HBO South Asia during
the fourth quarter of 2007 and first quarter of 2008, as well as the acquisition of an additional
equity interest in the HBO Latin America Group, consisting of HBO Brasil, HBO Olé and HBO Latin
America Production Services (collectively, “HBO LAG”), during the fourth quarter of 2008. These
acquired businesses contributed revenues and Operating Income before Depreciation and Amortization
of $119 million and $35 million, respectively, for the three months ended March 31, 2009 compared
to $36 million and $3 million, respectively, for the three months ended March 31, 2008. In
addition, during the first quarter of 2009, Turner launched two new networks in India. The Company
anticipates that international expansion will continue to be an area of focus at the Networks
segment for the foreseeable future.
Filmed Entertainment. Time Warner’s Filmed Entertainment segment is comprised of Warner Bros.
Entertainment Group (“Warner Bros.”), one of the world’s leading studios, and New Line Cinema
Corporation (“New Line”). For the three months ended March 31, 2009, the Filmed Entertainment
segment generated revenues of $2.633 billion (36% of the Company’s overall revenues), $308 million
in Operating Income before Depreciation and Amortization and $214 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 operating performance. To
increase operational efficiencies and maximize performance within the Filmed Entertainment segment,
in 2008 the Company reorganized the New Line business to be operated as a unit of Warner Bros.
while maintaining separate development, production and other operations, and the Company incurred
restructuring charges primarily related to involuntary employee terminations in connection with the
reorganization. Beginning in the first quarter of 2009, Warner Bros. commenced a significant
restructuring, primarily consisting of headcount reductions and the outsourcing of certain
functions to an external service provider. As a result, the Company incurred restructuring charges
of $37 million during the three months ended March 31, 2009 and expects to incur additional
restructuring charges ranging from $40 million to $60 million during the remainder of 2009.
Warner Bros. continues to be an industry leader in the television business. For the 2008-2009
broadcast season, Warner Bros. produced more than 20 primetime series, with at least one series
airing on each of the five broadcast networks (including Two and a Half Men, The Mentalist, The Big
Bang Theory, Gossip Girl, ER and Smallville), as well as original series for several cable networks
(including The Closer and Nip/Tuck).
The Screen Actors Guild (“SAG”), which covers performers in feature films and filmed
television programs, and the producers of such content, including the Company’s Filmed
Entertainment and Networks segments, have been working under contracts that expired on June 30,
2008. The producers and SAG have reached a tentative agreement, which, as of April 28, 2009, has
not been ratified by SAG’s membership. In the event the agreement is not ratified or SAG goes on
strike, it could cause delays in the production of feature films and television programs, as
well as higher costs resulting either from the strike or less favorable terms contained in a future
agreement.
3
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The sale of DVDs has been one of the largest drivers of the segment’s profit over the last
several years. The industry and the Company experienced a decline in DVD sales in 2008 and the
first quarter of 2009 as growing consumer interest in high definition Blu-ray DVDs only partially
offset softening consumer demand for standard definition DVDs. Also contributing to the overall
decline in DVD sales are several factors, including the general economic downturn in the U.S. and
many regions around the world, increasing competition for consumer discretionary time and spending,
piracy and the maturation of the standard definition DVD format.
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, television programming and interactive games. 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.
The Company enters into co-financing arrangements with other companies as a way of securing
funding for its films and mitigating risk. During 2008, one of the Company’s largest co-financing
partners informed the Company that difficulties in the credit markets had led to a delay in
securing the financing necessary to fund the partner’s 50% share (approximately $120 million) of
the production costs on four films released during the second half of 2008. As a result, the
Company has accounted for these four films in the accompanying consolidated financial statements as
if they were wholly owned. The Company is unsure whether this co-financing partner will ultimately
secure the funding for amounts due on these four 2008 productions or the funding it had committed
for films slated for release in 2009, and the difficulties in the credit market may also reduce the
Company’s ability to attract other financial partners to co-finance its films. These or similar
difficulties relating to co-financing arrangements may continue for the remainder of 2009 and in
future periods. As a result, the Company may have to provide more funding for film production
costs than it has in the past and may have to take on additional risk that it would have otherwise
sought to mitigate with a co-financing arrangement.
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. For the
three months ended March 31, 2009, the Publishing segment generated revenues of $806 million (12%
of the Company’s overall revenues) and had $12 million in Operating Income before Depreciation and
Amortization and an Operating Loss of $32 million.
As of March 31, 2009, Time Inc. published 23 magazines in the U.S., including People, Sports
Illustrated, Time, InStyle, Real Simple, Southern Living and Fortune, and over 90 magazines outside
the U.S., primarily through IPC Media (“IPC”) in the U.K. and Grupo Editorial Expansión (“GEE”) in
Mexico. 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. (“Synapse”), and the school and youth group
fundraising company QSP, Inc. and its Canadian affiliate, Quality Service Programs Inc.
(collectively, “QSP”). Advertising sales at the Publishing segment, particularly print advertising
sales, continue to be significantly adversely affected by the current economic environment as
evidenced by their continuing decline during the first quarter of 2009. Online advertising sales at
the Publishing segment have also been adversely affected by the current economic environment,
although, on a percentage basis, to a lesser degree than print advertising sales. Time Inc.
continues to develop digital content, including the relaunch of RealSimple.com and the expansion of
Time.com, as well as the expansion of digital properties owned by IPC and GEE. For the three months
ended March 31, 2009, online Advertising revenues were 12% of Time Inc.’s total Advertising
revenues, compared to 10% for the three months ended March 31, 2008. Time Inc.’s direct-selling
division, Southern Living At Home, which is held for sale, sells home decor products through
independent consultants at parties hosted in people’s homes throughout the U.S.
AOL. AOL LLC (together with its subsidiaries, “AOL”) operates a Global Web Services business,
which is comprised of its Platform-A, MediaGlow and People Networks business units. Platform-A
sells advertising services worldwide on both the AOL Network and third-party Internet sites,
referred to as the “Third Party Network.” MediaGlow and People Networks develop and operate the AOL
Network, which includes a leading network of web brands, free client software and services and a
social media network 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 March
31, 2009, AOL had 6.3 million AOL brand subscribers in the U.S., which does not include
registrations for free AOL services. For the three
months ended March 31, 2009, AOL generated revenues of $867 million (12% of the Company’s
overall revenues) and had $255 million in Operating Income before Depreciation and Amortization and
$150 million in Operating Income.
4
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
AOL’s business is focused on attracting and engaging Internet consumers and providing
advertising services on both the AOL Network and the Third Party Network. In addition to growing
its Global Web Services business, AOL is focused on managing costs in this business, as well as
managing its declining subscriber base and related cost structure in its Access Services business.
In the first quarter of 2009, in an effort to better position its Global Web Services business, AOL
undertook a significant restructuring. As a result, for the three months ended March 31, 2009, the
Company incurred restructuring charges of $58 million primarily related to involuntary employee
terminations and facility closures, and currently expects to incur up to an additional $90 million
in restructuring charges during the remainder of 2009.
During 2008, the Company announced that it had begun separating the AOL Access Services and
Global Web Services businesses, as a means of enhancing the operational focus and strategic options
available for each of these businesses. The Company continues to review its strategic alternatives
with respect to AOL. Although the Company’s Board of Directors has not made any decision, the
Company currently anticipates that it would initiate a process to spin off one or more parts of the
businesses of AOL to Time Warner’s stockholders, in one or a series of transactions. Based on the
results of the Company’s review, future market conditions or the availability of more favorable
strategic opportunities that may arise before a transaction is completed, the Company may decide to
pursue an alternative other than a spin-off with respect to either or both of AOL’s businesses.
The Platform-A business unit sells advertising services worldwide on both the AOL Network and
the Third Party Network and licenses 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.
The MediaGlow and People Networks business units develop and operate websites, applications
and services that are part of the AOL Network. In addition, AOL’s Products and Technologies group
develops and operates components of the AOL Network, such as e-mail, toolbar and search. The AOL
Network consists of a variety of websites, related applications and services that can be accessed
generally via the Internet or via AOL’s Access Services business. Specifically, the AOL Network
includes owned and operated websites, applications and services such as AOL.com, e-mail, MapQuest,
Moviefone, Engadget, Asylum, international versions of the AOL portal and social media properties
such as AIM, ICQ and Bebo. 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.
During the first quarter of 2009, AOL’s Advertising revenues were negatively affected by
weakening global economic conditions, which contributed to lower demand from a number of advertiser
categories, a deterioration in the financial position of certain significant customers and downward
pricing pressure on advertising inventory, as well as an overall increase in marketplace
competition, an increased volume of inventory monetized through lower-priced sales channels and
other sales execution issues. During the remainder of 2009, the Company anticipates that these
factors and trends may continue to negatively affect AOL’s Advertising revenues. Additionally, in
the first quarter of 2009, AOL made a number of organizational and personnel changes, including
hiring a new chief executive officer and changing the leadership within its Platform-A business
unit.
The AOL Network and Third Party Network components of the Global Web Services business have
differing cost structures. Third Party Network advertising has historically had higher traffic
acquisition costs (“TAC”) and, therefore, lower incremental margins than display advertising. As a
result, 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.
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. In late January 2009, Google exercised its right to request that AOL
register Google’s 5% equity interest for sale in an initial public offering. Time Warner has the
right, but not the obligation, 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
5
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
lieu of conducting an initial public offering. The Company is in
discussions with Google and has notified Google of its intention to purchase the 5% equity interest.
AOL’s Access Services business offers an online subscription service to consumers that
includes dial-up Internet access. AOL continued to experience declines during the first quarter of
2009 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. U.S. subscribers declined 0.6 million in each of the
three-month periods ended March 31, 2009 and 2008. The decline in subscribers has had an adverse
impact on AOL’s Subscription revenues, and the Company expects the total number of subscribers to
continue to 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.
Recent Developments
TWC Separation from Time Warner and Reverse Stock Split of Time Warner Common Stock
On March 12, 2009 (the “Distribution Record Date”), the Company
disposed of all of its shares of TWC common stock. The disposition was made pursuant to a
separation agreement entered into on May 20, 2008, among Time Warner, TWC and certain of their
subsidiaries (the “Separation Agreement”) for the purpose of achieving the legal and structural
separation of TWC from Time Warner (the “TWC Separation”). The TWC Separation was effected as a pro
rata dividend of all shares of TWC common stock held by Time Warner in a spin-off (the
“Distribution”) to Time Warner stockholders.
Prior to the Distribution Record Date, on March 12, 2009, TWC, in accordance with the terms of
the Separation Agreement, paid a special cash dividend of $10.27 per share to all holders of TWC
Class A Common Stock and TWC Class B Common Stock as of the close of business on March 11, 2009
(aggregating $10.856 billion) (the “Special Dividend”) that resulted in the receipt by Time Warner
of $9.253 billion.
With the completion of the TWC Separation, the Company disposed of the Cable segment in its
entirety. Accordingly, the Company has presented the financial condition and results of operations
of the Cable segment as discontinued operations in the accompanying consolidated financial
statements for all periods presented.
In connection with the TWC Separation, the Company implemented a 1-for-3 reverse stock split
on March 27, 2009.
In addition, in connection with the TWC Separation, and as provided for in the Company’s
equity plans, the number of stock options, restricted stock units (“RSUs”) and target performance
stock units (“PSUs”) outstanding at the Distribution Record Date and the exercise prices of such
stock options were adjusted to maintain the fair value of those awards. The changes in the number
of equity awards and the exercise prices were determined by comparing the fair value of such awards
immediately prior to the TWC Separation to the fair value of such awards immediately after the TWC
Separation. Accordingly, each equity award outstanding as of the Distribution Record Date was
increased by multiplying the size of such award by 1.35, while the per share exercise price of each
stock option was decreased by dividing by 1.35. This adjustment resulted in an increase of
approximately 50 million equity awards (comprised of 46 million stock options and 4 million RSUs). The modifications to the outstanding equity awards were
made pursuant to existing antidilution provisions in the Company’s equity plans, and did not result
in any additional compensation expense. In addition, all such awards were further adjusted for the
effect of the Company’s reverse stock split.
Under the terms of Time Warner’s equity plans and related award agreements, as a result of the
TWC Separation, TWC employees who held Time Warner equity awards were treated at the time of the
TWC Separation as if their employment with Time Warner was terminated without cause at the time of
the separation. For most TWC employees, this treatment resulted 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.
6
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Repayment and Termination of $2.0 Billion Term Facility
On March 17, 2009, the Company used a portion of the proceeds it received from the Special
Dividend to repay in full the $2.0 billion outstanding (plus accrued interest) under its unsecured
term loan facility with a maturity date of January 8, 2011 (the “Term Facility”) and terminated the
Term Facility. Time Warner did not incur any early termination or prepayment penalties in
connection with the termination of the Term Facility.
Termination of Supplemental Credit Agreement
On March 12, 2009, TWC borrowed the full committed amount of $1.932 billion under its
unsecured term loan credit facility entered into on June 30, 2008 (the “TWC Bridge Facility”), all
of which was used to pay a portion of the Special Dividend. On March 26, 2009, TWC completed an
offering of $3.0 billion in aggregate principal amount of debt securities and used a portion of the
net proceeds from the offering to prepay in full the outstanding loans and all other amounts due
under the TWC Bridge Facility, and the TWC Bridge Facility was terminated in accordance with its
terms. Concurrently with the termination of the TWC Bridge Facility and pursuant to the terms of
the $1.535 billion credit agreement (the “Supplemental Credit Agreement”) between the Company (as
lender) and TWC (as borrower) for a two-year senior unsecured supplemental term loan facility (the
“Supplemental Credit Facility”), on March 26, 2009, TWC terminated the commitments of Time Warner
under the Supplemental Credit Facility, and the Supplemental Credit Agreement was terminated in
accordance with its terms.
CME Investment
On March 23, 2009, the Company announced that it had entered into an agreement to acquire an
approximately 31% interest in Central European Media Enterprises Ltd. (“CME”), a broadcasting
company operating leading networks in seven Central and Eastern European countries, for an
investment of $242 million in cash. In connection with this investment, Time Warner has agreed to
allow CME founder and Non-Executive Chairman Ronald S. Lauder to vote Time Warner’s shares of CME
for at least four years, subject to certain exceptions. Also, Mr. Lauder has agreed to support Time
Warner’s appointment of two designees to CME’s board of directors. In addition to being subject to
customary closing conditions, the closing of the investment is subject to a vote of CME’s
shareholders and certain regulatory approvals, and Mr. Lauder has committed to vote the shares he
controls in favor of the transaction. The transaction is expected to close in the second quarter of
2009. See Note 2 to the accompanying consolidated financial statements.
RESULTS OF OPERATIONS
Changes in Basis of Presentation
As discussed more fully in Note 1 to the accompanying consolidated financial statements, the
2008 financial information has been recast so that the basis of presentation is consistent with
that of the 2009 financial information. This recast reflects (i) the financial condition and
results of operations of TWC as discontinued operations for all periods presented, (ii) the
adoption of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting
Standards (“Statement”) No. 160, Noncontrolling
Interests in Consolidated Financial Statements –
an amendment of ARB No. 51 (“FAS 160”), (iii) the adoption of FASB 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”), and (iv) the 1-for-3
reverse stock split of the Company’s common stock that became effective on March 27, 2009.
Recent Accounting Standards
See Note 1 to the accompanying consolidated financial statements for a discussion of
accounting standards adopted during the three months ended March 31, 2009 and recent accounting
standards not yet adopted.
7
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Significant Transactions and Other Items Affecting Comparability
As more fully described herein and in the related notes to the accompanying consolidated
financial statements, the comparability of Time Warner’s results from continuing operations has
been affected by significant transactions and certain other items in each period as follows
(millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
|
| |
|
|
|
|
|
(recast) |
Amounts related to securities litigation and government investigations |
|
$ |
(7 |
) |
|
$ |
(4 |
) |
|
|
|
|
|
|
|
Impact on Operating Income |
|
|
(7 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
Investment losses, net |
|
|
(13 |
) |
|
|
(36 |
) |
Costs related to the separation of TWC |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Pretax impact |
|
|
(25 |
) |
|
|
(41 |
) |
Income tax impact of above items |
|
|
6 |
|
|
|
7 |
|
Tax items related to TWC |
|
|
24 |
|
|
|
— |
|
|
|
|
|
|
|
|
After-tax impact |
|
|
5 |
|
|
|
(34 |
) |
Noncontrolling interest impacts |
|
|
5 |
|
|
|
— |
|
|
|
|
|
|
|
|
Impact of items on income from continuing operations attributable to
Time Warner Inc. shareholders |
|
$ |
10 |
|
|
$ |
(34 |
) |
|
|
|
|
|
|
|
In addition to the items affecting comparability above, the Company incurred restructuring
costs of $94 million and $142 million during the three months ended March 31, 2009 and 2008,
respectively. For further discussions of restructuring costs, refer to the “Consolidated Results”
and “Business Segment Results” discussions.
Amounts Related to Securities Litigation
The Company recognized legal and other professional fees related to the defense of various
shareholder lawsuits totaling $7 million and $4 million for the three months ended March 31, 2009
and 2008, respectively.
Investment Losses, Net
For the three months ended March 31, 2009, the Company recognized $13 million of miscellaneous
investment losses.
For the three months ended March 31, 2008, the Company recognized a $26 million impairment on
the Company’s investment in Eidos plc (formerly SCi Entertainment Group plc) and $10 million of
losses resulting from market fluctuations in equity derivative instruments.
Costs Related to the Separation of TWC
For the three months ended March 31, 2009 and 2008, the Company incurred pretax direct
transaction costs (e.g., legal and professional fees) related to the separation of TWC of $5
million and $1 million, respectively, which have been reflected in other income (loss), net in the
accompanying consolidated statement of operations.
Income Tax Impact and Tax Items Related to TWC
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. For the three
months ended March 31, 2009, the Company also recognized approximately $24 million of tax benefits
attributable to the impact of certain state tax law changes on TWC net deferred tax liabilities.
Noncontrolling Interest Impact
For the three months ended March 31, 2009, the $5 million noncontrolling interest item
affecting comparability reflects the minority owner’s share of the tax provision related to changes
in certain state tax laws.
8
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Three Months Ended March 31, 2009 compared to the Three Months Ended March 31, 2008
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 March 31, |
| |
|
2009 |
|
|
2008 |
|
|
% Change |
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
Subscription |
|
$ |
2,559 |
|
|
$ |
2,608 |
|
|
|
(2%) |
|
Advertising |
|
|
1,540 |
|
|
|
1,828 |
|
|
|
(16%) |
|
Content |
|
|
2,636 |
|
|
|
2,809 |
|
|
|
(6%) |
|
Other |
|
|
210 |
|
|
|
225 |
|
|
|
(7%) |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
6,945 |
|
|
$ |
7,470 |
|
|
|
(7%) |
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in Subscription revenues for the three months ended March 31, 2009 was primarily
related to declines at the AOL and Publishing segments, offset partially by an increase at the
Networks segment. The decline at the AOL segment resulted primarily from a decrease in the number
of domestic AOL brand subscribers. The decline at the Publishing segment was due to decreases at
IPC resulting principally from the effect of foreign exchange rates as well as lower revenues from
domestic subscription renewals due to the effect of the current economic environment and lower
revenues as a result of softening domestic newsstand sales due to the effect of the current
economic environment and wholesaler disruptions. The increase in Subscription revenues at the
Networks segment was due primarily to higher subscription rates at both Turner and HBO and the
effect of the consolidation of HBO LAG.
The decrease in Advertising revenues for the three months ended March 31, 2009 was primarily
due to declines at the Publishing and AOL segments and to a lesser degree declines at the Networks
segment. The decrease at the Publishing segment was due to declines in domestic print Advertising
revenues, international print Advertising revenues, including the effect of foreign exchange rates
at IPC, custom publishing revenues and online revenues, primarily reflecting the current weak
economic conditions and increased competition for advertising dollars. The decrease at the AOL
segment was due to declines in Advertising revenues on the Third Party Network and display
advertising on the AOL Network, primarily as a result of weakening global economic conditions,
which contributed to lower demand from a number of advertiser categories and downward pricing
pressure on advertising inventory, as well as declines in paid search advertising primarily due to
decreases in search query volume on certain AOL Network properties.
The decrease in Content revenues for the three months ended March 31, 2009 was principally
related to a decline at the Filmed Entertainment segment, mainly due to a decrease in theatrical
product revenues, partially offset by an increase 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 March 31, 2009 and 2008, costs of revenues
totaled $3.880 billion and $4.167 billion, respectively, and, as a percentage of revenues, were 56%
for each period. The segment variations are discussed in detail in “Business Segment Results.”
Selling, General and Administrative Expenses. For the three months ended March 31, 2009 and
2008, selling, general and administrative expenses decreased 5% to $1.652 billion in 2009 from
$1.732 billion in 2008, primarily related to decreases at the Filmed Entertainment and AOL
segments, partially offset by increases at the Networks segment. 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 decreased to $236 million for the three months ended March 31, 2009 from $247
million for the three months ended March 31, 2008, primarily reflecting a decline at the AOL
segment due to a reduction in network assets due to subscriber declines.
9
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Amortization Expense. Amortization expense increased 3% to $121 million for the three months
ended March 31, 2009 from $118 million for the three months ended March 31, 2008.
Restructuring Costs. For the three months ended March 31, 2009, the Company incurred
restructuring costs of $94 million, primarily related to various employee terminations and other
exit activities, including $58 million at the AOL segment, $37 million at the Filmed Entertainment
segment and a $1 million reversal at the Publishing segment.
The Company incurred restructuring costs for the three months ended March 31, 2008 of $142
million, primarily related to various employee terminations and other exit activities, including
$116 million at the Filmed Entertainment segment, $10 million at the Publishing segment, $9 million
at the AOL segment and $7 million at the Corporate segment.
Operating Income. Operating Income decreased to $1.198 billion for the three months ended
March 31, 2009 from $1.311 billion for the three months ended March 31, 2008. Excluding the items
previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling
$7 million and $4 million of expense for the three months ended March 31, 2009 and 2008,
respectively, Operating Income decreased $110 million, primarily reflecting declines at the AOL and
Publishing segments, partially offset by increases at the Networks and Filmed Entertainment
segments. The segment variations are discussed under “Business Segment Results.”
Interest Expense, Net. Interest expense, net, decreased to $312 million for the three months
ended March 31, 2009 from $347 million for the three months ended March 31, 2008. The decrease in
interest expense, net for the three months ended March 31, 2009 is due to lower average interest
rates and lower average net debt.
Other Loss, Net. Other loss, net detail is shown in the table below (millions):
| |
|
|
|
|
|
|
|
|
|
| |
Three Months Ended March 31, |
| |
2009 |
|
2008 |
| |
|
|
|
|
|
|
|
(recast) |
|
Investment losses, net |
|
$ |
(13 |
) |
|
|
$ |
(36 |
) |
Loss from equity-method investees |
|
|
(23 |
) |
|
|
|
(13 |
) |
Other |
|
|
(3 |
) |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
Other loss, net |
|
$ |
(39 |
) |
|
|
$ |
(59 |
) |
|
|
|
|
|
|
|
|
The changes in investment losses, net are discussed under “Significant Transactions and Other
Items Affecting Comparability.” Excluding the impact of investment losses, net, the change in other
loss, net was primarily due to an increase in losses from equity-method investees, partly offset by
lower securitization expenses.
Income Tax Provision. Income tax expense from continuing operations was $288 million for the
three months ended March 31, 2009 compared to $345 million for the three months ended March 31,
2008. The Company’s effective tax rate for continuing operations was 34% for the three months ended
March 31, 2009 compared to 38% for the three months ended March 31, 2008. The change was primarily
due to changes in certain state tax laws in the first quarter of 2009 principally related to TWC.
Income from Continuing Operations. Income from continuing operations was $559 million for the
three months ended March 31, 2009 compared to $560 million for the three months ended March 31,
2008. Basic and diluted income per common share from continuing operations were both $0.46 in 2009
and 2008. Excluding the items previously noted under “Significant Transactions and Other Items
Affecting Comparability” totaling $10 million of income and $34 million of expense, net in 2009 and
2008, respectively, income from continuing operations decreased by $45 million, primarily
reflecting lower Operating Income, partially offset by lower interest expense and lower tax
expense, all as noted above.
Discontinued Operations, Net of Tax. The financial results for the three months ended March
31, 2009 and 2008 included the impact of treating the results of operations and financial condition
of TWC as discontinued operations. Discontinued operations, net of tax decreased to $131 million
for the three months ended March 31, 2009 from $262 million for the three months ended March 31,
2008. The current year included results for the period from January 1, 2009 through March 12, 2009,
the Distribution Record Date, as compared to a full three-month period in 2008. In addition,
discontinued operations, net of tax for the three months ended March 31, 2009 and 2008 included
direct transaction costs (e.g., legal and professional fees) related to the separation of TWC of
$75 million and $2 million, respectively. For additional information, see Note 2 to the
accompanying consolidated financial statements.
10
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Net Income Attributable to Noncontrolling Interests. Net income attributable to
noncontrolling interests was $29 million and $51 million, respectively, for the three months ended
March 31, 2009 and 2008.
Net Income Attributable to Time Warner Inc. shareholders and Net Income Per Common Share
Attributable to Time Warner Inc. common shareholders. Net income attributable to Time Warner Inc.
shareholders was $661 million for the three months ended March 31, 2009 compared to $771 million
for the three months ended March 31, 2008. Basic and diluted net income per common share
attributable to Time Warner Inc. common shareholders were both $0.55 in 2009 compared to $0.65 and
$0.64, respectively, in 2008.
Business Segment Results
Networks. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Networks segment for the three months ended March 31, 2009 and 2008 are as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
|
% Change |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
1,850 |
|
|
$ |
1,695 |
|
|
|
9 |
% |
Advertising |
|
|
723 |
|
|
|
739 |
|
|
|
(2 |
%) |
Content |
|
|
205 |
|
|
|
213 |
|
|
|
(4 |
%) |
Other |
|
|
30 |
|
|
|
12 |
|
|
|
150 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,808 |
|
|
|
2,659 |
|
|
|
6 |
% |
Costs of revenues(a) |
|
|
(1,263 |
) |
|
|
(1,257 |
) |
|
|
— |
|
Selling, general and administrative(a) |
|
|
(481 |
) |
|
|
(444 |
) |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
1,064 |
|
|
|
958 |
|
|
|
11 |
% |
Depreciation |
|
|
(86 |
) |
|
|
(78 |
) |
|
|
10 |
% |
Amortization |
|
|
(18 |
) |
|
|
(6 |
) |
|
|
200 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
960 |
|
|
$ |
874 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The increase in Subscription revenues was due primarily to higher subscription rates at both
Turner and HBO and the impact of the consolidation of HBO LAG.
The decrease in Advertising revenues was driven mainly by Turner’s international networks,
including the negative effect of foreign exchange rates, and, to a lesser extent, a decline in
Turner’s domestic entertainment networks, reflecting weakened demand. The Company anticipates that
achieving Advertising revenue growth for the remainder of 2009 at the Networks segment will
continue to be challenging due to the difficult economic environment.
Costs of revenues were essentially flat as an increase in programming costs was offset by
lower newsgathering costs, primarily reflecting the absence in the first quarter of 2009 of the
prior year quarter’s election-related costs. Programming costs increased 2% to $925 million for the
three months ended March 31, 2009 from $907 million for the three months ended March 31, 2008 due
primarily to higher original programming costs at Turner and the impact of the consolidation of HBO
LAG, partly offset by lower sports programming costs at Turner, particularly related to NBA
programming. In addition, programming costs for the three months ended March 31, 2009 and 2008
included $5 million and $21 million, respectively, of charges related to decisions to not proceed
with certain original programming. Costs of revenues as a percentage of revenues were 45% and 47%
for the three months ended March 31, 2009 and 2008, respectively.
The increase in selling, general and administrative expenses was due primarily to increased
costs related to the consolidation of HBO LAG and higher marketing expenses.
Operating Income before Depreciation and Amortization increased primarily due to an increase
in revenues, partially
offset by an increase in selling, general and administrative expenses. Operating Income
increased primarily due to the increase in Operating Income before Depreciation and Amortization,
partly offset by higher amortization primarily related to the consolidation of HBO LAG.
11
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 months ended March 31, 2009 and
2008 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
|
% Change |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
9 |
|
|
$ |
10 |
|
|
|
(10 |
%) |
Advertising |
|
|
14 |
|
|
|
15 |
|
|
|
(7 |
%) |
Content |
|
|
2,553 |
|
|
|
2,753 |
|
|
|
(7 |
%) |
Other |
|
|
57 |
|
|
|
62 |
|
|
|
(8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,633 |
|
|
|
2,840 |
|
|
|
(7 |
%) |
Costs of revenues(a) |
|
|
(1,879 |
) |
|
|
(1,975 |
) |
|
|
(5 |
%) |
Selling, general and administrative(a) |
|
|
(409 |
) |
|
|
(469 |
) |
|
|
(13 |
%) |
Restructuring costs |
|
|
(37 |
) |
|
|
(116 |
) |
|
|
(68 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
308 |
|
|
|
280 |
|
|
|
10 |
% |
Depreciation |
|
|
(40 |
) |
|
|
(41 |
) |
|
|
(2 |
%) |
Amortization |
|
|
(54 |
) |
|
|
(56 |
) |
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
214 |
|
|
$ |
183 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (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 months ended March 31, 2009
and 2008 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
|
% Change |
Theatrical product: |
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical film |
|
$ |
486 |
|
|
$ |
509 |
|
|
|
(5 |
%) |
Home video and electronic delivery |
|
|
477 |
|
|
|
810 |
|
|
|
(41 |
%) |
Television licensing |
|
|
382 |
|
|
|
400 |
|
|
|
(5 |
%) |
Consumer products and other |
|
|
31 |
|
|
|
35 |
|
|
|
(11 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Total theatrical product |
|
|
1,376 |
|
|
|
1,754 |
|
|
|
(22 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Television product: |
|
|
|
|
|
|
|
|
|
|
|
|
Television licensing |
|
|
823 |
|
|
|
671 |
|
|
|
23 |
% |
Home video and electronic delivery |
|
|
157 |
|
|
|
160 |
|
|
|
(2 |
%) |
Consumer products and other |
|
|
61 |
|
|
|
59 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total television product |
|
|
1,041 |
|
|
|
890 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
136 |
|
|
|
109 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Content revenues |
|
$ |
2,553 |
|
|
$ |
2,753 |
|
|
|
(7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
The decrease in theatrical film revenues for the three months ended March 31, 2009 was due to
difficult comparisons to the three months ended March 31, 2008. Revenues in the first quarter of
2009 included the releases of Watchmen and He’s Just Not That Into You as well as carryover
revenues from Gran Torino, The Curious Case of Benjamin Button and Yes Man. Revenues in the first
quarter of 2008 included the releases of 10,000 B.C. and Fool’s Gold, as well as carryover revenues
from I Am Legend and The Bucket List. Theatrical product revenues from home video and electronic
delivery decreased for the three months ended March 31, 2009 primarily due to fewer significant
titles in the first quarter of 2009, including Body of Lies and Nights in Rodanthe, compared to the
first quarter of 2008, which included I Am Legend, Michael Clayton and The Brave One. Theatrical
product revenues from television licensing decreased for the three months ended March 31, 2009 due
primarily to the timing and quantity of availabilities.
Television product licensing fees increased primarily due to fewer network deliveries in the
first quarter of 2008 as a result of the Writers Guild of America (East and West) strike, which was
settled in February 2008, partially offset by a
difficult comparison to the first quarter 2008 off-network license fees from Seinfeld.
12
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The increase in other Content revenues was due primarily to revenues from the interactive
video game release of F.E.A.R. 2: Project Origin as well as the expansion of the distribution of
interactive video games.
The decrease in costs of revenues resulted primarily from lower theatrical advertising and
print costs due primarily to the timing, quantity and mix of films released and lower merchandise
and related costs associated with a decline in home video and electronic delivery revenues,
partially offset by higher film costs ($1.267 billion in 2009 compared to $1.152 billion in 2008).
Included in film costs are net pre-release theatrical film valuation adjustments, which increased
to $31 million for the three months ended March 31, 2009 from $9 million for the three months ended
March 31, 2008. In addition, in the first quarter of 2008, the Company recognized approximately $50
million in participation expense related to current claims on films released in prior periods.
Costs of revenues as a percentage of revenues were 71% and 70% in the first quarter of 2009 and
2008, respectively, reflecting the quantity and mix of products released.
The decrease in selling, general and administrative expenses was primarily the result of lower
employee costs resulting from the operational reorganization of the New Line business as well as
lower distribution expenses primarily associated with the decline in home video and electronic
delivery revenues.
Beginning in the first quarter of 2009, Warner Bros. commenced a significant restructuring,
primarily consisting of headcount reductions and the outsourcing of certain functions to an
external service provider. As a result, the Company incurred restructuring charges of $37 million
during the three months ended March 31, 2009 and expects to incur additional restructuring charges
ranging from $40 million to $60 million during the remainder of 2009. The three months ended March
31, 2008 included restructuring charges of $116 million primarily related to involuntary employee
terminations in connection with the operational reorganization of the New Line business.
Operating Income before Depreciation and Amortization and Operating Income increased primarily
due to lower costs of revenues, restructuring costs and selling, general and administrative
expenses, partly offset by a decrease in revenues and the negative effect of foreign exchange
rates.
Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating
Income (Loss) of the Publishing segment for the three months ended March 31, 2009 and 2008 are as
follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
307 |
|
|
$ |
365 |
|
|
|
(16 |
%) |
Advertising |
|
|
383 |
|
|
|
550 |
|
|
|
(30 |
%) |
Content |
|
|
19 |
|
|
|
12 |
|
|
|
58 |
% |
Other |
|
|
97 |
|
|
|
118 |
|
|
|
(18 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
806 |
|
|
|
1,045 |
|
|
|
(23 |
%) |
Costs of revenues(a) |
|
|
(329 |
) |
|
|
(424 |
) |
|
|
(22 |
%) |
Selling, general and administrative(a) |
|
|
(466 |
) |
|
|
(466 |
) |
|
|
— |
|
Restructuring costs |
|
|
1 |
|
|
|
(10 |
) |
|
|
(110 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
12 |
|
|
|
145 |
|
|
|
(92 |
%) |
Depreciation |
|
|
(31 |
) |
|
|
(34 |
) |
|
|
(9 |
%) |
Amortization |
|
|
(13 |
) |
|
|
(18 |
) |
|
|
(28 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) |
|
$ |
(32 |
) |
|
$ |
93 |
|
|
|
(134 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
Subscription revenues declined primarily due to decreases at IPC resulting principally from
the effect of foreign exchange rates as well as lower revenues from domestic subscription renewals
due to the effect of the current economic environment and lower revenues as a result of softening
domestic newsstand sales due to the effect of the current economic environment and wholesaler
disruptions. The Company anticipates that foreign exchange rates and the economic environment will continue to adversely affect
Subscription revenues during the remainder of 2009.
13
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Advertising revenues decreased due to declines in domestic print Advertising revenues,
international print Advertising revenues, including the effect of foreign exchange rates at IPC,
custom publishing revenues and online revenues primarily reflecting the current weak economic
conditions and increased competition for advertising dollars. The Company currently anticipates
that Advertising revenues at the Publishing segment for the remainder of 2009 will decline compared
to the similar period in 2008, reflecting primarily the effect of the current economic environment.
Other revenues decreased due primarily to decreases at the non-magazine businesses, including
Synapse and Southern Living At Home, partially offset by the effect of the acquisition of QSP.
Costs of revenues decreased 22% and, as a percentage of revenues, were 41% for both the three
months ended March 31, 2009 and 2008. Costs of revenues for the magazine and online businesses
include manufacturing costs (paper, printing and distribution) and editorial-related costs, which
together decreased 22% to $305 million for the three months ended March 31, 2009 from $389 million
for the three months ended March 31, 2008, primarily due to cost savings initiatives, lower
printing and paper costs related to a decline in volume and lower costs at IPC due primarily to the
effect of foreign exchange rates. In addition, costs of revenues at the non-magazine businesses
declined as a result of lower revenues.
Selling, general and administrative expenses were flat as cost savings initiatives, lower
marketing expenses and a decrease at IPC due primarily to the effect of foreign exchange rates were
offset by costs associated with the acquisition of QSP, an $18 million increase in bad debt
reserves related to a newsstand wholesaler and higher pension expense.
The results for the three months ended March 31, 2009 and 2008 included a $1 million reversal
and $10 million of restructuring costs, respectively, primarily related to severance costs
associated with continuing efforts to streamline operations.
Operating Income before Depreciation and Amortization and Operating Income (Loss) decreased
due primarily to lower revenues, partially offset by a decrease in costs of revenues.
The Company anticipates that, excluding the 2008 asset impairments, Operating
Income before Depreciation and Amortization and Operating Income (Loss) at the Publishing segment
for 2009 will be less than that achieved during 2008,
primarily resulting from the expected declines in Advertising revenues.
AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of
the AOL segment for the three months ended March 31, 2009 and 2008 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
393 |
|
|
$ |
539 |
|
|
|
(27 |
%) |
Advertising |
|
|
443 |
|
|
|
552 |
|
|
|
(20 |
%) |
Other |
|
|
31 |
|
|
|
37 |
|
|
|
(16 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
867 |
|
|
|
1,128 |
|
|
|
(23 |
%) |
Costs of revenues(a) |
|
|
(426 |
) |
|
|
(544 |
) |
|
|
(22 |
%) |
Selling, general and administrative(a) |
|
|
(128 |
) |
|
|
(170 |
) |
|
|
(25 |
%) |
Restructuring costs |
|
|
(58 |
) |
|
|
(9 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
255 |
|
|
|
405 |
|
|
|
(37 |
%) |
Depreciation |
|
|
(69 |
) |
|
|
(83 |
) |
|
|
(17 |
%) |
Amortization |
|
|
(36 |
) |
|
|
(38 |
) |
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
150 |
|
|
$ |
284 |
|
|
|
(47 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The decline in Subscription revenues was primarily due to a decrease in the number of domestic
AOL brand subscribers.
14
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The number of domestic AOL brand subscribers was 6.3 million, 6.9 million and 8.7 million as
of March 31, 2009, December 31, 2008 and March 31, 2008, respectively. The average revenue per
domestic AOL brand subscriber (“ARPU”) was $18.48 and $18.29 for the three months ended March 31,
2009 and 2008, 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. Individuals who have registered for the free AOL
service, including subscribers who have migrated from paid subscription plans, are not included in
the AOL brand subscriber numbers presented above.
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 efforts and increased competition from broadband access providers. The increase in ARPU
for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 was due
primarily to price increases for lower-priced plans, partially offset by a shift in the subscriber
mix to lower-priced plans.
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 months ended March 31, 2009 and 2008 are as
follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL Network: |
|
|
|
|
|
|
|
|
|
|
|
|
Display |
|
$ |
158 |
|
|
$ |
191 |
|
|
|
(17 |
%) |
Paid-search |
|
|
152 |
|
|
|
173 |
|
|
|
(12 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Total AOL Network |
|
|
310 |
|
|
|
364 |
|
|
|
(15 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Party Network |
|
|
133 |
|
|
|
188 |
|
|
|
(29 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Advertising revenues |
|
$ |
443 |
|
|
$ |
552 |
|
|
|
(20 |
%) |
|
|
|
|
|
|
|
|
|
|
|
The decrease in display Advertising revenues generated on the AOL Network was primarily due to
weakening global economic conditions, which contributed to lower demand from a number of advertiser
categories and downward pricing pressure on advertising inventory. The decrease in paid-search
Advertising revenues on the AOL Network, which are generated primarily through AOL’s strategic
relationship with Google, was attributable primarily to decreases in search query volume on certain
AOL Network properties.
The decrease in Advertising revenues on the Third Party Network was primarily due to weakening
global economic conditions, which contributed to lower demand from a number of advertiser
categories and downward pricing pressure on advertising inventory. In addition, the decline in
Advertising revenues on the Third Party Network included a decrease of $16 million due to a change
in the relationship with a major customer of Platform-A Inc. Revenues associated with this
relationship were $1 million for the three months ended March 31, 2009 compared to $17 million for
the three months ended March 31, 2008. Total revenues from this customer for the year ended
December 31, 2008 were $26 million.
Total Advertising revenues for the three months ended March 31, 2009 decreased $64 million
from the three months ended December 31, 2008, reflecting decreases in display and paid-search
Advertising revenues on the AOL Network as well as a decrease in Advertising revenues on the Third
Party Network. The decline in both display Advertising revenues on the AOL Network and Advertising
revenues on the Third Party Network reflected weak economic conditions resulting in lower demand
from a number of advertiser categories, seasonality and a loss of Advertising revenues from certain
customers, while the decline in paid-search Advertising revenues was primarily due to lower
revenues per search query on certain AOL Network properties.
The Company expects Advertising revenues at the AOL segment for the remainder of 2009 to be
less than those generated during the similar period of 2008, primarily reflecting weak economic
conditions.
15
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Costs of revenues decreased 22%, and, as a percentage of revenues, were 49% and 48% for the
three months ended March 31, 2009 and 2008, respectively. Costs of revenues decreased primarily due
to declines in TAC, and to a lesser extent declines in personnel-related costs primarily associated
with reduced headcount. 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. For the three months ended March 31, 2009, TAC
decreased 30% to $133 million in 2009 from $191 million in 2008, due primarily to the decrease in
Advertising revenues on the Third Party Network and to a lesser extent declines in new product
distribution costs.
Selling, general and administrative expenses decreased 25% to $128 million for the three
months ended March 31, 2009, reflecting a reduction in direct marketing costs primarily due to
reduced subscriber acquisition marketing and lower consulting costs.
In the first quarter of 2009, in an effort to better position its Global Web Services
business, AOL undertook a significant restructuring. As a result, for the three months ended March
31, 2009, the Company incurred restructuring charges of $58 million primarily related to
involuntary employee terminations and facility closures, and currently expects to incur up to an
additional $90 million in restructuring charges during the remainder of 2009. The results for the
three months ended March 31, 2008 also included net restructuring charges of $9 million primarily
related to involuntary employee terminations and facility closures.
Operating Income before Depreciation and Amortization decreased due primarily to a decline in
revenues, partially offset by lower costs of revenues and selling, general and administrative
expenses. Operating Income decreased due primarily to the decrease in Operating Income before
Depreciation and Amortization, as discussed above, partially offset by a decrease in depreciation
expense as a result of a reduction in network assets due to subscriber declines.
Excluding the fourth quarter 2008 asset impairments, the Company anticipates that Operating
Income before Depreciation and Amortization and Operating Income at the AOL segment during the
remainder of 2009 will be less than that generated during the similar period of 2008, primarily
resulting from continuing declines in Subscription and Advertising revenues as well as the effect
of the current year restructuring activities.
Corporate. Operating Loss before Depreciation and Amortization and Operating Loss of the
Corporate segment for the three months ended March 31, 2009 and 2008 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative(a) |
|
$ |
(84 |
) |
|
$ |
(96 |
) |
|
|
(13 |
%) |
Restructuring costs |
|
|
— |
|
|
|
(7 |
) |
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
Operating Loss before Depreciation and Amortization |
|
|
(84 |
) |
|
|
(103 |
) |
|
|
(18 |
%) |
Depreciation |
|
|
(10 |
) |
|
|
(11 |
) |
|
|
(9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
$ |
(94 |
) |
|
$ |
(114 |
) |
|
|
(18 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Selling, general and administrative expenses exclude depreciation. |
The results for the three months ended March 31, 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.
Excluding the restructuring costs noted above, Operating Loss before Depreciation and
Amortization and Operating Loss decreased due primarily to lower corporate costs, related primarily
to the cost savings initiatives, partially offset by an increase in legal and other professional
fees related to the defense of various shareholder lawsuits.
FINANCIAL CONDITION AND LIQUIDITY
Management believes that cash generated by or available to the Company 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
facility and commercial paper program and
16
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
access to capital markets. Time Warner’s unused committed
capacity at March 31, 2009 was $13.955 billion, including $7.115 billion of cash and equivalents.
As discussed in “Recent Developments,” as part of the TWC Separation, the Company received
$9.253 billion as its portion of the Special Dividend paid by TWC.
In late January 2009, Google exercised its right to request that AOL register Google’s 5%
equity interest for sale in an initial public offering. Time Warner has the right, but not the
obligation, 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 is in discussions with Google and has notified Google of its
intention to purchase the 5% equity interest.
Current Financial Condition
At March 31, 2009, Time Warner had $17.482 billion of debt, $7.115 billion of cash and
equivalents (net debt of $10.367 billion, defined as total debt less cash and equivalents) and
$35.786 billion of shareholders’ equity, compared to $21.955 billion of debt, $1.233 billion of
cash and equivalents (net debt of $20.722 billion, defined as total debt less cash and equivalents)
and $42.288 billion of shareholders’ equity at December 31, 2008.
The following table shows the significant items contributing to the decrease in consolidated
net debt from December 31, 2008 to March 31, 2009 (millions):
| |
|
|
|
|
Balance at December 31, 2008 |
|
$ |
20,722 |
|
Cash provided by operations from continuing operations |
|
|
(1,425 |
) |
Capital expenditures and product development costs |
|
|
134 |
|
Dividends paid to common stockholders |
|
|
226 |
|
Investments and acquisitions, net(a) |
|
|
52 |
|
Proceeds from the sale of investments(a) |
|
|
(117 |
) |
Proceeds from the Special Dividend(b) |
|
|
(9,253 |
) |
All other, net |
|
|
28 |
|
|
|
|
|
Balance at March 31, 2009(c) |
|
$ |
10,367 |
|
|
|
|
|
|
|
|
| (a) |
|
Refer to “Investing Activities” below for further detail. |
| (b) |
|
Refer to “Financing Activities” below for further detail. |
| (c) |
|
Included in the net debt balance is $30 million that represents the net unamortized
fair value adjustment recognized as a result of the merger of AOL and Historic TW Inc. |
Time Warner had a shelf registration statement (the “Registration Statement”) on file with the
Securities and Exchange Commission (the “SEC”) since November 8, 2006 that allowed 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 a result of the Company’s $13.955 billion of unused committed
capacity at March 31, 2009 and the anticipated expiration in early November 2009 of the
Registration Statement, the Company determined it no longer needed
the Registration Statement. Accordingly, on April 24, 2009, the Company and the subsidiary guarantors under the
Registration Statement submitted filings to the SEC that suspended the reporting obligations with
respect to the debt securities (and related guarantees) that were offered and sold pursuant to the
Registration Statement and deregistered the securities covered under the Registration Statement
that were available for offer and sale.
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 $330 million investment in The
Reserve Fund, but the redemption request was not honored. 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. Through April 28, 2009, the Company
has received $297 million from The Reserve Fund representing its pro rata share of partial
distributions made by The Reserve Fund. The Company has not been informed as to when the remaining
amount will be returned. In February 2009, The Reserve Fund announced that it would set aside an
initial amount of $3.5 billion to defend against certain legal actions. The Company has filed a
claim against The Reserve Fund demanding repayment of the remaining amount of its
17
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
full investment. As a result of the status of The Reserve Fund, the Company has classified its
receivable from The Reserve Fund at March 31, 2009 as other current assets on the Company’s
consolidated balance sheet.
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 April 28, 2009, the Company has repurchased approximately 51 million shares of common stock
for approximately $2.8 billion, pursuant to trading programs under Rule 10b5-1 of the Exchange Act
(Note 6).
On November 13, 2009, Time Warner’s floating rate notes due November 13, 2009 (aggregate
principal amount of $2.000 billion) will mature.
Cash Flows
Cash and equivalents increased by $5.882 billion, including $2 million of cash used by
discontinued operations, and $92 million, including $3 million of cash used by discontinued
operations, for the three months ended March 31, 2009 and 2008, respectively. Components of these
changes are discussed below in more detail.
Operating Activities from Continuing Operations
Details of cash provided by operations from continuing operations are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
1,198 |
|
|
$ |
1,311 |
|
Depreciation and amortization |
|
|
357 |
|
|
|
365 |
|
Net interest payments(a) |
|
|
(128 |
) |
|
|
(200 |
) |
Net income taxes paid(b) |
|
|
(52 |
) |
|
|
(63 |
) |
Noncash equity-based compensation |
|
|
71 |
|
|
|
75 |
|
Domestic pension plan contributions |
|
|
(8 |
) |
|
|
(103 |
) |
Merger-related and restructuring payments, net of accruals(c) |
|
|
(8 |
) |
|
|
78 |
|
All other, net, including working capital changes |
|
|
(5 |
) |
|
|
153 |
|
|
|
|
|
|
|
|
Cash provided by operations from continuing operations |
|
$ |
1,425 |
|
|
$ |
1,616 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Includes interest income received of $11 million and $22 million in 2009 and 2008,
respectively. |
| (b) |
|
Includes income tax refunds received of $44 million and $7 million in 2009 and 2008,
respectively. |
| (c) |
|
Includes payments for merger-related and restructuring costs and payments for
certain other merger-related liabilities, net of accruals. |
Cash provided by operations from continuing operations decreased to $1.425 billion in 2009
from $1.616 billion in 2008. The decrease in cash provided by operations from continuing operations
was related primarily to a decrease in operating income and a decline in cash provided by working
capital, partially offset by a decline in net interest payments and domestic pension plan
contributions. The 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 lower cash collections on receivables and the timing of payments for production
spending, accounts payable and accrued liabilities.
As of March 31, 2009, certain of the Company’s domestic defined benefit pension plans were
funded by assets in a pension trust totaling $1.556 billion compared to $1.702 billion as of
December 31, 2008. Between January 1, 2009 and March 31, 2009, the Company’s plan assets have
experienced market losses of approximately 7%. The Company did not make any discretionary cash
contributions to its defined benefit plans during the three months ended March 31, 2009. Subject to
market conditions and other considerations, the Company may make discretionary cash contributions
during the remainder of the year.
18
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Investing Activities from Continuing Operations
Details of cash provided (used) by investing activities from continuing operations are as
follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
$ |
(2 |
) |
|
$ |
— |
|
Investments and acquisitions, net of cash acquired: |
|
|
|
|
|
|
|
|
buy.at |
|
|
— |
|
|
|
(124 |
) |
All other |
|
|
(50 |
) |
|
|
(129 |
) |
Capital expenditures and product development costs |
|
|
(134 |
) |
|
|
(146 |
) |
Special Dividend received from TWC |
|
|
9,253 |
|
|
|
— |
|
All other investment and asset sale proceeds |
|
|
117 |
|
|
|
30 |
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities from continuing operations |
|
$ |
9,184 |
|
|
$ |
(369 |
) |
|
|
|
|
|
|
|
Cash provided by investing activities from continuing operations was $9.184 billion for the
three months ended March 31, 2009 compared to cash used by investing activities from continuing operations of $369 million for the three months ended
March 31, 2008. The change in cash provided (used) by investing activities from continuing
operations was primarily due to the receipt of the Special Dividend and a
decline in investments and acquisitions.
Financing Activities from Continuing Operations
Details of cash used by financing activities from continuing operations are as follows
(millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
| |
|
|
|
|
|
(recast) |
Borrowings(a) |
|
$ |
3,507 |
|
|
$ |
2,112 |
|
Debt repayments(a) |
|
|
(7,986 |
) |
|
|
(2,716 |
) |
Proceeds from exercise of stock options |
|
|
— |
|
|
|
34 |
|
Excess tax benefit on stock options |
|
|
— |
|
|
|
2 |
|
Principal payments on capital leases |
|
|
(11 |
) |
|
|
(10 |
) |
Repurchases of common stock |
|
|
— |
|
|
|
(332 |
) |
Dividends paid |
|
|
(226 |
) |
|
|
(224 |
) |
Other financing activities |
|
|
(9 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
Cash used by financing activities from continuing operations |
|
$ |
(4,725 |
) |
|
$ |
(1,152 |
) |
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The Company reflects borrowings under its bank credit agreements on a gross basis in
the consolidated statement of cash flows and reflects short-term commercial paper on a net
basis, as provided for under FASB Statement No. 95, Statement of Cash Flows. |
Cash used by financing activities from continuing operations increased to $4.725 billion for
the three months ended March 31, 2009 from $1.152 billion for the three months ended March 31,
2008. The change in cash used by financing activities from continuing operations was primarily due
to an increase in debt repayments. The Company used a portion of the $9.253 billion Special
Dividend to repay in full the $2.0 billion three-year unsecured term loan facility (plus accrued
interest) and repay all amounts outstanding under the TW Revolving Facility (defined below).
19
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Cash Flows from Discontinued Operations
Details of cash used by discontinued operations are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
| |
|
|
|
|
|
(recast) |
Cash provided by operations from discontinued operations |
|
$ |
582 |
|
|
$ |
1,180 |
|
Cash used by investing activities from discontinued operations |
|
|
(622 |
) |
|
|
(841 |
) |
Cash used by financing activities from discontinued operations |
|
|
(5,224 |
) |
|
|
(348 |
) |
Effect of change in cash and equivalents of discontinued operations |
|
|
5,262 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Cash used by discontinued operations |
|
$ |
(2 |
) |
|
$ |
(3 |
) |
|
|
|
|
|
|
|
Cash used by discontinued operations reflects cash activity of discontinued operations for the
period from January 1, 2009 through March 12, 2009, the Distribution Record Date, and for the full
three-month period ended March 31, 2008. Cash provided by operations from discontinued operations
decreased to $582 million for the three months ended March 31, 2009 from $1.180 billion for the
three months ended March 31, 2008, primarily reflecting a change in working capital resulting from
the timing of programming payments and cash collections and a decrease in income from discontinued
operations, net of tax. Cash used by investing activities from discontinued operations decreased to
$622 million for the three months ended March 31, 2009 from $841 million for the three months ended
March 31, 2008 due primarily to a decrease in capital expenditures. Cash used by financing
activities from discontinued operations increased to $5.224 billion for the three months ended
March 31, 2009 from $348 million for the three months ended March 31, 2008 primarily due to the
payment of the Special Dividend, partially offset by an increase in borrowings.
Outstanding Debt and Other Financing Arrangements
Outstanding Debt and Committed Financial Capacity
At March 31, 2009, Time Warner had total committed capacity, defined as maximum available
borrowings under various existing debt arrangements and cash and short-term investments, of $31.497
billion. Of this committed capacity, $13.955 billion was unused and $17.482 billion was outstanding
as debt. At March 31, 2009, total committed capacity, outstanding letters of credit, unamortized
discount on commercial paper, outstanding debt and total unused committed capacity were as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Unamortized |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Discount on |
|
|
|
|
|
|
Unused |
|
| |
|
Committed |
|
|
Letters of |
|
|
Commercial |
|
|
Outstanding |
|
|
Committed |
|
| |
|
Capacity (a) |
|
|
Credit(b) |
|
|
Paper |
|
|
Debt(c) |
|
|
Capacity(d) |
|
Cash and equivalents |
|
$ |
7,115 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
7,115 |
|
Bank credit agreement and commercial paper program |
|
|
6,900 |
|
|
|
60 |
|
|
|
— |
|
|
|
— |
|
|
|
6,840 |
|
Floating-rate public debt(d) |
|
|
2,000 |
|
|
|
— |
|
|
|
— |
|
|
|
2,000 |
|
|
|
— |
|
Fixed-rate public debt |
|
|
15,227 |
|
|
|
— |
|
|
|
— |
|
|
|
15,227 |
|
|
|
— |
|
Other fixed-rate obligations(e) |
|
|
255 |
|
|
|
— |
|
|
|
— |
|
|
|
255 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31,497 |
|
|
$ |
60 |
|
|
$ |
— |
|
|
$ |
17,482 |
|
|
$ |
13,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The bank credit agreement, commercial paper program 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 11.5 years as of March 31, 2009. |
| (b) |
|
Represents the portion of committed capacity reserved for outstanding and undrawn
letters of credit. |
| (c) |
|
Represents principal amounts adjusted for premiums and discounts. |
| (d) |
|
The Company has classified $2.000 billion in debt of Time Warner due within the next
twelve months as short-term in the accompanying consolidated balance sheet. |
| (e) |
|
Includes debt due within one year of $80 million that relates to capital lease and
other obligations. |
20
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Repayment and Termination of $2.0 Billion Term Facility
As discussed in “Recent Developments,” on March 17, 2009, the Company used a portion of the
proceeds it received from the Special Dividend to repay in full the $2.0 billion outstanding (plus
accrued interest) under the Term Facility and terminated the Term Facility. Time Warner did not
incur any early termination or prepayment penalties in connection with the termination of the Term
Facility.
Termination of Supplemental Credit Agreement
As discussed in “Recent Developments,” on March 12, 2009, TWC borrowed the full committed
amount of $1.932 billion under the TWC Bridge Facility, all of which was used to pay a portion of
the Special Dividend. On March 26, 2009, TWC completed an offering of $3.0 billion in aggregate
principal amount of debt securities and used a portion of the net proceeds from the offering to
prepay in full the outstanding loans and all other amounts due under the TWC Bridge Facility, and
the TWC Bridge Facility was terminated in accordance with its terms. Concurrently with the
termination of the TWC Bridge Facility and pursuant to the terms of the Supplemental Credit
Agreement, on March 26, 2009, TWC terminated the commitments of Time Warner under the Supplemental
Credit Facility, and the Supplemental Credit Agreement was terminated in accordance with its terms.
Amendments to Revolving Facility
On March 11, 2009, the Company entered into the first and second amendments to the amended and
restated credit agreement (the “Revolving Credit Agreement”) for its senior unsecured five-year
revolving credit facility (the “Revolving Facility”). The first amendment terminated the $100
million commitment of Lehman Commercial Paper Inc. (“LCPI”), a subsidiary of Lehman Brothers
Holdings Inc., which filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code
in September 2008, reducing the committed amount of the Revolving Facility from $7.0 billion to
$6.9 billion. The second amendment, among other things, amended the Revolving Credit Agreement to
(i) expand the circumstances under which any other lender under the Revolving Facility would become
a Defaulting Lender (as defined in the Revolving Credit Agreement, as amended) and (ii) permit Time
Warner to terminate the commitment of any such lender on terms substantially similar to those
applicable to LCPI under the first amendment to the Revolving Credit Agreement.
Consent Solicitation
On April 15, 2009, the Company completed a solicitation of consents (the “Consent
Solicitation”) from the holders of the debt securities (the “Securities”) issued by Time Warner
Inc. and its subsidiaries under all of the indentures governing the publicly traded debt securities
of the Company and its subsidiaries other than the indenture entered into in November 2006
(collectively, the “Indentures”), resulting in the adoption on April 16, 2009 of certain amendments
to each Indenture that provide that certain restrictive covenants will not apply (subject to the
concurrent or prior issuance of the guarantee by HBO discussed below) to a conveyance or transfer
by AOL LLC of its properties and assets substantially as an entirety, unless such conveyance or
transfer constitutes a conveyance or transfer of the properties and assets of the issuer and the
guarantors under the relevant Indenture and their respective subsidiaries, taken as a whole,
substantially as an entirety. As a result of the Consent Solicitation, prior to or concurrently
with a conveyance or transfer of AOL LLC’s properties and assets substantially as an entirety, HBO
will issue a guarantee of the obligations of Historic TW Inc. (“Historic TW”) (including in its
capacity as successor to Time Warner Companies, Inc.), whether as issuer or guarantor, under the
Indentures and the Securities. Such guarantee will be issued by HBO only in connection with such a
transaction.
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 $4.1 billion at both March
31, 2009 and December 31, 2008. Included in these amounts is licensing of film product from the
Filmed Entertainment segment to the Networks segment in the amount of $875 million and $967 million
at March 31, 2009 and December 31, 2008, respectively.
21
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Customer Credit Risk
Credit risk in the Company’s businesses originates from sales of various products and services
and is dispersed among many different counterparties. At March 31, 2009, no single customer of the
Company had a receivable balance that was greater than 5% of the Company’s total net receivables.
As a result of the current economic environment, a number of customers that purchase products and
services from the Company are experiencing financial challenges (including bankruptcy in some
cases). It is possible that some of these customers may not pay amounts owed or expected. It is
also possible that these customers or others may not have the financial means to purchase the
Company’s products or services in the future. If these events occur, they could have an adverse
impact on the Company’s operating results and cash flows.
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 trends in
revenues, Operating Income before Depreciation and Amortization, Operating Income 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 2008 Form 10-K and in Time Warner’s other
filings made from time to time with the SEC after the date of this report. In addition, Time Warner
operates in highly competitive, consumer and technology-driven and rapidly changing media,
entertainment and interactive services. 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 2008 Form 10-K, as well as:
| |
• |
|
a longer than anticipated continuation of the current economic slowdown or further
deterioration in the economy; |
|
| |
• |
|
decreased liquidity in the capital markets, including any reduction in the ability to
access the capital markets for debt securities or bank financings; |
|
| |
• |
|
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; and |
|
| |
• |
|
the failure to meet earnings expectations. |
22
TIME WARNER INC.
Item 4. CONTROLS AND PROCEDURES
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including the
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rule
13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the
Company’s disclosure controls and procedures are effective to ensure that information required to
be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms
and that information required to be disclosed by the Company is accumulated and communicated to the
Company’s management to allow timely decisions regarding the required disclosure.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting
during the quarter ended March 31, 2009 that have materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting.
23
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
December 31, |
| |
|
2009 |
|
2008 |
| |
|
|
|
|
|
(recast) |
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
7,115 |
|
|
$ |
1,233 |
|
Receivables, less allowances of $1,878 and $2,269 |
|
|
4,674 |
|
|
|
5,664 |
|
Inventories |
|
|
2,050 |
|
|
|
1,989 |
|
Deferred income taxes |
|
|
723 |
|
|
|
624 |
|
Prepaid expenses and other current assets |
|
|
725 |
|
|
|
772 |
|
Current assets of discontinued operations |
|
|
— |
|
|
|
6,480 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
15,287 |
|
|
|
16,762 |
|
|
|
|
|
|
|
|
|
|
Noncurrent inventories and film costs |
|
|
5,054 |
|
|
|
5,192 |
|
Investments, including available-for-sale securities |
|
|
944 |
|
|
|
1,036 |
|
Property, plant and equipment, net |
|
|
4,769 |
|
|
|
4,896 |
|
Intangible assets subject to amortization, net |
|
|
3,492 |
|
|
|
3,564 |
|
Intangible assets not subject to amortization |
|
|
7,723 |
|
|
|
7,728 |
|
Goodwill |
|
|
32,357 |
|
|
|
32,428 |
|
Other assets |
|
|
1,203 |
|
|
|
1,220 |
|
Noncurrent assets of discontinued operations |
|
|
— |
|
|
|
41,231 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
70,829 |
|
|
$ |
114,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
7,789 |
|
|
$ |
8,194 |
|
Deferred revenue |
|
|
966 |
|
|
|
1,012 |
|
Debt due within one year |
|
|
2,080 |
|
|
|
2,066 |
|
Current liabilities of discontinued operations |
|
|
52 |
|
|
|
2,865 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
10,887 |
|
|
|
14,137 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
15,402 |
|
|
|
19,889 |
|
Deferred income taxes |
|
|
1,127 |
|
|
|
974 |
|
Deferred revenue |
|
|
273 |
|
|
|
266 |
|
Other noncurrent liabilities |
|
|
6,712 |
|
|
|
6,801 |
|
Noncurrent liabilities of discontinued operations |
|
|
— |
|
|
|
26,320 |
|
Commitments and contingencies(Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
Time Warner common stock, $0.01 par value, 1.631 and 1.630 billion
shares issued and 1.196 and 1.196 billion shares outstanding |
|
|
16 |
|
|
|
16 |
|
Paid-in-capital |
|
|
162,116 |
|
|
|
169,564 |
|
Treasury stock, at cost (434 million and 434 million shares) |
|
|
(25,836 |
) |
|
|
(25,836 |
) |
Accumulated other comprehensive loss, net |
|
|
(1,392 |
) |
|
|
(1,676 |
) |
Accumulated deficit |
|
|
(99,118 |
) |
|
|
(99,780 |
) |
|
|
|
|
|
|
|
Total Time Warner Inc. shareholders’ equity |
|
|
35,786 |
|
|
|
42,288 |
|
Noncontrolling interests (including $0 and $2,751 attributable to discontinued
operations) |
|
|
642 |
|
|
|
3,382 |
|
|
|
|
|
|
|
|
Total equity |
|
|
36,428 |
|
|
|
45,670 |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
70,829 |
|
|
$ |
114,057 |
|
|
|
|
|
|
|
|
See accompanying notes.
24
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31,
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
2009 |
|
2008 |
| |
|
|
|
|
|
(recast) |
Revenues: |
|
|
|
|
|
|
|
|
Subscription |
|
$ |
2,559 |
|
|
$ |
2,608 |
|
Advertising |
|
|
1,540 |
|
|
|
1,828 |
|
Content |
|
|
2,636 |
|
|
|
2,809 |
|
Other |
|
|
210 |
|
|
|
225 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
6,945 |
|
|
|
7,470 |
|
Costs of revenues |
|
|
(3,880 |
) |
|
|
(4,167 |
) |
Selling, general and administrative |
|
|
(1,652 |
) |
|
|
(1,732 |
) |
Amortization of intangible assets |
|
|
(121 |
) |
|
|
(118 |
) |
Restructuring costs |
|
|
(94 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
|
Operating income |
|
|
1,198 |
|
|
|
1,311 |
|
Interest expense, net |
|
|
(312 |
) |
|
|
(347 |
) |
Other loss, net |
|
|
(39 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
847 |
|
|
|
905 |
|
Income tax provision |
|
|
(288 |
) |
|
|
(345 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
|
559 |
|
|
|
560 |
|
Discontinued operations, net of tax |
|
|
131 |
|
|
|
262 |
|
|
|
|
|
|
|
|
Net income |
|
|
690 |
|
|
|
822 |
|
Less Net income attributable to noncontrolling interests |
|
|
(29 |
) |
|
|
(51 |
) |
|
|
|
|
|
|
|
Net income attributable to Time Warner Inc. shareholders |
|
$ |
661 |
|
|
$ |
771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Time Warner Inc. shareholders: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
555 |
|
|
$ |
548 |
|
Discontinued operations, net of tax |
|
|
106 |
|
|
|
223 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
661 |
|
|
$ |
771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information attributable to Time Warner Inc. common
shareholders: |
|
|
|
|
|
|
|
|
Basic income per common share from continuing operations |
|
$ |
0.46 |
|
|
$ |
0.46 |
|
Discontinued operations |
|
|
0.09 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.55 |
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
Average basic common shares outstanding |
|
|
1,196.1 |
|
|
|
1,193.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share from continuing operations |
|
$ |
0.46 |
|
|
$ |
0.46 |
|
Discontinued operations |
|
|
0.09 |
|
|
|
0.18 |
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.55 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
Average diluted common shares outstanding |
|
|
1,200.3 |
|
|
|
1,200.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share of common stock |
|
$ |
0.1875 |
|
|
$ |
0.1875 |
|
|
|
|
|
|
|
|
See accompanying notes.
25
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
(Unaudited; millions)
| |
|
|
|
|
|
|
|
|
| |
|
2009 |
|
2008 |
| |
|
|
|
|
|
(recast) |
OPERATIONS |
|
|
|
|
|
|
|
|
Net income |
|
$ |
690 |
|
|
$ |
822 |
|
Less Discontinued operations, net of tax |
|
|
131 |
|
|
|
262 |
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
559 |
|
|
|
560 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
357 |
|
|
|
365 |
|
Amortization of film and television costs |
|
|
1,624 |
|
|
|
1,377 |
|
Loss on investments and other assets, net |
|
|
2 |
|
|
|
26 |
|
Equity in losses of investee companies, net of cash distributions |
|
|
22 |
|
|
|
19 |
|
Equity-based compensation |
|
|
71 |
|
|
|
75 |
|
Deferred income taxes |
|
|
(40 |
) |
|
|
37 |
|
Changes in operating assets and liabilities, net of acquisitions |
|
|
(1,170 |
) |
|
|
(843 |
) |
|
|
|
|
|
|
|
Cash provided by operations from continuing operations |
|
|
1,425 |
|
|
|
1,616 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
|
(2 |
) |
|
|
— |
|
Investments and acquisitions, net of cash acquired |
|
|
(50 |
) |
|
|
(253 |
) |
Capital expenditures and product development costs |
|
|
(134 |
) |
|
|
(146 |
) |
Investment proceeds from available-for-sale securities |
|
|
5 |
|
|
|
— |
|
Special Dividend received from Time Warner Cable Inc. |
|
|
9,253 |
|
|
|
— |
|
Other investment proceeds |
|
|
112 |
|
|
|
30 |
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities from continuing operations |
|
|
9,184 |
|
|
|
(369 |
) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Borrowings |
|
|
3,507 |
|
|
|
2,112 |
|
Debt repayments |
|
|
(7,986 |
) |
|
|
(2,716 |
) |
Proceeds from exercise of stock options |
|
|
— |
|
|
|
34 |
|
Excess tax benefit on stock options |
|
|
— |
|
|
|
2 |
|
Principal payments on capital leases |
|
|
(11 |
) |
|
|
(10 |
) |
Repurchases of common stock |
|
|
— |
|
|
|
(332 |
) |
Dividends paid |
|
|
(226 |
) |
|
|
(224 |
) |
Other financing activities |
|
|
(9 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
Cash used by financing activities from continuing operations |
|
|
(4,725 |
) |
|
|
(1,152 |
) |
|
|
|
|
|
|
|
Cash provided by continuing operations |
|
|
5,884 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operations from discontinued operations |
|
|
582 |
|
|
|
1,180 |
|
Cash used by investing activities from discontinued operations |
|
|
(622 |
) |
|
|
(841 |
) |
Cash used by financing activities from discontinued operations |
|
|
(5,224 |
) |
|
|
(348 |
) |
Effect of change in cash and equivalents of discontinued operations |
|
|
5,262 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Cash used by discontinued operations |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
INCREASE IN CASH AND EQUIVALENTS |
|
|
5,882 |
|
|
|
92 |
|
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
1,233 |
|
|
|
1,285 |
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
7,115 |
|
|
$ |
1,377 |
|
|
|
|
|
|
|
|
See accompanying notes.
26
TIME WARNER INC.
CONSOLIDATED STATEMENT OF EQUITY
Three Months Ended March 31,
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| |
|
Time Warner |
|
|
Noncontrolling |
|
|
|
|
|
|
Time Warner |
|
|
Noncontrolling |
|
|
|
|
| |
|
Shareholders |
|
|
Interests |
|
|
Total Equity |
|
|
Shareholders |
|
|
Interests |
|
|
Total Equity |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
BALANCE AT BEGINNING OF PERIOD |
|
$ |
42,288 |
|
|
$ |
3,382 |
|
|
$ |
45,670 |
|
|
$ |
58,536 |
|
|
$ |
4,322 |
|
|
$ |
62,858 |
|
Net income |
|
|
661 |
|
|
|
29 |
|
|
|
690 |
|
|
|
771 |
|
|
|
51 |
|
|
|
822 |
|
Other comprehensive income |
|
|
(107 |
) |
|
|
— |
|
|
|
(107 |
) |
|
|
(61 |
) |
|
|
1 |
|
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
554 |
|
|
|
29 |
|
|
|
583 |
|
|
|
710 |
|
|
|
52 |
|
|
|
762 |
|
Cash dividends ($0.1875 per common share) |
|
|
(226 |
) |
|
|
— |
|
|
|
(226 |
) |
|
|
(224 |
) |
|
|
— |
|
|
|
(224 |
) |
Common stock repurchases |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(299 |
) |
|
|
— |
|
|
|
(299 |
) |
Impact of adopting new accounting
pronouncements (a) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(13 |
) |
|
|
— |
|
|
|
(13 |
) |
Time Warner Cable Inc. Special Dividend |
|
|
— |
|
|
|
(1,603 |
) |
|
|
(1,603 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Time Warner Cable Inc. Spin-off |
|
|
(6,822 |
) |
|
|
(1,167 |
) |
|
|
(7,989 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
(8 |
) |
|
|
1 |
|
|
|
(7 |
) |
|
|
2 |
|
|
|
8 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD |
|
$ |
35,786 |
|
|
$ |
642 |
|
|
$ |
36,428 |
|
|
$ |
58,712 |
|
|
$ |
4,382 |
|
|
$ |
63,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the three months ended March 31, 2008, amount reflects 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”). |
See accompanying notes.
27
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. |
|
DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Description of Business
Time Warner Inc. (“Time Warner” or the “Company”) is a leading media and entertainment
company, whose businesses include television networks, filmed entertainment, publishing and
interactive services. Time Warner classifies its operations into four reportable segments:
Networks: consisting principally of cable television networks that provide programming; Filmed
Entertainment: consisting principally of feature film, television and home video production and
distribution; Publishing: consisting principally of magazine publishing; and AOL: consisting
principally of interactive consumer and advertising services. Financial information for Time
Warner’s various reportable segments is presented in Note 11.
Changes in Basis of Presentation
The 2008 financial information has been recast so that the basis of presentation is consistent
with that of the 2009 financial information. This recast reflects (i) the financial condition and
results of operations of Time Warner Cable Inc. (“TWC”) as discontinued operations for all periods
presented, (ii) the adoption of Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“Statement”) No. 160, Noncontrolling Interests in Consolidated
Financial Statements – an amendment of ARB No. 51 (“FAS 160”), (iii) the adoption of FASB 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”), and (iv) the 1-for-3 reverse stock split of the Company’s common stock that became
effective on March 27, 2009.
TWC Separation from Time Warner
On March 12, 2009 (the “Distribution Record Date”), the Company
disposed of all of its shares of TWC common stock. The disposition was made pursuant to a
separation agreement entered into on May 20, 2008, among Time Warner, TWC and certain of their
subsidiaries (the “Separation Agreement”) for the purpose of achieving the legal and structural
separation of TWC from Time Warner (the “TWC Separation”). The TWC Separation was effected as a pro
rata dividend of all shares of TWC common stock held by Time Warner in a spin-off (the
“Distribution”) to Time Warner stockholders.
Prior to the Distribution Record Date, on March 12, 2009, TWC, in accordance with the terms of
the Separation Agreement, paid a special cash dividend of $10.27 per share to all holders of TWC
Class A Common Stock and TWC Class B Common Stock as of the close of business on March 11, 2009
(aggregating $10.856 billion) (the “Special Dividend”) that resulted in the receipt by Time Warner
of $9.253 billion.
With the completion of the TWC Separation, the Company disposed of the Cable segment in its
entirety. Accordingly, the Company has presented the financial condition and results of operations
of the Cable segment as discontinued operations in the consolidated financial statements for all
periods presented. For a summary of discontinued operations see Note 2.
28
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Noncontrolling Interests
On January 1, 2009, the Company adopted the provisions of FAS 160. The provisions of FAS 160
establish accounting and reporting standards for the noncontrolling interest in a consolidated
subsidiary, including the accounting treatment upon the deconsolidation of a subsidiary. FAS 160 is
being applied prospectively, except for the provisions related to the presentation of
noncontrolling interests. As of March 31, 2009 and December 31, 2008, noncontrolling interests of
$642 million and $3.382 billion, respectively, have been classified as a component of equity in the
consolidated balance sheet. For the three months ended March 31, 2009 and 2008, net income
attributable to noncontrolling interests of $29 million and $51 million, respectively, is included
in net income. Earnings per share has not been affected as a result of the adoption of the
provisions of FAS 160.
Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating
Securities
On January 1, 2009, the Company adopted the provisions of FSP No. EITF 03-6-1. The provisions
of FSP No. EITF 03-6-1 require that all outstanding unvested share-based payment awards that
contain rights to nonforfeitable dividends or dividend equivalents (such as restricted stock units
granted by the Company) be considered participating securities. Because the awards are
participating securities, the Company is required to apply the two-class method of computing basic
and diluted earnings per share (the “Two-Class Method”). The retrospective application of the
provisions of FSP No. EITF 03-6-1 did not change any prior-period earnings per share amounts.
Basis of Presentation
Basis of Consolidation
The consolidated financial statements include 100% of the assets, liabilities, revenues,
expenses and cash flows of Time Warner and all voting interest entities in which Time Warner has a
controlling voting interest (“subsidiaries”). In addition, FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities (“FIN 46R”), applies to certain entities in which
equity investors do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties (a “VIE”). The primary beneficiary of a VIE is the party that
absorbs the majority of the entity’s expected losses, receives the majority of its expected
residual returns, or both, as a result of holding variable interests. In accordance with FIN 46R,
the Company consolidates those VIEs of which it is the primary beneficiary. Intercompany accounts
and transactions between consolidated companies have been eliminated in consolidation.
The Company’s investments in entities determined to be VIEs principally consisted of certain
investments in its Networks segment, primarily HBO Asia and HBO South Asia (collectively “HBO
Asia”) and HBO Latin America Group (“HBO LAG”). For the three months ended March 31, 2009, HBO Asia
and HBO LAG collectively had revenues and operating income of $109 million and $24 million,
respectively. As of March 31, 2009, total assets, liabilities and noncontrolling interest
attributable to HBO Asia and HBO LAG were $875 million (including goodwill and intangible assets of
$683 million), $128 million and $394 million, respectively. Such amounts are included in the
consolidated statement of operations and consolidated balance sheet.
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. Translation gains or losses of assets and liabilities are included in the consolidated statement of shareholders’ equity as a
component of Accumulated other comprehensive income, net.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (“GAAP”) requires management to make estimates, judgments and assumptions that affect
the amounts reported in the consolidated financial statements and footnotes thereto. Actual results
could differ from those estimates.
29
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Significant estimates inherent in the preparation of the consolidated financial statements
include reserves established for 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, litigation matters and certain programming arrangements.
Interim Financial Statements
The consolidated financial statements are unaudited; however, in the opinion of management,
they contain all the adjustments (consisting of those of a normal recurring nature) considered
necessary to present fairly the financial position, the results of operations and cash flows for
the periods presented in conformity with GAAP applicable to interim periods. The consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements of Time Warner included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008 (the “2008 Form 10-K”).
Recent Accounting Standards Adopted in 2009
In addition to the adoption of FAS 160 and FSP No. EITF 03-6-1 as discussed in “Changes in
Basis of Presentation,” the Company has also adopted the following accounting standards in 2009:
Fair Value Measurements
On January 1, 2009, the Company adopted the provisions of FASB Statement No. 157, Fair Value
Measurements (“FAS 157”) related to nonfinancial assets and liabilities on a prospective basis. FAS
157 establishes the authoritative definition of fair value, sets out a framework for measuring fair
value and expands the required disclosures about fair value measurement. On January 1, 2008, the
Company adopted the provisions of FAS 157 related to financial assets and liabilities as well as
other assets and liabilities carried at fair value on a recurring basis. The adoption of the
provisions of FAS 157 did not affect the Company’s historical consolidated financial statements.
For more information, see Note 4.
Business Combinations
On January 1, 2009, the Company adopted the provisions of FASB Statement No. 141 (revised
2007), Business Combinations (“FAS 141R”) and is applying such provisions prospectively to business
combinations that have an acquisition date on or after January 1, 2009. FAS 141R establishes
principles and requirements for how an acquirer in a business combination (i) recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree, (ii) recognizes and measures goodwill acquired in a
business combination or a gain from a bargain purchase, and (iii) determines what information to
disclose to enable users of financial statements to evaluate the nature and financial effects of
the business combination. In addition, FAS 141R requires that changes in the amount of acquired tax
attributes be included in the Company’s results of operations. While FAS 141R applies only to
business combinations with an acquisition date after its effective date, the amendments to FASB
Statement No. 109, Accounting for Income Taxes (“FAS 109”), with respect to deferred tax valuation
allowances and liabilities for income tax uncertainties have been applied to all deferred tax
valuation allowances and liabilities for income tax uncertainties recognized in prior business
combinations. The adoption of the provisions of FAS 141R did not affect the Company’s historical
consolidated financial statements.
Disclosures about Derivative Instruments and Hedging Activities
On January 1, 2009, the Company adopted the provisions of FASB Statement No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (“FAS
161”). The provisions of FAS 161 amend and expand the disclosure requirements for derivative
instruments and hedging activities by requiring enhanced
disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for under FAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. The adoption of the provisions of FAS
161 requires prospective disclosures and accordingly did not affect the Company’s historical consolidated financial statements. For more
information, see Note 10.
30
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accounting for Collaborative Arrangements
On January 1, 2009, the Company adopted the provisions of EITF Issue No. 07-1, Accounting for
Collaborative Arrangements (“EITF 07-1”). EITF 07-1 defines collaborative arrangements and
establishes accounting and reporting requirements for transactions between participants in the
arrangement and third parties. The Company’s collaborative arrangements primarily relate to
arrangements entered into with third parties to jointly finance and distribute theatrical
productions. These arrangements, which are referred to as co-financing arrangements, take various
forms. In most cases, the form of the arrangement is the sale of an economic interest in a film to
an investor. The Filmed Entertainment segment generally records the amounts received for the sale
of an economic interest as a reduction of the cost of the film, as the investor assumes full risk
for that portion of the film asset acquired in these transactions. The substance of these
arrangements is that the third-party investors own an interest in the film and, therefore, in each
period the Company reflects in the statement of operations either a charge or benefit to costs of
revenues to reflect the estimate of the third-party investor’s interest in the profits or losses
incurred on the film. Consistent with the requirements of Statement of Position 00-2, Accounting by
Producers or Distributors of Films (“SOP 00-2”), the estimate of the third-party investor’s
interest in profits or losses incurred on the film is determined by reference to the ratio of
actual revenue earned to date in relation to total estimated ultimate revenues. For the three
months ended March 31, 2009 and 2008, participation costs of $68 million and $124 million,
respectively, were recorded in costs of revenues and net amounts received from collaborators for
which capitalized film costs were reduced was $38 million and $58 million, respectively. As of
March 31, 2009 and December 31, 2008, the net amount due to collaborators for their share of
participations was $280 million and $276 million, respectively, and were recorded in participations
payable in the consolidated balance sheet. The provisions of EITF 07-1 did not affect the Company’s
historical consolidated financial statements.
Recent Accounting Standards Not Yet Adopted
Interim Disclosures about Fair Value of Financial Instruments
In April 2009, the FASB staff issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments (“FSP No. FAS 107-1 and APB 28-1”). This FSP amends FASB
Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments in interim financial statements as well as in annual
financial statements. This FSP also amends Accounting Principles Board Opinion No. 28, Interim
Financial Reporting, to require these disclosures in all interim financial statements. The
provisions of FSP No. FAS 107-1 and APB 28-1 became effective for Time Warner on April 1, 2009,
will be applied prospectively beginning in the second quarter of 2009 and are not expected to have
a material impact on the Company’s consolidated financial statements.
Recognition and Presentation of Other-Than-Temporary-Impairments
In April 2009, the FASB staff issued FSP No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary-Impairments (“FSP No. FAS 115-2 and FAS 124-2”). This FSP
incorporates impairment guidance for debt securities from various sources of authoritative
literature and clarifies the interaction of the factors that should be considered when determining
whether a debt security is other than temporarily impaired. The provisions of FSP No. FAS 115-2 and
FAS 124-2 became effective for Time Warner on April 1, 2009, will be applied prospectively
beginning in the second quarter of 2009 and are not expected to have a material impact on the
Company’s consolidated financial statements.
31
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly
In April 2009, the FASB staff issued FSP No. FAS 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly (“FSP No. FAS 157-4”). This FSP provides additional guidance for
estimating fair value in accordance with FAS 157 when the
volume and level of activity for the asset or liability have significantly decreased. This FSP
also includes guidance on identifying circumstances that indicate a transaction is not orderly
(i.e., a forced liquidation or distressed sale). The provisions of FSP No. FAS 157-4 became
effective for Time Warner on April 1, 2009, are being applied prospectively beginning in the second
quarter of 2009 and are not expected to have a material impact on the Company’s consolidated
financial statements.
Income Per Common Share
Basic income per common share is determined using the Two-Class Method and is computed by dividing net income attributable to Time Warner
Inc. common shareholders by the weighted-average common shares outstanding during the period.
The Two-Class Method is an earnings
allocation formula that determines income per share for each class of common stock and
participating security according to dividends declared and participation rights in undistributed
earnings. Diluted income per common share reflects the more dilutive earnings per share amount calculated
using the treasury stock method or the Two-Class Method. For the three months ended March 31, 2009 and 2008, both the Two-Class Method and the
treasury stock method calculation for diluted income per common share attributable to Time Warner
Inc. common shareholders yielded the same result.
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 March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Income from
continuing operations attributable to Time Warner Inc. shareholders |
|
$ |
555 |
|
|
$ |
548 |
|
Income allocated to participating securities (restricted stock and restricted
stock units) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Income from continuing operations attributable to Time Warner Inc. common
shareholders — basic |
|
$ |
553 |
|
|
$ |
547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding — basic |
|
|
1,196.1 |
|
|
|
1,193.0 |
|
Dilutive effect of equity awards |
|
|
4.2 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
Average number of common shares outstanding — diluted |
|
|
1,200.3 |
|
|
|
1,200.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share from continuing operations
attributable to Time Warner Inc. common
shareholders: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.46 |
|
|
$ |
0.46 |
|
Diluted |
|
$ |
0.46 |
|
|
$ |
0.46 |
|
Diluted income per common share for the three months ended March 31, 2009 and 2008, excludes
approximately 184 million and 133 million, respectively, common shares that may be issued under the
Company’s stock compensation plans because they do not have a dilutive effect.
Interim Impairment Testing of Goodwill at AOL
As discussed in more detail in Note 1 to the Company’s consolidated financial statements in
the 2008 Form 10-K, goodwill and indefinite-lived intangible assets are tested annually for
impairment during the fourth quarter or earlier upon the occurrence of certain events or
substantive changes in circumstances. Although the Board of Directors has not made any decisions
related to AOL, management anticipates that it would initiate a process to spin off one or more
parts of the business of AOL to Time Warner stockholders, in one or a series of transactions. As a
result, the Company was required
32
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
under FASB Statement No. 142, Goodwill and Other Intangible Assets
(“FAS 142”) to test goodwill at AOL as of March 31, 2009 (the “interim testing date”).
In determining the fair value of AOL for the interim impairment analysis, the Company used a
market based approach. The market based approach to determine fair value involves the exercise of
judgment in identifying the relevant comparable company market multiples. The market multiples
identified by the Company were multiplied by AOL’s 2009 earnings
forecast in determining the estimated fair value of AOL. Such fair value exceeded AOL’s net
book value and therefore did not result in an impairment charge.
If the fair value of the AOL reporting unit had been hypothetically lower by 20% at March 31,
2009, the fair value of the AOL reporting unit would have exceeded its book value. In addition, if
the fair value of the AOL reporting unit had been hypothetically lower by 30% at March 31, 2009,
the book value of the AOL reporting unit would have exceeded its fair value by approximately $100
million. If the book value of the AOL reporting unit had been greater than its fair value, the
second step of the goodwill impairment test would have been required to be performed to determine
the ultimate amount of impairment loss to recognize.
| 2. |
|
BUSINESS ACQUISITIONS, DISPOSITIONS AND RELATED TRANSACTIONS |
CME Investment
On March 23, 2009, the Company announced that it had entered into an agreement to acquire an
approximately 31% interest in Central European Media Enterprises Ltd. (“CME”), a broadcasting
company operating leading networks in seven Central and Eastern European countries, for an
investment of $242 million in cash. In connection with this investment, Time Warner has agreed to
allow CME founder and Non-Executive Chairman Ronald S. Lauder to vote Time Warner’s shares of CME
for at least four years, subject to certain exceptions. Also, Mr. Lauder has agreed to support Time
Warner’s appointment of two designees to CME’s board of directors. In addition to being subject to
customary closing conditions, the closing of the investment is subject to a vote of CME’s
shareholders and certain regulatory approvals, and Mr. Lauder has committed to vote the shares he
controls in favor of the transaction. The transaction is expected to close in the second quarter of
2009.
Summary of Discontinued Operations
Discontinued operations for the three months ended March 31, 2009 and 2008 reflect the
financial condition and results of operations of TWC. Financial data for discontinued operations
for the three months ended March 31, 2009 and 2008 is as follows (millions, except per share
amounts):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Total revenues |
|
$ |
3,443 |
|
|
$ |
4,160 |
|
|
|
|
|
|
|
|
|
|
Pretax income |
|
$ |
262 |
|
|
$ |
448 |
|
Income tax benefit (provision) |
|
|
(131 |
) |
|
|
(186 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
131 |
|
|
$ |
262 |
|
|
|
|
|
|
|
|
Net income attributable to Time Warner Inc. shareholders |
|
$ |
106 |
|
|
$ |
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information attributable to Time Warner Inc. common shareholders: |
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
Average
common shares outstanding - basic |
|
|
1,196.1 |
|
|
|
1,193.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.09 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
Average
common shares outstanding - diluted |
|
|
1,200.3 |
|
|
|
1,200.2 |
|
|
|
|
|
|
|
|
Discontinued operations for the three months ended March 31, 2009 and 2008 included direct
transaction costs (e.g., legal and professional fees) related to the separation of TWC of $75
million and $2 million, respectively. The Networks segment of
Time Warner recognized approximately $170 million of
Subscription revenues from TWC in 2009 through the Distribution
Record Date and $210 million for the full three-month period
ended March 31, 2008.
33
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 3. |
|
INVENTORIES AND FILM COSTS |
Inventories and film costs consist of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
December 31, |
|
| |
|
March 31, 2009 |
|
|
2008 |
|
Inventories: |
|
|
|
|
|
|
|
|
Programming costs, less amortization |
|
$ |
3,573 |
|
|
$ |
3,439 |
|
DVDs, books, paper and other merchandise |
|
|
333 |
|
|
|
408 |
|
|
|
|
|
|
|
|
Total inventories (a) |
|
|
3,906 |
|
|
|
3,847 |
|
Less: current portion of inventory |
|
|
(2,050 |
) |
|
|
(1,989 |
) |
|
|
|
|
|
|
|
Total noncurrent inventories |
|
|
1,856 |
|
|
|
1,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film costs — Theatrical: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
715 |
|
|
|
767 |
|
Completed and not released |
|
|
553 |
|
|
|
364 |
|
In production |
|
|
474 |
|
|
|
713 |
|
Development and pre-production |
|
|
84 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
Film costs — Television: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
789 |
|
|
|
726 |
|
Completed and not released |
|
|
183 |
|
|
|
221 |
|
In production |
|
|
398 |
|
|
|
465 |
|
Development and pre-production |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total film costs |
|
|
3,198 |
|
|
|
3,334 |
|
|
|
|
|
|
|
|
Total noncurrent inventories and film costs |
|
$ |
5,054 |
|
|
$ |
5,192 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Does not include $2.113 billion and $2.160 billion of net film library costs as
of March 31, 2009 and December 31, 2008, respectively, which are included in
intangible assets subject to amortization in 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 March 31, 2009
(millions):
34
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurements as of March 31, 2009 Using |
|
| |
|
|
|
|
|
Quoted Market |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Prices in Active |
|
|
|
|
|
|
Significant |
|
| |
|
Fair Value |
|
|
Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
| |
|
as of |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
| Description |
|
March 31, 2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
$ |
220 |
|
|
$ |
216 |
|
|
$ |
4 |
|
|
$ |
— |
|
Available-for-sale securities |
|
|
75 |
|
|
|
39 |
|
|
|
36 |
|
|
|
— |
|
Derivatives |
|
|
54 |
|
|
|
5 |
|
|
|
30 |
|
|
|
19 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
(103 |
) |
|
|
— |
|
|
|
(103 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
246 |
|
|
$ |
260 |
|
|
$ |
(33 |
) |
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company primarily applies the market approach for recurring fair value measurements.
The following table reconciles the beginning and ending balances of assets classified as Level
3 measurements and identifies the net income (losses) the Company recognized during the three
months ended March 31, 2009 on such assets and liabilities that were included in the balance as of
March 31, 2009 (millions):
| |
|
|
|
|
| |
|
Derivatives |
|
Balance as of January 1, 2009 |
|
$ |
1 |
|
Total gains (losses): |
|
|
|
|
Included in net income |
|
|
2 |
|
Included in other comprehensive income |
|
|
— |
|
Purchases, issuances and settlements |
|
|
16 |
|
Transfers in and/or out of Level 3 |
|
|
— |
|
|
|
|
|
Balance as of March 31, 2009 |
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
Total gain for the three months ended March 31, 2009 included in
net income related to assets still held
as of March 31, 2009 |
|
$ |
2 |
|
|
|
|
|
Gains and losses recognized for assets and liabilities valued using significant unobservable
inputs are reported in investment gains (losses), net, in other loss, net (Note 13).
Non-Financial Instruments
The majority of the Company’s non-financial instruments, which include goodwill, intangible
assets, inventories and property, plant and equipment, are not required to be carried at fair value
on a recurring basis. However, if certain triggering events occur (or at least annually for
goodwill and indefinite-lived intangible assets) such that a non-financial instrument is required
to be evaluated for impairment, a resulting asset impairment would require that the non-financial
instrument be recorded at the lower of historical cost or its fair value.
The Company accounts for film production costs in accordance with the guidance in SOP 00-2,
which requires that upon the occurrence of an event or change in circumstance that may indicate
that the fair value of a film is less than its unamortized costs, an entity should determine the
fair value of the film and write off to the consolidated statement of operations the amount by
which the unamortized capitalized costs exceed the film’s fair value. Some of these events or
changes in circumstance include: (i) an adverse change in the expected performance of a film prior
to its release, (ii) actual costs substantially in excess of budgeted costs, (iii) substantial
delays in completion or release schedules, (iv) changes in release plans, (v) insufficient funding
or resources to complete the film and to market it effectively and (vi) the failure of actual
performance subsequent to release to meet that which had been expected prior to release. When
required to determine the fair value of its films, the Company employs a discounted cash flow
methodology with assumptions for cash
35
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
flows for periods not exceeding 10 years. The discount rate
utilized in the discounted cash flow analysis is based on the weighted average cost of capital of
the respective business (e.g., Warner Bros.) plus a risk premium representing the risk associated
with producing a particular film. The fair value of any film costs associated with a film that
management plans to abandon is zero. As the primary determination of fair value is determined using
a discounted cash flow model, the resulting fair value is considered a Level 3 input. During the
quarter ended March 31, 2009, certain film production costs, which are recorded as inventory in the
consolidated balance sheet, were written down from their carrying value of $79 million to their
fair value of $43 million.
| 5. |
|
LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS |
Committed financing capacity and long-term debt consists of (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized |
|
|
2009 |
|
|
|
|
| |
|
Rate at |
|
|
|
|
|
2009 |
|
|
|
|
|
|
Discount on |
|
|
Unused |
|
|
Outstanding Debt(b) |
|
| |
|
March 31, |
|
|
|
|
|
Committed |
|
|
Letters of |
|
|
Commercial |
|
|
Committed |
|
|
March 31, |
|
|
December 31, |
|
| |
|
2009 |
|
Maturities |
|
|
Capacity |
|
|
Credit (a) |
|
|
Paper |
|
|
Capacity |
|
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
|
|
|
|
|
|
|
|
$ |
7,115 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
7,115 |
|
|
|
|
|
|
|
|
|
Bank credit agreement
and commercial paper
program |
|
|
— |
|
|
|
2011 |
|
|
|
6,900 |
|
|
|
60 |
|
|
|
— |
|
|
|
6,840 |
|
|
$ |
— |
|
|
$ |
4,490 |
|
Floating-rate public debt (c) |
|
|
1.46 |
% |
|
|
2009 |
|
|
|
2,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,000 |
|
|
|
2,000 |
|
Fixed-rate public debt (c) |
|
|
7.14 |
% |
|
|
2011-2036 |
|
|
|
15,227 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15,227 |
|
|
|
15,227 |
|
Other fixed-rate obligations (d) |
|
|
7.26 |
% |
|
|
— |
|
|
|
255 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
255 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
31,497 |
|
|
|
60 |
|
|
|
— |
|
|
|
13,955 |
|
|
|
17,482 |
|
|
|
21,955 |
|
Debt due within one year |
|
|
|
|
|
|
|
|
|
|
(2,080 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,080 |
) |
|
|
(2,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
29,417 |
|
|
$ |
60 |
|
|
$ |
— |
|
|
$ |
13,955 |
|
|
$ |
15,402 |
|
|
$ |
19,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Represents the portion of committed capacity reserved for outstanding and undrawn letters of credit. |
| (b) |
|
Represents principal amounts adjusted for premiums and discounts. The weighted-average interest rate on Time Warner’s total debt was 6.50% at March 31, 2009 and 5.51% at December 31, 2008. The Company’s public debt
matures as follows: $2.000 billion in 2009, $0 in 2010, $2.000 billion
in 2011, $2.000 billion in 2012, $1.300 billion in 2013 and
$10.031 billion thereafter. |
| (c) |
|
The bank credit agreement, commercial paper program 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
average maturity of approximately 11.5 years as of
March 31, 2009. |
| (d) |
|
Amount includes capital lease and other obligations. |
Repayment and Termination of $2.0 Billion Term Facility
On March 17, 2009, the Company used a portion of the proceeds it received from the Special
Dividend to repay in full the $2.0 billion outstanding (plus accrued interest) under its unsecured
term loan facility with a maturity date of January 8, 2011 (the “Term Facility”) and terminated the
Term Facility. Time Warner did not incur any early termination or prepayment penalties in
connection with the termination of the Term Facility.
Termination of Supplemental Credit Agreement
On March 12, 2009, TWC borrowed the full committed amount of $1.932 billion under its
unsecured term loan credit facility entered into on June 30, 2008 (the “TWC Bridge Facility”), all
of which was used to pay a portion of the Special Dividend. On March 26, 2009, TWC completed an
offering of $3.0 billion in aggregate principal amount of debt securities and used a portion of the
net proceeds from the offering to prepay in full the outstanding loans and all other amounts due
under the TWC Bridge Facility, and the TWC Bridge Facility was terminated in accordance with its
terms. Concurrently with the termination of the TWC Bridge Facility and pursuant to the terms of
the $1.535 billion credit agreement (the “Supplemental Credit Agreement”) between the Company (as
lender) and TWC (as borrower) for a two-year senior unsecured supplemental term loan facility (the
“Supplemental Credit Facility”), on March 26, 2009, TWC terminated the
36
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
commitments of Time Warner
under the Supplemental Credit Facility, and the Supplemental Credit Agreement was terminated in
accordance with its terms.
Amendment of the TW Revolving Facility
On March 11, 2009, the Company entered into the first and second amendments to the amended and
restated credit agreement (the “Revolving Credit Agreement”) for its senior unsecured five-year
revolving credit facility (the “Revolving Facility”). The first amendment terminated the $100
million commitment of Lehman Commercial Paper Inc. (“LCPI”), a subsidiary of Lehman Brothers
Holdings Inc., which filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code
in September 2008, reducing the committed amount of the Revolving Facility from $7.0 billion to
$6.9 billion. The second amendment, among other things, amended the Revolving Credit Agreement to
(i) expand the circumstances under which any other lender under the Revolving Facility would become
a Defaulting Lender (as defined in
the Revolving Credit Agreement, as amended) and (ii) permit Time Warner to terminate the
commitment of any such lender on terms substantially similar to those applicable to LCPI under the
first amendment to the Revolving Credit Agreement.
Consent Solicitation
On April 15, 2009, the Company completed a solicitation of consents (the “Consent
Solicitation”) from the holders of the debt securities (the “Securities”) issued by Time Warner
Inc. and its subsidiaries under all of the indentures governing the publicly traded debt securities
of the Company and its subsidiaries other than the indenture entered into in November 2006
(collectively, the “Indentures”), resulting in the adoption on April 16, 2009 of certain amendments
to each Indenture that provide that certain restrictive covenants will not apply (subject to the
concurrent or prior issuance of the guarantee by HBO discussed below) to a conveyance or transfer
by AOL LLC of its properties and assets substantially as an entirety, unless such conveyance or
transfer constitutes a conveyance or transfer of the properties and assets of the issuer and the
guarantors under the relevant Indenture and their respective subsidiaries, taken as a whole,
substantially as an entirety. As a result of the Consent Solicitation, prior to or concurrent with
a conveyance or transfer of AOL LLC’s properties and assets substantially as an entirety, HBO will
issue a guarantee of the obligations of Historic TW Inc. (“Historic TW”) (including in its capacity
as successor to Time Warner Companies, Inc.), whether as issuer or guarantor, under the Indentures
and the Securities. Such guarantee will be issued by HBO only in connection with such a
transaction.
Shelf Registration Statement
Time Warner had a shelf registration statement (the “Registration Statement”) on file with the
Securities and Exchange Commission (the “SEC”) since November 8, 2006 that allowed 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 a result of the Company’s $13.955 billion of unused committed
capacity at March 31, 2009 and the anticipated expiration in early November 2009 of the
Registration Statement, the Company determined it no longer needed
the Registration Statement. Accordingly, on April 24, 2009, the Company and the subsidiary guarantors under the
Registration Statement submitted filings to the SEC that suspended the reporting obligations with
respect to the debt securities (and related guarantees) that were offered and sold pursuant to the
Registration Statement and deregistered the securities covered under the Registration Statement
that were available for offer and sale.
Spin-Off of TWC
In connection with the Distribution, the Company recognized a reduction of $7.989 billion to
shareholders’ equity, including $1.167 billion attributable to noncontrolling interests.
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
37
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
inception
through March 31, 2009, the Company repurchased approximately 51 million shares of common stock for
approximately $2.8 billion, 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 83 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 three months ended March 31, 2009, the
Company granted approximately 9 million options at a weighted-average grant date fair value per
option of $4.99 ($3.09 net of tax). For the three months ended March 31, 2008, the Company granted
approximately 10 million stock options at a weighted-average grant date fair value per option of
$12.39 ($7.68 net of tax). The table below presents the weighted-average values of the assumptions
used to value stock options at their grant date.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2009 |
|
2008 |
Expected volatility |
|
|
35.0 |
% |
|
|
28.7 |
% |
Expected term to exercise from grant date |
|
6.24 years |
|
5.96 years |
Risk-free rate |
|
|
2.6 |
% |
|
|
3.2 |
% |
Expected dividend yield |
|
|
4.5 |
% |
|
|
1.7 |
% |
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 non-employee
directors. Certain RSU awards provide for accelerated vesting upon an election to retire pursuant
to the Company’s defined benefit retirement plans or after reaching a specified age and years of
service, as well as certain additional circumstances for non-employee directors. Holders of
restricted stock and RSU awards are generally entitled to receive cash dividends or dividend
equivalents, respectively, paid by the Company during the period of time that the restricted stock
or RSU awards are unvested. For the three months ended March 31, 2009, the Company granted
approximately 4 million RSUs at a weighted-average grant date fair value per RSU of $22.07 ($13.68
net of tax). For the three months ended March 31, 2008, the Company granted approximately 3 million
RSUs at a weighted-average grant date fair value per RSU of $44.79 ($27.77 net of tax).
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. For PSUs granted prior to 2009, the recipient of a PSU may receive, depending on
the Company’s total shareholder return (“TSR”) relative to the other companies in the S&P 500
Index, of 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.
PSUs granted in 2009 will be paid out in a number of shares of Common Stock based on (i) the
Company’s TSR relative to the other companies in the S&P 500 Index and (ii) the Company’s growth in
adjusted earnings per share (“EPS”) relative to the growth in adjusted EPS of the other companies
in the S&P 500 Index, in each case over a three-year performance period. Depending on the Company’s
TSR ranking and adjusted EPS growth ranking relative to the other companies in the S&P 500 Index, a
recipient of a PSU will receive between 0% and 200% of his or her target award following the
three-year performance period. If (i) the Company’s TSR ranking and adjusted EPS growth ranking are
both below the 50th percentile or (ii) the Company’s TSR ranking is at or above the 50th
percentile, then the percentage of a participant’s target PSUs that will vest will be based on the
Company’s TSR ranking for the performance period. If the Company’s TSR ranking is below the 50th
percentile and its adjusted EPS growth ranking is at or above the 50th
38
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
percentile, the percentage
of a participant’s target PSUs that will vest will be the average of (i) the percentage of target
PSUs that would vest based on the Company’s TSR ranking during the performance period and (ii)
100%.
For accounting purposes, PSUs granted prior to 2009 are considered to have a market condition
and PSUs granted in 2009 are considered to have a market condition and a performance condition. The
effect of a market condition is reflected in the grant date fair value of the award, which is
estimated 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. In the case of PSUs granted in 2009, the
performance condition is assumed to have been met. As a result, compensation expense is recognized
on these types of awards provided that the requisite service is rendered (regardless of whether the
market condition is achieved).
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 the
three months ended March 31, 2009, the Company granted approximately 0.2 million target PSUs at a
weighted-average grant date fair value per PSU of $23.67 ($14.68 net of tax). For the three months
ended March 31, 2008, the Company granted approximately 0.4 million target PSUs at a
weighted-average grant date fair value per PSU of $52.60 ($32.61 net of tax).
In connection with the TWC Separation, and as provided for in the Company’s equity plans, the
number of stock options, RSUs and target PSUs outstanding at the Distribution Record Date and the
exercise prices of such stock options were adjusted to maintain the fair value of those awards. The
changes in the number of equity awards and the exercise prices (which are reflected herein) were
determined by comparing the fair value of such awards immediately prior to the TWC Separation to
the fair value of such awards immediately after the TWC Separation. In performing this analysis,
the only assumptions that changed related to the Time Warner stock price and the employee’s
exercise price. Accordingly, each equity award outstanding as of the Distribution Record Date was
increased by multiplying the size of such award by 1.35, while the per share exercise price of each
stock option was decreased by dividing by 1.35. This adjustment resulted in an increase of
approximately 50 million equity awards (comprised of 46 million stock options and 4 million RSUs). The modifications to the outstanding equity awards were
made pursuant to existing antidilution provisions in the Company’s equity plans and did not result
in any additional compensation expense.
In addition, in connection with the 1-for-3 reverse stock split, the number of outstanding
equity awards was proportionately adjusted to reflect the reverse stock split. As a result, and
after giving effect to the adjustment for the TWC Separation, the number of outstanding equity
awards was determined by dividing the number of outstanding equity awards by three. The per share
exercise price of stock options, after giving effect to the adjustment for the TWC Separation, was
determined by multiplying the exercise price by three.
Compensation expense recognized for equity-based compensation plans for the three months ended
March 31, 2009 and 2008 is as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Stock options |
|
$ |
29 |
|
|
$ |
38 |
|
Restricted stock, restricted stock units and performance stock units |
|
|
42 |
|
|
|
37 |
|
|
|
|
|
|
|
|
Total impact on Operating Income |
|
|
71 |
|
|
|
75 |
|
|
|
|
|
|
|
|
Tax benefit recognized |
|
$ |
27 |
|
|
$ |
29 |
|
Under the terms of Time Warner’s equity plans and related award agreements, as a result of the
TWC Separation, TWC employees who held Time Warner equity awards were treated at the time of the
TWC Separation as if their employment with Time Warner was terminated without cause at the time of
the separation. This treatment resulted 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.
Upon
the exercise of Time Warner stock options and the vesting of Time
Warner RSUs held by TWC employees,
TWC is obligated to reimburse Time Warner for the intrinsic value of
the applicable award. As a result of the
TWC Separation, TWC is no longer considered a related party. Accordingly, on the Distribution
Record Date, the Company established an asset of $16 million for the estimated fair value
(determined using the Black-Sholes option pricing model) of outstanding equity awards held by TWC
employees, with an offsetting adjustment to Time Warner Inc. shareholders’ equity in the
consolidated balance sheet. The estimated receivable from TWC fluctuates with the fair value and
number of outstanding equity awards and the resulting change is recorded in other loss, net, in
the consolidated statement of operations. As of March 31, 2009, the
estimated receivable was $18 million, and for the three months ended March 31, 2009, the Company
recognized $2 million of other income related to the increase in the estimated fair value of Time
Warner equity awards held by TWC employees.
39
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 months ended March 31, 2009 and 2008 is as follows (millions):
Components of Net Periodic Benefit Costs
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Domestic |
|
|
International |
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
18 |
|
|
$ |
22 |
|
|
$ |
4 |
|
|
$ |
5 |
|
Interest cost |
|
|
36 |
|
|
|
36 |
|
|
|
10 |
|
|
|
14 |
|
Expected return on plan assets |
|
|
(33 |
) |
|
|
(42 |
) |
|
|
(12 |
) |
|
|
(19 |
) |
Amounts amortized |
|
|
29 |
|
|
|
6 |
|
|
|
2 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs |
|
$ |
50 |
|
|
$ |
22 |
|
|
$ |
4 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
|
|
$ |
8 |
|
|
$ |
103 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2009, there were no
minimum required contributions for domestic funded plans. As of December 31, 2008, the Company’s
funded domestic defined benefit pension plans were funded by assets in a pension trust totaling
$1.702 billion. Between January 1, 2009 and March 31, 2009, the Company’s plan assets have
experienced market losses of approximately 7%. The Company did not make any discretionary cash
contributions to its funded defined benefit pension plans during the three months ended March 31,
2009. Subject to market conditions and other considerations, the Company may make discretionary
cash contributions during the remainder of the year. For domestic unfunded plans, contributions
will continue to be made to the extent benefits are paid. Expected benefit payments for domestic
unfunded plans for 2009 are approximately $27 million. In addition, the Company anticipates making
an additional $20 million discretionary contribution to its international plans in the fourth
quarter of 2009.
40
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Merger Costs Capitalized as a Cost of Acquisition
As of March 31, 2009, merger costs capitalized as a cost of acquisition was $26 million, with
$1 million having been paid during the first quarter of 2009. As of March 31, 2009, $5 million of
the remaining liability was classified as a current liability in the consolidated balance sheet,
with the remaining $21 million classified as a long-term liability. Amounts classified as
long-term, primarily related to lease exit costs, are expected to be paid through 2014.
Restructuring Costs Expensed
Restructuring costs expensed as incurred by segment for the three months ended March 31, 2009
and 2008 are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Filmed Entertainment |
|
$ |
37 |
|
|
$ |
116 |
|
Publishing |
|
|
(1 |
) |
|
|
10 |
|
AOL |
|
|
58 |
|
|
|
9 |
|
Corporate |
|
|
— |
|
|
|
7 |
|
|
|
|
|
|
|
|
Restructuring costs by segment |
|
$ |
94 |
|
|
$ |
142 |
|
|
|
|
|
|
|
|
The Company’s restructuring costs primarily related to employee termination costs that
primarily occurred at the AOL and Filmed Entertainment segments and ranged from senior executives
to line personnel. The Company currently expects to incur incremental restructuring charges
relating to operational reorganizations at these two segments of up to $150 million during the
remainder of 2009.
Restructuring costs that were expensed for the three months ended March 31, 2009 and 2008 are
as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
2009 restructuring activity |
|
$ |
95 |
|
|
$ |
— |
|
2008 and prior restructuring activity |
|
|
(1 |
) |
|
|
142 |
|
|
|
|
|
|
|
|
Restructuring costs |
|
$ |
94 |
|
|
$ |
142 |
|
|
|
|
|
|
|
|
Selected Information
Selected information relating to restructuring costs is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee |
|
|
|
|
|
|
|
| |
|
Terminations |
|
|
Other Exit Costs |
|
|
Total |
|
Remaining liability as of December 31, 2008 (recast) |
|
$ |
204 |
|
|
$ |
84 |
|
|
$ |
288 |
|
Net accruals |
|
|
65 |
|
|
|
29 |
|
|
|
94 |
|
Noncash reductions (a) |
|
|
(10 |
) |
|
|
— |
|
|
|
(10 |
) |
Cash paid |
|
|
(81 |
) |
|
|
(20 |
) |
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of March 31, 2009 |
|
$ |
178 |
|
|
$ |
93 |
|
|
$ |
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Noncash reductions relate to the settlement of certain employee-related
liabilities with equity instruments. |
41
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of March 31, 2009, of the remaining liability of $271 million, $174 million was classified
as a current liability in the consolidated balance sheet, with the remaining $97 million classified
as a long-term liability. Amounts classified as long-term are expected to be paid through 2017.
10. DERIVATIVE INSTRUMENTS
Time Warner uses derivative instruments, principally forward contracts, to manage the risk
associated with the volatility of future cash flows denominated in foreign currencies and changes
in fair value resulting from changes in foreign currency exchange rates. The Company uses
derivative instruments that generally have maturities of three to eighteen months to hedge various
foreign exchange exposures, including the following: (i) variability in foreign
currency-denominated cash flows, such as the hedges of unremitted or forecasted royalty and license
fees to be received from the sale or anticipated sale of U.S. copyrighted products abroad or cash
flows for certain film costs denominated in a foreign currency (i.e., cash flow hedges) and (ii)
currency risk associated with foreign currency-denominated operating assets and liabilities (i.e.,
fair value hedges). The Company also enters into derivative contracts that economically hedge
certain of its foreign currency risks, even though hedge accounting does not apply or the Company
elects not to apply hedge accounting under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (“FAS 133”). These economic hedges are used primarily to offset
the change in certain foreign currency denominated long-term receivables and certain foreign
currency denominated debt due to changes in the underlying foreign exchange rates. The Company
monitors its positions with, and the credit quality of, the financial institutions that are party
to any of its financial transactions.
The following is a summary of amounts pertaining to Time Warner’s use of foreign currency
derivatives at March 31, 2009 (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow |
|
| |
|
FAS 133 Hedges |
|
|
Economic Hedges |
|
|
Hedges |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive |
|
| |
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
|
income |
|
March 31, 2009 |
|
$ |
80 |
|
|
$ |
(203 |
) |
|
$ |
89 |
|
|
$ |
(39 |
) |
|
$ |
(145 |
) |
Netting provisions are provided for in existing International Swap and Derivative Association
Inc. agreements in situations where the Company executes multiple contracts with the same
counterparty. As a result, net assets or liabilities resulting from foreign exchange derivatives
subject to these netting agreements are classified within prepaid expenses and other current assets
or accounts payable and accrued expenses in the Company’s consolidated balance sheet. Deferred
gains and losses recorded in accumulated other comprehensive income are expected to be recognized
in earnings at the same time hedged items affect earnings. Included in accumulated other
comprehensive income are deferred net losses of $129 million related to hedges of cash flows
associated with films that are not expected to be released within the next twelve months.
The following is a summary of amounts pertaining to Time Warner’s use of foreign currency
derivatives for the three months ended March 31, 2009 (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Hedges |
|
|
Economic Hedges |
|
|
Cash Flow Hedges |
|
| |
|
|
|
|
|
|
|
|
|
Gain(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain(loss) |
|
| |
|
|
|
|
|
|
|
|
|
recognized in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recognized in |
|
| |
|
|
|
|
|
|
|
|
|
net income and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net income and |
|
| |
|
|
|
|
|
|
|
|
|
excluded from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluded from |
|
| |
|
|
|
|
|
|
|
|
|
effectiveness |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain(loss) reclassed from |
|
|
effectiveness |
|
| |
|
|
|
|
|
|
|
|
|
testing - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated other |
|
|
testing - |
|
| |
|
|
|
|
|
|
|
|
|
Ineffective |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income to |
|
|
Ineffective |
|
| Gain(loss) |
|
|
Portion |
|
|
Gain(loss) |
|
|
net income - Effective Portion |
|
|
Portion |
|
| Selling, |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, |
|
|
|
|
|
|
|
|
|
|
Selling, |
|
|
|
|
|
|
|
| general and |
|
|
|
|
|
|
|
|
Other |
|
|
general and |
|
|
|
|
|
|
Other |
|
|
general and |
|
|
|
|
|
|
|
| administrative |
|
|
|
|
Costs of |
|
|
income |
|
|
administrative |
|
|
Costs of |
|
|
income |
|
|
administrative |
|
|
Costs of |
|
|
Other income |
|
| expense |
|
|
|
|
revenues |
|
|
(loss), net |
|
|
expense |
|
|
revenues |
|
|
(loss), net |
|
|
expense |
|
|
revenues |
|
|
(loss), net |
|
| $ |
— |
|
|
|
|
$ |
(1 |
) |
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
15 |
|
|
$ |
(7 |
) |
|
$ |
(1 |
) |
|
$ |
(7 |
) |
|
$ |
2 |
|
42
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
11. SEGMENT INFORMATION
Time Warner classifies its operations into four reportable segments: Networks, consisting
principally of cable television networks that provide programming: Filmed Entertainment, consisting
principally of feature film, television and home video production and distribution; Publishing,
consisting principally of magazine publishing; and AOL, consisting principally of interactive
consumer and advertising services.
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 March 31, 2009 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
|
|
|
|
|
|
(millions) |
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks |
|
$ |
1,850 |
|
|
$ |
723 |
|
|
$ |
205 |
|
|
$ |
30 |
|
|
$ |
2,808 |
|
Filmed Entertainment |
|
|
9 |
|
|
|
14 |
|
|
|
2,553 |
|
|
|
57 |
|
|
|
2,633 |
|
Publishing |
|
|
307 |
|
|
|
383 |
|
|
|
19 |
|
|
|
97 |
|
|
|
806 |
|
AOL |
|
|
393 |
|
|
|
443 |
|
|
|
— |
|
|
|
31 |
|
|
|
867 |
|
Intersegment eliminations |
|
|
— |
|
|
|
(23 |
) |
|
|
(141 |
) |
|
|
(5 |
) |
|
|
(169 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,559 |
|
|
$ |
1,540 |
|
|
$ |
2,636 |
|
|
$ |
210 |
|
|
$ |
6,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, 2008 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
|
|
|
|
|
|
(recast, millions) |
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks |
|
$ |
1,695 |
|
|
$ |
739 |
|
|
$ |
213 |
|
|
$ |
12 |
|
|
$ |
2,659 |
|
Filmed Entertainment |
|
|
10 |
|
|
|
15 |
|
|
|
2,753 |
|
|
|
62 |
|
|
|
2,840 |
|
Publishing |
|
|
365 |
|
|
|
550 |
|
|
|
12 |
|
|
|
118 |
|
|
|
1,045 |
|
AOL |
|
|
539 |
|
|
|
552 |
|
|
|
— |
|
|
|
37 |
|
|
|
1,128 |
|
Intersegment eliminations |
|
|
(1 |
) |
|
|
(28 |
) |
|
|
(169 |
) |
|
|
(4 |
) |
|
|
(202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,608 |
|
|
$ |
1,828 |
|
|
$ |
2,809 |
|
|
$ |
225 |
|
|
$ |
7,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; and |
|
| |
• |
|
the Networks, Publishing and AOL 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 affect segment results. Revenues recognized by Time
Warner’s segments on intersegment transactions are as follows:
43
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
Intersegment Revenues |
|
|
|
|
|
|
|
|
Networks |
|
$ |
24 |
|
|
$ |
25 |
|
Filmed Entertainment |
|
|
138 |
|
|
|
167 |
|
Publishing |
|
|
6 |
|
|
|
6 |
|
AOL |
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Total intersegment revenues |
|
$ |
169 |
|
|
$ |
202 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
Operating Income before Depreciation and Amortization |
|
|
|
|
|
|
|
|
Networks |
|
$ |
1,064 |
|
|
$ |
958 |
|
Filmed Entertainment |
|
|
308 |
|
|
|
280 |
|
Publishing |
|
|
12 |
|
|
|
145 |
|
AOL |
|
|
255 |
|
|
|
405 |
|
Corporate (a) |
|
|
(84 |
) |
|
|
(103 |
) |
Intersegment eliminations |
|
|
— |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
Total operating income before depreciation and amortization |
|
$ |
1,555 |
|
|
$ |
1,676 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the three months ended March 31, 2009 and 2008, includes $7 million and $4
million, respectively, in net expenses related to securities litigation and
government investigations. |
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
Depreciation of Property, Plant and Equipment |
|
|
|
|
|
|
|
|
Networks |
|
$ |
(86 |
) |
|
$ |
(78 |
) |
Filmed Entertainment |
|
|
(40 |
) |
|
|
(41 |
) |
Publishing |
|
|
(31 |
) |
|
|
(34 |
) |
AOL |
|
|
(69 |
) |
|
|
(83 |
) |
Corporate |
|
|
(10 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
Total depreciation of property, plant and equipment |
|
$ |
(236 |
) |
|
$ |
(247 |
) |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
Amortization of Intangible Assets |
|
|
|
|
|
|
|
|
Networks |
|
$ |
(18 |
) |
|
$ |
(6 |
) |
Filmed Entertainment |
|
|
(54 |
) |
|
|
(56 |
) |
Publishing |
|
|
(13 |
) |
|
|
(18 |
) |
AOL |
|
|
(36 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
Total amortization of intangible assets |
|
$ |
(121 |
) |
|
$ |
(118 |
) |
|
|
|
|
|
|
|
44
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
Operating Income |
|
|
|
|
|
|
|
|
Networks |
|
$ |
960 |
|
|
$ |
874 |
|
Filmed Entertainment |
|
|
214 |
|
|
|
183 |
|
Publishing |
|
|
(32 |
) |
|
|
93 |
|
AOL |
|
|
150 |
|
|
|
284 |
|
Corporate (a) |
|
|
(94 |
) |
|
|
(114 |
) |
Intersegment eliminations |
|
|
— |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
Total operating income |
|
$ |
1,198 |
|
|
$ |
1,311 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the three months ended March 31, 2009 and 2008, includes $7
million and $4 million, respectively, in net expenses related to
securities litigation and government investigations. |
A summary of total assets by operating segment is set forth below:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
December 31, |
|
| |
|
March 31, 2009 |
|
|
2008 |
|
| |
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
Assets |
|
|
|
|
|
|
|
|
Networks |
|
$ |
36,369 |
|
|
$ |
36,097 |
|
Filmed Entertainment |
|
|
16,029 |
|
|
|
17,080 |
|
Publishing |
|
|
6,374 |
|
|
|
6,778 |
|
AOL |
|
|
3,970 |
|
|
|
4,075 |
|
Corporate |
|
|
8,087 |
|
|
|
2,316 |
|
Assets of discontinued operations |
|
|
— |
|
|
|
47,711 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
70,829 |
|
|
$ |
114,057 |
|
|
|
|
|
|
|
|
12. COMMITMENTS AND CONTINGENCIES
Commitments
Six Flags
In connection with the Company’s 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”), in 1997, certain subsidiaries of the Company (including Historic TW) agreed to guarantee
(the “Six Flags Guarantee”) certain obligations of the partnerships that hold the Parks (the
“Partnerships”) for the benefit of the limited partners in such Partnerships, including the
following (the “Guaranteed Obligations”): (a) making a minimum annual distribution to the limited
partners of the Partnerships (the minimum was approximately $61 million in 2008 and is subject to
annual cost of living adjustments); (b) making a minimum amount of capital expenditures each year
(an amount approximating 6% of the Parks’ annual revenues); (c) offering each year to purchase 5%
of the limited partnership units of the Partnerships (plus any such units not purchased pursuant to
such offer in any prior year) based on an aggregate price for all limited partnership units at the
higher of (i) $250 million in the case of Six Flags Georgia and $374.8 million in the case of Six
Flags Texas (the “Base Valuations”) and (ii) a weighted average multiple of EBITDA for the
respective Park over the previous four-year period (the “Cumulative LP Unit Purchase Obligation”);
(d) making annual ground lease payments; and (e) either (i) purchasing all of the outstanding
limited partnership units through the exercise of a call option upon the earlier of the occurrence
of certain specified events and the end of the term of each of the Partnerships in 2027 (Six Flags
Georgia) and 2028 (Six Flags Texas) (the “End of Term Purchase”) or (ii) causing each of the
Partnerships to have no indebtedness and to meet certain other financial tests as of the end of the
term of the Partnership. The aggregate amount payable in connection with an End of Term Purchase
option on either Park will be the Base Valuation applicable to such Park, adjusted for changes in
the
45
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
consumer price index from December 1996, in the case of Six Flags Georgia, and December 1997,
in the case of Six Flags Texas, through December of the year immediately preceding the year in
which the End of Term Purchase occurs, in each case, reduced ratably to reflect limited partnership
units previously purchased.
In connection with the Company’s 1998 sale of Six Flags Entertainment Corporation (which held
the controlling interests in the Parks) to Six Flags, Inc. (formerly Premier Parks Inc.) (“Six
Flags”), Six Flags and Historic TW entered into a Subordinated Indemnity Agreement pursuant to
which Six Flags agreed to guarantee the performance of the Guaranteed Obligations when due and to
indemnify Historic TW, among others, in the event that the Guaranteed Obligations are not performed
and the Six Flags Guarantee is called upon. In the event of a default of Six Flags’ obligations
under the Subordinated Indemnity Agreement, the Subordinated Indemnity Agreement and related
agreements provide, among other things, that Historic TW has the right to acquire control of the
managing partner of the Parks. Six Flags’ obligations to Historic TW are further secured by its
interest in all limited partnership units that are held by Six Flags.
In connection with the TWC Separation, guarantees previously made by Time Warner Entertainment
Company, L.P. (“TWE”), a subsidiary of TWC, were terminated and, pursuant to and as required under
the original terms of the Six Flags Guarantees, Warner Bros. Entertainment Inc. (“WBEI”) became a
guarantor. In addition, TWE’s rights and obligations under the Subordinated Indemnity Agreement
have been assigned to WBEI. The Company continues to indemnify TWE in connection with any residual
exposure of TWE under the Guaranteed Obligations.
In
March 2009, Fitch Ratings downgraded its credit rating for Six
Flags from CC to C and
Moody’s Investors Services downgraded its credit rating for Six Flags from Caa3 to C. In April
2009, Standard & Poor’s lowered Six Flags’ credit rating from CCC to D. To date, no payments have
been made by the Company pursuant to the Six Flags Guarantee. In its annual report on Form 10-K for
the period ended December 31, 2008, Six Flags reported an estimated maximum Cumulative LP Unit
Purchase Obligation for 2009 of approximately $335 million. The aggregate undiscounted estimated
future cash flow requirements covered by the Six Flags Guarantee over the remaining term (through
2028) of the agreements are approximately $1.4 billion (for a net present value of approximately
$450 million). Six Flags has deposited approximately $6 million in an escrow account as a source of
funds in the event Historic TW is required to fund any portion of the Guaranteed Obligations in the
future.
On April 17, 2009, Six Flags commenced an Exchange Offer and Consent Solicitation relating to
debt securities issued by Six Flags (the “Restructuring Plan”). The Restructuring Plan is designed
to reduce Six Flags’ debt and interest expense and improve its liquidity and financial and
operational flexibility. The Restructuring Plan contemplates the conversion of certain debt to
equity, a 1-for-100 reverse stock split and other amendments to Six Flags’ certificate of
incorporation. The Six Flags Exchange Offer and Consent Solicitation will expire at 11:59 p.m., New
York City time, on June 25, 2009, unless extended or earlier terminated.
Because the Six Flags Guarantee 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 guarantee came into existence, the recognition requirements of FIN 45 are
not applicable to the arrangements and the Company has continued to account for the Guaranteed
Obligations in accordance with FASB Statement No. 5, Accounting for Contingencies (“FAS 5”). Based
on its evaluation of the current facts and circumstances surrounding the Guaranteed Obligations and
the Subordinated Indemnity Agreement (including the recent financial performance reported for the
Parks and by Six Flags), the Company is unable to predict the loss, if any, that may be incurred
under these Guaranteed Obligations and no liability for the arrangements has been recognized at
March 31, 2009. 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 Guaranteed Obligations and related Subordinated
Indemnity Agreement.
Google Investment in AOL
In connection with the expansion of their strategic relationship in April 2006, Google Inc.
(“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. In
late January 2009, Google exercised its right to request that AOL register Google’s 5% equity
interest for sale in an initial public offering. Time Warner has the right, but not the obligation,
to purchase Google’s equity
46
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 is in
discussions with Google and has notified Google of its intention to purchase the 5% equity interest.
Contingencies
Shareholder Derivative Lawsuits
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. At
March 31, 2009, the Company’s remaining reserve related to these matters is $9 million, which
approximates an expected award for plaintiffs’ attorneys’ fees.
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 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. The first phase trial commenced on April 28, 2009,
and the second phase trial is scheduled to commence on October 20, 2009. The Company intends to defend against
this lawsuit vigorously.
On October 22, 2004, the same Siegel heirs filed a second lawsuit against the Company, DC
Comics, Warner Bros. Entertainment Inc., Warner Communications Inc. and Warner Bros. Television
Production Inc. in the U.S. District Court for the Central District of California. Plaintiffs claim
that Jerome Siegel was the sole creator of the character Superboy and, as such, DC Comics has had
no right to create new Superboy works since the alleged October 17, 2004 termination by plaintiffs
of Siegel’s grants of rights to the Superboy character to DC Comics’ predecessor-in-interest. This
lawsuit seeks a
47
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. 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 February 21, 2008, the
court granted plaintiffs’ motion to issue notice to the former community leaders nationwide. Notice
to the putative class was issued in May 2008 and in December 2008 and the putative class had until
February 27, 2009 to opt-in to the collective action. 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. Two related class actions were
filed in state courts in New Jersey and Ohio, alleging violations of the FLSA and/or the respective
state laws. These 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. A third related action was filed in state court in California, which the parties have
settled. The Company intends to defend against the remaining lawsuits vigorously.
On January 17, 2002, Community Leader volunteers filed a class action lawsuit in the U.S.
District Court for the Southern District of New York against the Company, AOL and AOL Community,
Inc. under ERISA. Plaintiffs allege that they are entitled to pension and/or welfare benefits
and/or other employee benefits subject to ERISA. In March 2003, plaintiffs filed and served a
second amended complaint, adding as defendants the Company’s Administrative Committee and the AOL
Administrative Committee. On May 19, 2003, the Company, AOL and AOL Community, Inc. filed a motion
to dismiss and the Administrative Committees filed a motion for judgment on the pleadings. Both of
these motions are pending. The Company intends to defend against these lawsuits vigorously.
On August 1, 2005, Thomas Dreiling filed a derivative suit in the U.S. District Court for the
Western District of Washington against AOL and Infospace Inc. as nominal defendant. The complaint,
brought in the name of Infospace by one of its shareholders, asserts violations of Section 16(b) of
the Exchange Act. Plaintiff alleges that certain AOL executives and the founder of Infospace,
Naveen Jain, entered into an agreement to manipulate Infospace’s stock price through the exercise
of warrants that AOL had received in connection with a commercial agreement with Infospace. Because
of this alleged agreement, plaintiff asserts that AOL and Mr. Jain constituted a “group” that held
more than 10% of Infospace’s stock and, as a result, AOL violated the short-swing trading
prohibition of Section 16(b) in connection with sales of shares received from the exercise of those
warrants. The complaint seeks disgorgement of profits, interest and attorneys’ fees. On 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. Plaintiff has filed a notice of appeal
with the U.S. Court of Appeals for the Ninth Circuit, and the oral argument is scheduled for May 7,
2009. 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 AOL, among other defendants,
infringes 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
48
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Multidistrict Litigation Order transferring the case for pretrial proceedings to the U.S.
District Court for the Central District of California. In April 2008, AOL and 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 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 New Line Cinema Corporation (“NLC Corp.”), a wholly owned subsidiary of the Company, and Katja
Motion Picture Corp., a wholly owned subsidiary of NLC Corp., and other unnamed defendants in Los
Angeles Superior Court. The complaint alleges that defendants breached contracts 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”) 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, and on November 20, 2008 the court denied the plaintiffs’ motion. 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 four assessments from the French tax authorities for French
value added tax (“VAT”) related to AOL Luxembourg’s subscription revenues from French subscribers
earned during the period from July 1, 2003 through October 31, 2006. The first assessment was
received on December 27, 2006, and the fourth was received on April 20, 2009. The French tax
authorities allege that the French subscriber revenues are subject to French VAT, instead of
Luxembourg VAT, as originally reported and paid by AOL Luxembourg. The assessments, including
interest accrued through the respective assessment dates, total €191.8 million (approximately $253
million based on the exchange rate as of March 31, 2009). The Company is currently appealing the
assessments at the French VAT audit level and intends to continue to defend against the assessments
vigorously.
On April 16, 2009, Time Inc. prevailed in a final disposition by the Supreme Court of the
Republic of Indonesia of the lawsuit 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. On August 30, 2007, eight
years after the case was initially filed, the Supreme Court overturned the rulings of two lower
courts and issued a judgment against Time Inc. Asia and six journalists. Among other things, the
court’s August 30, 2007 decision ordered defendants to apologize for certain aspects of the May
1999 article and pay Mr. Suharto damages in the amount of one trillion rupiah (approximately $87
million based on the exchange rate as of March 31, 2009). The Company challenged the judgment by
filing a petition for review before a different panel of Supreme Court justices on February 21,
2008. On April 16, 2009, that panel of the Supreme Court ruled in Time Inc.’s favor and reversed
the August 30, 2007 judgment. The court’s April 16, 2009 ruling is a final disposition of this
lawsuit.
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. The complaint, which
also named as defendants several other programming content providers (collectively, the “programmer
defendants”) as well as 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
49
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
“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. The defendants, including the
Company, filed motions to dismiss the First Amended Complaint and these motions were granted, with
leave to amend. On March 20, 2008, plaintiffs filed a second amended complaint (the “Second Amended
Complaint”) that modified certain aspects of the First Amended Complaint. On April 22, 2008, the
defendants, including the Company, filed motions to dismiss the Second Amended Complaint, which
motions were denied. On July 14, 2008, the defendants filed motions requesting the court to certify
its order for interlocutory appeal to the U.S. Court of Appeals for the Ninth Circuit, which
motions were denied. On November 14, 2008, the Company was dismissed as a programmer defendant, and
Turner Broadcasting System, Inc. was substituted in its place. 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. On November 19, 2008, the Administrative Law Judge
issued a non-binding recommended decision finding CNN America liable. On February 17, 2009, CNN
America filed exceptions to this decision with the NLRB. The Company intends to defend against this
matter vigorously.
On June 6, 2005, David McDavid and certain related entities (collectively, “McDavid”) 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 concluded on December 2, 2008. On December 9, 2008, the jury
announced its verdict in favor of McDavid on the breach of contract and promissory estoppel claims,
awarding damages on those claims of $281 million and $35 million, respectively. Pursuant to the
court’s direction that McDavid choose one of the two claim awards, McDavid elected the $281 million
award. The jury found in favor of Turner on the two remaining claims of fraud and breach of
confidential information. On January 12, 2009, Turner filed a motion to overturn the jury verdict
or, in the alternative, for a new trial, and, on April 22, 2009, the court denied the motion. On
April 23, 2009, Turner filed a notice of appeal to the Georgia
Court of Appeals. On April 24, 2009, McDavid filed a motion for
supersedeas bond requesting the court to order Turner to post a bond in the amount of $25 million. The Company
has a reserve established for this matter at March 31, 2009 of approximately $287 million
(including interest accrued through such date), although it intends to defend against this lawsuit
vigorously.
On March 10, 2009, Anderson News L.L.C. and Anderson Services L.L.C. (collectively, “Anderson
News”) filed an antitrust lawsuit in the U.S. District Court for the Southern District of New York
against several magazine publishers, distributors and wholesalers, including Time Inc. and one of
its subsidiaries, Time/Warner Retail Sales & Marketing, Inc. Plaintiffs allege that defendants
violated Section 1 of the Sherman Antitrust Act by engaging in an antitrust conspiracy against
Anderson News, as well as other related state law claims. Plaintiffs are seeking unspecified
monetary 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
50
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 three months ended March 31, 2009, the Company recorded additional income tax
reserves of approximately $13 million. Of the $13 million additional income tax reserves,
approximately $6 million would affect the Company’s effective tax rate if reversed. During the
three months ended March 31, 2009, the Company recorded interest reserves related to the income tax
reserves of approximately $36 million.
13. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
Additional financial information with respect to cash (payments) and receipts is as follows
(millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Cash payments made for interest |
|
$ |
(139 |
) |
|
$ |
(222 |
) |
Interest income received |
|
|
11 |
|
|
|
22 |
|
|
|
|
|
|
|
|
Cash interest payments, net |
|
$ |
(128 |
) |
|
$ |
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments made for income taxes |
|
$ |
(96 |
) |
|
$ |
(70 |
) |
Income tax refunds received |
|
|
44 |
|
|
|
7 |
|
|
|
|
|
|
|
|
Cash tax payments, net |
|
$ |
(52 |
) |
|
$ |
(63 |
) |
|
|
|
|
|
|
|
The consolidated statement of cash flows for the three months ended March 31, 2009 does not
reflect the noncash dividend of all shares of TWC common stock held by the Company in a spin-off to
Time Warner stockholders, which reduced shareholders’ equity by $6.822 billion.
Interest Expense, Net
Interest expense, net, consists of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Interest income |
|
$ |
34 |
|
|
$ |
47 |
|
Interest expense |
|
|
(346 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
Total interest expense, net |
|
$ |
(312 |
) |
|
$ |
(347 |
) |
|
|
|
|
|
|
|
51
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other Loss, Net
Other loss, net, consists of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Investment losses, net |
|
$ |
(13 |
) |
|
$ |
(36 |
) |
Loss on equity method investees |
|
|
(23 |
) |
|
|
(13 |
) |
Losses on accounts receivable |
|
|
(2 |
) |
|
|
(13 |
) |
Other |
|
|
(1 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
Total other loss, net |
|
$ |
(39 |
) |
|
$ |
(59 |
) |
|
|
|
|
|
|
|
Related Parties
Income (expense) resulting from transactions with related parties consists of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Revenues |
|
$ |
105 |
|
|
$ |
93 |
|
Costs of revenues |
|
|
(1 |
) |
|
|
(3 |
) |
Selling, general and administrative |
|
|
(4 |
) |
|
|
(1 |
) |
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 $330 million investment in The
Reserve Fund, but the redemption request was not honored. On September 22, 2008, The Reserve Fund
announced that redemptions of shares were suspended pursuant to a Securities and Exchange
Commission order requested by The Reserve Fund so that an orderly liquidation could be effected.
Through April 28, 2009, the Company has received $297 million from The Reserve Fund representing
its pro rata share of partial distributions made by The Reserve Fund. The Company has not been
informed as to when the remaining amount will be returned. In February 2009, The Reserve Fund
announced that it would set aside an initial amount of $3.5 billion to defend against certain legal
actions. The Company has filed a claim against The Reserve Fund demanding repayment of the
remaining amount of its full investment. As a result of the status of The Reserve Fund, the Company
has classified its receivable from The Reserve Fund at March 31, 2009 as other current assets on
the Company’s consolidated balance sheet.
52
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
March 31, 2009 |
|
|
December 31, 2008 |
|
| |
|
|
|
|
|
(recast) |
|
Accounts payable |
|
$ |
595 |
|
|
$ |
800 |
|
Accrued expenses |
|
|
2,632 |
|
|
|
2,789 |
|
Participations payable |
|
|
2,474 |
|
|
|
2,522 |
|
Royalties and programming costs payable |
|
|
751 |
|
|
|
687 |
|
Accrued compensation |
|
|
660 |
|
|
|
974 |
|
Accrued interest |
|
|
421 |
|
|
|
265 |
|
Accrued income taxes |
|
|
256 |
|
|
|
157 |
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses |
|
$ |
7,789 |
|
|
$ |
8,194 |
|
|
|
|
|
|
|
|
Other Noncurrent Liabilities
Other noncurrent liabilities consist of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
March 31, 2009 |
|
|
December 31, 2008 |
|
| |
|
|
|
|
|
(recast) |
|
Noncurrent tax and interest reserves |
|
$ |
2,127 |
|
|
$ |
2,106 |
|
Participations payable |
|
|
1,207 |
|
|
|
1,384 |
|
Royalties and programming costs payable |
|
|
1,219 |
|
|
|
1,145 |
|
Noncurrent pension and post retirement liabilities |
|
|
848 |
|
|
|
829 |
|
Deferred compensation |
|
|
500 |
|
|
|
552 |
|
Other noncurrent liabilities |
|
|
811 |
|
|
|
785 |
|
|
|
|
|
|
|
|
Total other noncurrent liabilities |
|
$ |
6,712 |
|
|
$ |
6,801 |
|
|
|
|
|
|
|
|
Accounts Receivable and Receivables Securitized
Accounts receivable and receivables securitized consist of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
March 31, 2009 |
|
|
December 31, 2008 |
|
| |
|
|
|
|
|
(recast) |
|
Securitized trade receivables |
|
$ |
1,501 |
|
|
$ |
1,984 |
|
Receivables sold to third parties |
|
|
(717 |
) |
|
|
(805 |
) |
|
|
|
|
|
|
|
Retained interests in securitizations |
|
|
784 |
|
|
|
1,179 |
|
Receivables not subject to securitizations |
|
|
5,768 |
|
|
|
6,754 |
|
|
|
|
|
|
|
|
Receivables, including retained interest in securitizations |
|
|
6,552 |
|
|
|
7,933 |
|
Allowances |
|
|
(1,878 |
) |
|
|
(2,269 |
) |
|
|
|
|
|
|
|
Current receivables, including retained interests in securitizations, net |
|
|
4,674 |
|
|
|
5,664 |
|
Noncurrent receivables (included in other assets) |
|
|
956 |
|
|
|
983 |
|
|
|
|
|
|
|
|
Total receivables |
|
$ |
5,630 |
|
|
$ |
6,647 |
|
|
|
|
|
|
|
|
Revenues (and related receivables) from the distribution of television product are recognized
when the film or series is made available to customers for exploitation. In certain circumstances,
the availability dates granted to the customers may
precede the date the Company, pursuant to the terms of the applicable contractual
arrangements, may bill the customers for these sales. Unbilled accounts receivable, which primarily
relate to the aforementioned distribution of television product, totaled $2.388 billion and $2.428
billion at March 31, 2009 and December 31, 2008, respectively. Included in the unbilled accounts
receivable at March 31, 2009 was $1.527 billion to be billed in the next twelve months.
53
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Overview
Set forth below are condensed consolidating financial statements presenting the financial
position, results of operations and cash flows of (i) Time Warner Inc. (the “Parent Company”), (ii)
Historic TW Inc. (in its own capacity and as successor to Time Warner Companies, Inc.), Home Box
Office, Inc. (“HBO”), and Turner Broadcasting System, Inc., each a wholly owned subsidiary of the
Parent Company, on a combined basis (collectively, the “Guarantor Subsidiaries”), (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.
These condensed consolidating financial statements are included in connection with the
registration statement on Form S-3 filed with the Securities and Exchange Commission by the Parent Company and HBO on April 6, 2009.
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. and reflect Time Warner Cable Inc., which
was separated from the Parent Company on March 12, 2009, as a discontinued operation.
On April 15, 2009, the Parent Company completed a solicitation of consents (the “Consent
Solicitation”) from the holders of debt securities issued under certain Indentures (the
“Securities”), resulting in the adoption on April 16, 2009 of certain amendments to each Indenture
that provide that certain restrictive covenants will not apply (subject to the concurrent or prior
issuance of the guarantee by HBO discussed below) to a conveyance or transfer by AOL LLC, a
subsidiary of the Parent Company, of its properties and assets substantially as an entirety unless
such conveyance or transfer constitutes a conveyance or transfer of the properties and assets of
the issuer and the guarantors under the relevant Indenture and their respective subsidiaries, taken
as a whole, substantially as an entirety. As a result of the Consent Solicitation, in connection
with the conveyance or transfer of AOL LLC’s properties and assets substantially as an entirety,
HBO will issue a guarantee of the obligations of Historic TW Inc., whether as issuer or guarantor,
under the Indentures and the Securities. Such guarantee will be issued by HBO only in connection
with such a transaction. Accordingly, for purposes of this presentation, the consolidating
financial information herein reflects HBO as a Guarantor Subsidiary and does not reflect the
historical financial information of AOL LLC in the Guarantor data and information. Instead, the
historical financial information of AOL LLC is reflected in the data and information regarding the
Non-Guarantor Subsidiaries. If the HBO guarantee is issued, HBO, together with the other Guarantor
Subsidiaries, will fully and unconditionally, jointly and severally, guarantee the Securities on an
unsecured basis.
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. Certain transfers of cash between
subsidiaries and their parent companies are reflected as cash flows
from investing and financing activities in the accompanying condensed
consolidating statements of cash flows. All other intercompany
activity is reflected in cash flows from operations.
54
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Balance Sheet
March 31, 2009
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
6,247 |
|
|
$ |
99 |
|
|
$ |
769 |
|
|
$ |
— |
|
|
$ |
7,115 |
|
Receivables, net |
|
|
33 |
|
|
|
656 |
|
|
|
3,985 |
|
|
|
— |
|
|
|
4,674 |
|
Inventories |
|
|
— |
|
|
|
519 |
|
|
|
1,531 |
|
|
|
— |
|
|
|
2,050 |
|
Deferred income taxes |
|
|
723 |
|
|
|
563 |
|
|
|
563 |
|
|
|
(1,126 |
) |
|
|
723 |
|
Prepaid expenses and other current assets |
|
|
113 |
|
|
|
126 |
|
|
|
486 |
|
|
|
— |
|
|
|
725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
7,116 |
|
|
|
1,963 |
|
|
|
7,334 |
|
|
|
(1,126 |
) |
|
|
15,287 |
|
Noncurrent inventories and film costs |
|
|
— |
|
|
|
1,712 |
|
|
|
3,458 |
|
|
|
(116 |
) |
|
|
5,054 |
|
Investments in amounts due to and from consolidated
subsidiaries |
|
|
43,516 |
|
|
|
21,121 |
|
|
|
11,187 |
|
|
|
(75,824 |
) |
|
|
— |
|
Investments, including available-for-sale securities |
|
|
67 |
|
|
|
345 |
|
|
|
1,011 |
|
|
|
(479 |
) |
|
|
944 |
|
Property, plant and equipment |
|
|
393 |
|
|
|
485 |
|
|
|
3,891 |
|
|
|
— |
|
|
|
4,769 |
|
Intangible assets subject to amortization, net |
|
|
— |
|
|
|
2 |
|
|
|
3,490 |
|
|
|
— |
|
|
|
3,492 |
|
Intangible assets not subject to amortization |
|
|
— |
|
|
|
2,009 |
|
|
|
5,714 |
|
|
|
— |
|
|
|
7,723 |
|
Goodwill |
|
|
— |
|
|
|
9,880 |
|
|
|
22,477 |
|
|
|
— |
|
|
|
32,357 |
|
Other assets |
|
|
142 |
|
|
|
91 |
|
|
|
970 |
|
|
|
— |
|
|
|
1,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
51,234 |
|
|
$ |
37,608 |
|
|
$ |
59,532 |
|
|
$ |
(77,545 |
) |
|
$ |
70,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
925 |
|
|
$ |
1,066 |
|
|
$ |
5,880 |
|
|
$ |
(82 |
) |
|
$ |
7,789 |
|
Deferred revenue |
|
|
— |
|
|
|
15 |
|
|
|
965 |
|
|
|
(14 |
) |
|
|
966 |
|
Debt due within one year |
|
|
2,000 |
|
|
|
12 |
|
|
|
68 |
|
|
|
— |
|
|
|
2,080 |
|
Current liabilities of discontinued operations |
|
|
49 |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,974 |
|
|
|
1,093 |
|
|
|
6,916 |
|
|
|
(96 |
) |
|
|
10,887 |
|
Long-term debt |
|
|
9,976 |
|
|
|
5,345 |
|
|
|
81 |
|
|
|
— |
|
|
|
15,402 |
|
Due (to) from affiliates |
|
|
(787 |
) |
|
|
— |
|
|
|
787 |
|
|
|
— |
|
|
|
— |
|
Deferred income taxes |
|
|
1,127 |
|
|
|
2,812 |
|
|
|
2,622 |
|
|
|
(5,434 |
) |
|
|
1,127 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
384 |
|
|
|
(111 |
) |
|
|
273 |
|
Other noncurrent liabilities |
|
|
2,158 |
|
|
|
2,324 |
|
|
|
4,451 |
|
|
|
(2,221 |
) |
|
|
6,712 |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due (to) from Time Warner and subsidiaries |
|
|
— |
|
|
|
(16,337 |
) |
|
|
(2,961 |
) |
|
|
19,298 |
|
|
|
— |
|
Other shareholders’ equity |
|
|
35,786 |
|
|
|
42,371 |
|
|
|
46,469 |
|
|
|
(88,840 |
) |
|
|
35,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Time Warner Inc. shareholders’ equity |
|
|
35,786 |
|
|
|
26,034 |
|
|
|
43,508 |
|
|
|
(69,542 |
) |
|
|
35,786 |
|
Noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
783 |
|
|
|
(141 |
) |
|
|
642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
35,786 |
|
|
|
26,034 |
|
|
|
44,291 |
|
|
|
(69,683 |
) |
|
|
36,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
51,234 |
|
|
$ |
37,608 |
|
|
$ |
59,532 |
|
|
$ |
(77,545 |
) |
|
$ |
70,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Balance Sheet
December 31, 2008
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(recast, millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
469 |
|
|
$ |
103 |
|
|
$ |
661 |
|
|
$ |
— |
|
|
$ |
1,233 |
|
Receivables, net |
|
|
67 |
|
|
|
675 |
|
|
|
4,922 |
|
|
|
— |
|
|
|
5,664 |
|
Inventories |
|
|
— |
|
|
|
553 |
|
|
|
1,436 |
|
|
|
— |
|
|
|
1,989 |
|
Deferred income taxes |
|
|
625 |
|
|
|
464 |
|
|
|
465 |
|
|
|
(930 |
) |
|
|
624 |
|
Prepaid expenses and other current assets |
|
|
217 |
|
|
|
107 |
|
|
|
448 |
|
|
|
— |
|
|
|
772 |
|
Current assets of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
6,480 |
|
|
|
— |
|
|
|
6,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,378 |
|
|
|
1,902 |
|
|
|
14,412 |
|
|
|
(930 |
) |
|
|
16,762 |
|
Noncurrent inventories and film costs |
|
|
— |
|
|
|
1,732 |
|
|
|
3,584 |
|
|
|
(124 |
) |
|
|
5,192 |
|
Investments in amounts due to and from consolidated
subsidiaries |
|
|
59,525 |
|
|
|
38,198 |
|
|
|
11,178 |
|
|
|
(108,901 |
) |
|
|
— |
|
Investments, including available-for-sale securities |
|
|
68 |
|
|
|
382 |
|
|
|
1,047 |
|
|
|
(461 |
) |
|
|
1,036 |
|
Property, plant and equipment |
|
|
406 |
|
|
|
499 |
|
|
|
3,991 |
|
|
|
— |
|
|
|
4,896 |
|
Intangible assets subject to amortization, net |
|
|
— |
|
|
|
2 |
|
|
|
3,562 |
|
|
|
— |
|
|
|
3,564 |
|
Intangible assets not subject to amortization |
|
|
— |
|
|
|
2,009 |
|
|
|
5,719 |
|
|
|
— |
|
|
|
7,728 |
|
Goodwill |
|
|
— |
|
|
|
9,879 |
|
|
|
22,549 |
|
|
|
— |
|
|
|
32,428 |
|
Other assets |
|
|
104 |
|
|
|
101 |
|
|
|
1,015 |
|
|
|
— |
|
|
|
1,220 |
|
Noncurrent assets of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
41,231 |
|
|
|
— |
|
|
|
41,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
61,481 |
|
|
$ |
54,704 |
|
|
$ |
108,288 |
|
|
$ |
(110,416 |
) |
|
$ |
114,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
463 |
|
|
$ |
1,030 |
|
|
$ |
6,789 |
|
|
$ |
(88 |
) |
|
$ |
8,194 |
|
Deferred revenue |
|
|
— |
|
|
|
8 |
|
|
|
1,020 |
|
|
|
(16 |
) |
|
|
1,012 |
|
Debt due within one year |
|
|
2,000 |
|
|
|
12 |
|
|
|
54 |
|
|
|
— |
|
|
|
2,066 |
|
Current liabilities of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
2,865 |
|
|
|
— |
|
|
|
2,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,463 |
|
|
|
1,050 |
|
|
|
10,728 |
|
|
|
(104 |
) |
|
|
14,137 |
|
Long-term debt |
|
|
14,466 |
|
|
|
5,350 |
|
|
|
73 |
|
|
|
— |
|
|
|
19,889 |
|
Due (to) from affiliates |
|
|
(847 |
) |
|
|
— |
|
|
|
847 |
|
|
|
— |
|
|
|
— |
|
Deferred income taxes |
|
|
974 |
|
|
|
2,795 |
|
|
|
2,616 |
|
|
|
(5,411 |
) |
|
|
974 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
379 |
|
|
|
(113 |
) |
|
|
266 |
|
Other noncurrent liabilities |
|
|
2,137 |
|
|
|
2,330 |
|
|
|
4,504 |
|
|
|
(2,170 |
) |
|
|
6,801 |
|
Noncurrent liabilities of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
26,320 |
|
|
|
— |
|
|
|
26,320 |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due (to) from Time Warner and subsidiaries |
|
|
— |
|
|
|
(15,308 |
) |
|
|
(30,627 |
) |
|
|
45,935 |
|
|
|
— |
|
Other shareholders’ equity |
|
|
42,288 |
|
|
|
58,487 |
|
|
|
89,927 |
|
|
|
(148,414 |
) |
|
|
42,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Time Warner Inc. shareholders’ equity |
|
|
42,288 |
|
|
|
43,179 |
|
|
|
59,300 |
|
|
|
(102,479 |
) |
|
|
42,288 |
|
Noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
3,521 |
|
|
|
(139 |
) |
|
|
3,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
42,288 |
|
|
|
43,179 |
|
|
|
62,821 |
|
|
|
(102,618 |
) |
|
|
45,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
61,481 |
|
|
$ |
54,704 |
|
|
$ |
108,288 |
|
|
$ |
(110,416 |
) |
|
$ |
114,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Operations
For The Three Months Ended March 31, 2009
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
|
$ |
1,273 |
|
|
$ |
5,747 |
|
|
$ |
(75 |
) |
|
$ |
6,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(608 |
) |
|
|
(3,347 |
) |
|
|
75 |
|
|
|
(3,880 |
) |
Selling, general and administrative |
|
|
(91 |
) |
|
|
(199 |
) |
|
|
(1,362 |
) |
|
|
— |
|
|
|
(1,652 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(121 |
) |
|
|
— |
|
|
|
(121 |
) |
Restructuring costs |
|
|
— |
|
|
|
— |
|
|
|
(94 |
) |
|
|
— |
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(91 |
) |
|
|
466 |
|
|
|
823 |
|
|
|
— |
|
|
|
1,198 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
1,158 |
|
|
|
638 |
|
|
|
310 |
|
|
|
(2,106 |
) |
|
|
— |
|
Interest expense, net |
|
|
(203 |
) |
|
|
(107 |
) |
|
|
(2 |
) |
|
|
— |
|
|
|
(312 |
) |
Other income (expense), net |
|
|
(17 |
) |
|
|
2 |
|
|
|
5 |
|
|
|
(29 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
847 |
|
|
|
999 |
|
|
|
1,136 |
|
|
|
(2,135 |
) |
|
|
847 |
|
Income tax provision |
|
|
(288 |
) |
|
|
(347 |
) |
|
|
(395 |
) |
|
|
742 |
|
|
|
(288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
559 |
|
|
|
652 |
|
|
|
741 |
|
|
|
(1,393 |
) |
|
|
559 |
|
Discontinued operations, net of tax |
|
|
131 |
|
|
|
180 |
|
|
|
180 |
|
|
|
(360 |
) |
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
690 |
|
|
|
832 |
|
|
|
921 |
|
|
|
(1,753 |
) |
|
|
690 |
|
Less Net income attributable to noncontrolling interests |
|
|
(29 |
) |
|
|
(20 |
) |
|
|
(37 |
) |
|
|
57 |
|
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Time Warner Inc. shareholders |
|
$ |
661 |
|
|
$ |
812 |
|
|
$ |
884 |
|
|
$ |
(1,696 |
) |
|
$ |
661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Operations
For The Three Months Ended March 31, 2008
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(recast, millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
|
$ |
1,237 |
|
|
$ |
6,319 |
|
|
$ |
(86 |
) |
|
$ |
7,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(639 |
) |
|
|
(3,614 |
) |
|
|
86 |
|
|
|
(4,167 |
) |
Selling, general and administrative |
|
|
(100 |
) |
|
|
(198 |
) |
|
|
(1,434 |
) |
|
|
— |
|
|
|
(1,732 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(118 |
) |
|
|
— |
|
|
|
(118 |
) |
Restructuring costs |
|
|
(6 |
) |
|
|
— |
|
|
|
(136 |
) |
|
|
— |
|
|
|
(142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(106 |
) |
|
|
400 |
|
|
|
1,017 |
|
|
|
— |
|
|
|
1,311 |
|
Equity in pretax income of consolidated subsidiaries |
|
|
1,269 |
|
|
|
830 |
|
|
|
332 |
|
|
|
(2,431 |
) |
|
|
— |
|
Interest expense, net |
|
|
(262 |
) |
|
|
(265 |
) |
|
|
180 |
|
|
|
— |
|
|
|
(347 |
) |
Other income (expense), net |
|
|
4 |
|
|
|
(4 |
) |
|
|
(35 |
) |
|
|
(24 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
905 |
|
|
|
961 |
|
|
|
1,494 |
|
|
|
(2,455 |
) |
|
|
905 |
|
Income tax provision |
|
|
(345 |
) |
|
|
(354 |
) |
|
|
(579 |
) |
|
|
933 |
|
|
|
(345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
560 |
|
|
|
607 |
|
|
|
915 |
|
|
|
(1,522 |
) |
|
|
560 |
|
Discontinued operations, net of tax |
|
|
262 |
|
|
|
263 |
|
|
|
259 |
|
|
|
(522 |
) |
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
822 |
|
|
|
870 |
|
|
|
1,174 |
|
|
|
(2,044 |
) |
|
|
822 |
|
Less Net income attributable to noncontrolling interests |
|
|
(51 |
) |
|
|
(40 |
) |
|
|
(71 |
) |
|
|
111 |
|
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Time Warner Inc. shareholders |
|
$ |
771 |
|
|
$ |
830 |
|
|
$ |
1,103 |
|
|
$ |
(1,933 |
) |
|
$ |
771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Cash Flows
For The Three Months Ended March 31, 2009
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Time Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
(millions) |
|
|
|
|
|
|
|
|
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
690 |
|
|
$ |
832 |
|
|
$ |
921 |
|
|
$ |
(1,753 |
) |
|
$ |
690 |
|
Less Discontinued operations, net of tax |
|
|
131 |
|
|
|
180 |
|
|
|
180 |
|
|
|
(360 |
) |
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
559 |
|
|
|
652 |
|
|
|
741 |
|
|
|
(1,393 |
) |
|
|
559 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
10 |
|
|
|
31 |
|
|
|
316 |
|
|
|
— |
|
|
|
357 |
|
Amortization of film and television costs |
|
|
— |
|
|
|
472 |
|
|
|
1,152 |
|
|
|
— |
|
|
|
1,624 |
|
Loss on investments and other assets, net |
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
Excess (deficiency) of distributions over equity in pretax
income of consolidated subsidiaries |
|
|
(1,158 |
) |
|
|
(638 |
) |
|
|
(310 |
) |
|
|
2,106 |
|
|
|
— |
|
Equity in losses of investee companies, net of cash
distributions |
|
|
— |
|
|
|
(3 |
) |
|
|
25 |
|
|
|
— |
|
|
|
22 |
|
Equity-based compensation |
|
|
13 |
|
|
|
15 |
|
|
|
43 |
|
|
|
— |
|
|
|
71 |
|
Deferred income taxes |
|
|
(40 |
) |
|
|
(47 |
) |
|
|
(47 |
) |
|
|
94 |
|
|
|
(40 |
) |
Changes in operating assets and liabilities, net of acquisitions |
|
|
534 |
|
|
|
(130 |
) |
|
|
(759 |
) |
|
|
(815 |
) |
|
|
(1,170 |
) |
Intercompany |
|
|
— |
|
|
|
150 |
|
|
|
(150 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by operations from continuing operations |
|
|
(82 |
) |
|
|
504 |
|
|
|
1,011 |
|
|
|
(8 |
) |
|
|
1,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
Investments and acquisitions, net of cash acquired |
|
|
— |
|
|
|
(12 |
) |
|
|
(38 |
) |
|
|
— |
|
|
|
(50 |
) |
Capital expenditures and product development costs |
|
|
(13 |
) |
|
|
(17 |
) |
|
|
(104 |
) |
|
|
— |
|
|
|
(134 |
) |
Investment proceeds from available-for-sale securities |
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
Special Dividend received from Time Warner Cable Inc. |
|
|
9,253 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,253 |
|
Advances to parent and consolidated subsidiaries |
|
|
1,308 |
|
|
|
552 |
|
|
|
— |
|
|
|
(1,860 |
) |
|
|
— |
|
Other investment proceeds |
|
|
38 |
|
|
|
2 |
|
|
|
72 |
|
|
|
— |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by investing activities from continuing operations |
|
|
10,584 |
|
|
|
525 |
|
|
|
(65 |
) |
|
|
(1,860 |
) |
|
|
9,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
3,493 |
|
|
|
— |
|
|
|
14 |
|
|
|
— |
|
|
|
3,507 |
|
Debt repayments |
|
|
(7,983 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(7,986 |
) |
Principal payments on capital leases |
|
|
— |
|
|
|
(4 |
) |
|
|
(7 |
) |
|
|
— |
|
|
|
(11 |
) |
Dividends paid |
|
|
(226 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(226 |
) |
Other financing activities |
|
|
(8 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(9 |
) |
Change in due to/from parent and investment in segment |
|
|
— |
|
|
|
(1,029 |
) |
|
|
(839 |
) |
|
|
1,868 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities from continuing
operations |
|
|
(4,724 |
) |
|
|
(1,033 |
) |
|
|
(836 |
) |
|
|
1,868 |
|
|
|
(4,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by continuing operations |
|
|
5,778 |
|
|
|
(4 |
) |
|
|
110 |
|
|
|
— |
|
|
|
5,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operations from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
582 |
|
|
|
— |
|
|
|
582 |
|
Cash used by investing activities from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(622 |
) |
|
|
— |
|
|
|
(622 |
) |
Cash used by financing activities from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(5,224 |
) |
|
|
— |
|
|
|
(5,224 |
) |
Effect of change in cash and equivalents of discontinued
operations |
|
|
— |
|
|
|
— |
|
|
|
5,262 |
|
|
|
— |
|
|
|
5,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND EQUIVALENTS |
|
|
5,778 |
|
|
|
(4 |
) |
|
|
108 |
|
|
|
— |
|
|
|
5,882 |
|
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD |
|
|
469 |
|
|
|
103 |
|
|
|
661 |
|
|
|
— |
|
|
|
1,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
6,247 |
|
|
$ |
99 |
|
|
$ |
769 |
|
|
$ |
— |
|
|
$ |
7,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)
Consolidating Statement of Cash Flows
For The Three Months Ended March 31, 2008
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Guarantor |
|
|
Non-
Guarantor |
|
|
|
|
|
|
Time Warner |
|
| |
|
Time Warner |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(recast, millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
822 |
|
|
$ |
870 |
|
|
$ |
1,174 |
|
|
$ |
(2,044 |
) |
|
$ |
822 |
|
Less Discontinued operations, net of tax |
|
|
262 |
|
|
|
263 |
|
|
|
259 |
|
|
|
(522 |
) |
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
560 |
|
|
|
607 |
|
|
|
915 |
|
|
|
(1,522 |
) |
|
|
560 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
10 |
|
|
|
27 |
|
|
|
328 |
|
|
|
— |
|
|
|
365 |
|
Amortization of film and television costs |
|
|
— |
|
|
|
494 |
|
|
|
883 |
|
|
|
— |
|
|
|
1,377 |
|
Loss on investments and other assets, net |
|
|
— |
|
|
|
1 |
|
|
|
25 |
|
|
|
— |
|
|
|
26 |
|
Excess (deficiency) of distributions over equity in pretax
income of consolidated subsidiaries |
|
|
(1,269 |
) |
|
|
(830 |
) |
|
|
(332 |
) |
|
|
2,431 |
|
|
|
— |
|
Equity in losses of investee companies, net of cash
distributions |
|
|
— |
|
|
|
(3 |
) |
|
|
22 |
|
|
|
— |
|
|
|
19 |
|
Equity-based compensation |
|
|
19 |
|
|
|
16 |
|
|
|
40 |
|
|
|
— |
|
|
|
75 |
|
Deferred income taxes |
|
|
37 |
|
|
|
(111 |
) |
|
|
(94 |
) |
|
|
205 |
|
|
|
37 |
|
Changes in operating assets and liabilities, net of acquisitions |
|
|
468 |
|
|
|
(88 |
) |
|
|
(112 |
) |
|
|
(1,111 |
) |
|
|
(843 |
) |
Intercompany |
|
|
— |
|
|
|
193 |
|
|
|
(193 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by operations from continuing operations |
|
|
(175 |
) |
|
|
306 |
|
|
|
1,482 |
|
|
|
3 |
|
|
|
1,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and acquisitions, net of cash acquired |
|
|
— |
|
|
|
(13 |
) |
|
|
(240 |
) |
|
|
— |
|
|
|
(253 |
) |
Capital expenditures and product development costs |
|
|
(2 |
) |
|
|
(24 |
) |
|
|
(120 |
) |
|
|
— |
|
|
|
(146 |
) |
Advances to parent and consolidated subsidiaries |
|
|
989 |
|
|
|
1,190 |
|
|
|
381 |
|
|
|
(2,560 |
) |
|
|
— |
|
Other investment proceeds |
|
|
2 |
|
|
|
14 |
|
|
|
14 |
|
|
|
— |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by investing activities from continuing operations |
|
|
989 |
|
|
|
1,167 |
|
|
|
35 |
|
|
|
(2,560 |
) |
|
|
(369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
2,102 |
|
|
|
— |
|
|
|
10 |
|
|
|
— |
|
|
|
2,112 |
|
Debt repayments |
|
|
(2,531 |
) |
|
|
(166 |
) |
|
|
(19 |
) |
|
|
— |
|
|
|
(2,716 |
) |
Proceeds from exercise of stock options |
|
|
34 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
34 |
|
Excess tax benefit on stock options |
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
Principal payments on capital leases |
|
|
— |
|
|
|
(1 |
) |
|
|
(9 |
) |
|
|
— |
|
|
|
(10 |
) |
Repurchases of common stock |
|
|
(332 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(332 |
) |
Dividends paid |
|
|
(224 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(224 |
) |
Other financing activities |
|
|
(18 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(18 |
) |
Change in due to/from parent and investment in segment |
|
|
— |
|
|
|
(1,255 |
) |
|
|
(1,302 |
) |
|
|
2,557 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities from continuing
operations |
|
|
(967 |
) |
|
|
(1,422 |
) |
|
|
(1,320 |
) |
|
|
2,557 |
|
|
|
(1,152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by continuing operations |
|
|
(153 |
) |
|
|
51 |
|
|
|
197 |
|
|
|
— |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operations from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
1,180 |
|
|
|
— |
|
|
|
1,180 |
|
Cash used by investing activities from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(841 |
) |
|
|
— |
|
|
|
(841 |
) |
Cash used by financing activities from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(348 |
) |
|
|
— |
|
|
|
(348 |
) |
Effect of change in cash and equivalents of discontinued
operations |
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND EQUIVALENTS |
|
|
(153 |
) |
|
|
51 |
|
|
|
194 |
|
|
|
— |
|
|
|
92 |
|
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD |
|
|
586 |
|
|
|
53 |
|
|
|
646 |
|
|
|
— |
|
|
|
1,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
433 |
|
|
$ |
104 |
|
|
$ |
840 |
|
|
$ |
— |
|
|
$ |
1,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Part II. Other Information
Item 1. Legal Proceedings.
Other Matters
Reference is made to the lawsuit filed by certain heirs of Jerome Siegel described on page 55
of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008 Form
10-K”). The first phase trial commenced on April 28, 2009,
and the second phase trial is scheduled to commence
on October 20, 2009.
Reference is made to the derivative suit filed by Thomas Dreiling described on page 56 of the
2008 Form 10-K. The oral argument is scheduled for May 7, 2009.
Reference is made to the lawsuit filed by the former dictator of
the Republic of Indonesia described on page
57 of the 2008 Form 10-K. On April 16, 2009, the Supreme Court of Indonesia ruled
in Time Inc.’s favor and reversed the court’s August 30, 2007 judgment. The court’s April 16, 2009
ruling is a final disposition of this lawsuit.
Reference is made to the lawsuit filed by David McDavid and certain related entities described
on page 58 of the 2008 Form 10-K. On April 22, 2009, the court denied Turner’s motion to overturn
the jury verdict or, in the alternative, for a new trial, and, on
April 23, 2009, Turner filed
a notice of appeal to the Georgia Court of Appeals. On April 24, 2009, McDavid filed a motion for
supersedeas bond requesting the court to order Turner to post a bond in the amount of $25
million. The Company has a reserve established for this matter at March 31, 2009 of approximately
$287 million (including interest accrued through such date), although it intends to defend against
this lawsuit vigorously.
On March 10, 2009, Anderson News L.L.C. and Anderson Services L.L.C. (collectively, “Anderson
News”) filed an antitrust lawsuit in the U.S. District Court for the Southern District of New York
against several magazine publishers, distributors and wholesalers, including Time Inc. and one of
its subsidiaries, Time/Warner Retail Sales & Marketing, Inc. Plaintiffs allege that defendants
violated Section 1 of the Sherman Antitrust Act by engaging in an antitrust conspiracy
against Anderson News, as well as other related state law claims. Plaintiffs are seeking
unspecified monetary damages. The Company intends to defend against this lawsuit vigorously.
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 2008 Form 10-K.
61
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 March 31, 2009 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) |
January 1, 2009 –
January 31, 2009 |
|
|
0 |
|
|
N/A |
|
|
|
|
0 |
|
|
$ |
2,202,463,464 |
|
February 1, 2009 –
February 28, 2009 |
|
|
0 |
|
|
N/A |
|
|
|
|
0 |
|
|
$ |
2,202,463,464 |
|
March 1, 2009 –
March 31, 2009 |
|
|
0 |
|
|
N/A |
|
|
|
|
0 |
|
|
$ |
2,202,463,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
0 |
|
|
N/A |
|
|
|
|
0 |
|
|
|
|
|
|
|
|
| (1) |
|
The total number of shares purchased includes (a) shares of Common Stock purchased
by the Company under the Stock Repurchase Program described in footnote 3 below, and (b)
shares of Common Stock that are tendered by employees to the Company to satisfy the employees’
tax withholding obligations in connection with the vesting of awards of restricted stock,
which are repurchased by the Company based on their fair market value on the vesting date. No
awards of restricted stock vested in the months of January, February and March. Consequently,
the Company did not purchase any shares of Common Stock in connection with the vesting of such
awards during these months. |
| (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 4. Submission of Matters to a Vote of Security Holders.
A Special Meeting of Stockholders of the Company was held on January 16, 2009 (the “January
2009 Special Meeting”). For a description of the matter voted on at the January 2009 Special
Meeting, see Part I, Item 4 of the 2008 Form 10-K.
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.
62
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: April 29, 2009 |
/s/
John K. Martin, Jr. |
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John K. Martin, Jr. |
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Executive Vice President and Chief Financial Officer |
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EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
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Exhibit
No. |
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Description of Exhibit |
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3.1
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Certificate of Amendment, dated March 27, 2009, to the Restated Certificate
of Incorporation of Time Warner Inc. (the “Company”) as filed with the
Secretary of State of the State of Delaware on March 27, 2009 (incorporated
herein by reference to Exhibit 3.1 to the Company’s Current Report on Form
8-K dated March 27, 2009). |
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4.1
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Fifth Supplemental Indenture, dated as of February 23, 2009, to the
Indenture dated as of October 15, 1992 (the “1992 Historic TW Indenture”),
among Time Warner Companies, Inc. (“TWCI”) as issuer, the Company, AOL LLC
(“AOL”), Historic TW Inc. (“Historic TW”) and Turner Broadcasting System,
Inc. (“TBS”) as guarantors, and The Bank of New York Mellon (“BNY Mellon”),
as Trustee (incorporated herein by reference to Exhibit 99.1 to the
Company’s Current Report on Form 8-K dated February 23, 2009 (the “February
2009 Form 8-K”)). |
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4.2
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Sixth Supplemental Indenture, dated as of April 16, 2009, to the 1992
Historic TW Indenture, among Historic TW (in its capacity as successor to
TWCI) as issuer, the Company, AOL, Historic TW (in its own capacity and not
as successor to TWCI) and TBS as guarantors, and BNY Mellon, as Trustee
(incorporated herein by reference to Exhibit 99.4 to the Company’s Current
Report on Form 8-K dated April 16, 2009 (the
“April 2009 Form 8-K”)). |
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4.3
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Eighth Supplemental Indenture, dated as of February 23, 2009, to the
Indenture dated as of January 15, 1993 (the “1993 Historic TW Indenture”),
among TWCI as issuer, the Company, AOL, Historic TW and TBS as guarantors,
and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 99.2
to the February 2009 Form 8-K). |
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4.4
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Ninth Supplemental Indenture, dated as of April 16, 2009, to the 1993
Historic TW Indenture, among Historic TW (in its capacity as successor to
TWCI) as issuer, the Company, AOL, Historic TW (in its own capacity and not
as successor to TWCI) and TBS as guarantors, and BNY Mellon, as Trustee
(incorporated herein by reference to Exhibit 99.3 to the
April 2009
Form 8-K). |
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4.5
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Fifth Supplemental Indenture, dated as of February 23, 2009, to the
Indenture dated as of May 15, 1993 (the “1993 TBS Indenture”), among TBS as
issuer, TWCI, the Company, AOL and Historic TW as guarantors, and BNY
Mellon, as Trustee (incorporated herein by reference to Exhibit 99.3 to the
February 2009 Form 8-K). |
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4.6
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Sixth Supplemental Indenture, dated as of April 16, 2009, to the 1993 TBS
Indenture, among TBS as issuer, the Company, AOL and Historic TW (including
in its capacity as successor to TWCI) as guarantors, and BNY Mellon, as
Trustee (incorporated herein by reference to Exhibit 99.5 to the April 2009
Form 8-K). |
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4.7
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Second Supplemental Indenture, dated as of April 16, 2009, to the Indenture
dated as of June 1, 1998, among Historic TW as issuer, the Company, AOL,
Historic TW (in its capacity as successor to TWCI) and TBS as guarantors,
and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 99.2
to the April 2009
Form 8-K). |
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4.8
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First Supplemental Indenture, dated as of April 16, 2009, to the Indenture
dated as of April 19, 2001, among the Company as issuer, AOL, Historic TW
(including in its capacity as successor to TWCI) and TBS as guarantors, and
BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 99.1 to
the April 2009 Form 8-K). |
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10.1
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Time Warner Inc. 1999 Stock Plan, as amended through March 27, 2009. |
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10.2
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Time Warner Inc. 2006 Stock Incentive Plan, as amended through March 27, 2009. |
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10.3
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Form of Performance Stock Units Agreement (PSU Agreement, Version Bewkes 3). |
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10.4
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First Amendment Agreement, dated as of March 11, 2009, to the Amended and
Restated Revolving Credit Agreement dated as of July 8, 2002 and amended and
restated as of February 17, 2006 (the “Revolving Credit Agreement”), by and
among Lehman Commercial Paper Inc., as Exiting Lender, the Lenders party
thereto, Citibank, N.A., as Administrative Agent, and Time Warner and Time
Warner International Finance Limited, as Borrowers. |
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Exhibit
No. |
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Description of Exhibit |
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10.5
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Second Amendment Agreement, dated as of March 11, 2009, to the Revolving
Credit Agreement, by and among Time Warner and Time Warner International
Finance Limited, as Borrowers, Citibank, N.A., as Administrative Agent, and
the Lenders party thereto. |
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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 March 31, 2009. |
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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 March 31, 2009. |
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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 March 31,
2009. † |
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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. |
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