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 1934 |
for the quarterly period ended September 30, 2005 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: 1-15062
TIME WARNER INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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13-4099534
(I.R.S. Employer
Identification No.) |
One Time Warner Center
New York, New York 10019
(Address of principal executive offices) (Zip Code)
(212) 484-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No 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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date.
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Shares Outstanding |
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as
of October 28, 2005 |
Common Stock — $.01 par value |
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4,575,364,733 |
Series LMCN-V Common Stock — $.01 par value |
87,245,036 |
TIME WARNER INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
Management’s discussion and analysis of results of operations and financial condition (“MD&A”)
is provided as a supplement to the accompanying consolidated financial statements and notes to help
provide an understanding of Time Warner Inc.’s (“Time Warner” or the “Company”) financial
condition, changes in financial condition and results of operations. MD&A is organized as follows:
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Overview. This section provides a general description of Time Warner’s business segments,
as well as recent developments the Company believes are important in understanding the
results of operations and financial condition or in understanding anticipated future trends. |
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Results of operations. This section provides an analysis of the Company’s results of
operations for the three and nine months ended September 30, 2005 compared to the same
periods in 2004. This analysis is presented on both a consolidated and a business segment
basis. In addition, a brief description is provided of significant transactions and events
that impact the comparability of the results being analyzed. |
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Financial condition and liquidity. This section provides an analysis of the Company’s
financial condition as of September 30, 2005 and cash flows for the nine months ended
September 30, 2005. |
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Risk factors and caution concerning forward-looking statements. This section provides a
description of risk factors that could adversely affect the operations, business or
financial results of the Company or its business segments and 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. |
Use of Operating Income before Depreciation and Amortization
The Company utilizes Operating Income before Depreciation and Amortization, among other
measures, to evaluate the performance of its businesses. Operating Income before Depreciation and
Amortization is considered an important indicator of the operational strength of the Company’s
businesses. Operating Income before Depreciation and Amortization eliminates the uneven effect
across all business segments of considerable amounts of noncash depreciation of tangible assets and
amortization of certain intangible assets that were recognized in business combinations. A
limitation of this measure, however, is that it does not reflect the periodic costs of certain
capitalized tangible and intangible assets used in generating revenues in the Company’s businesses.
Management evaluates the costs of such tangible and intangible assets, the impact of related
impairments, as well as asset sales through other financial measures, such as capital expenditures,
investment spending and return on capital.
Operating Income before Depreciation and Amortization should be considered in addition to, not
as a substitute for, the Company’s Operating Income and Net Income, as well as other measures of
financial performance reported in accordance with U.S. generally accepted accounting principles
(“GAAP”).
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
OVERVIEW
Time Warner is a leading media and entertainment company whose major businesses encompass an
array of the most respected and successful media brands. Among the Company’s brands are HBO, CNN,
AOL, People, Sports Illustrated, Time and Time Warner Cable. The Company has produced and
distributed films including The Lord of the Rings trilogy, the Harry Potter series, Batman Begins
and Wedding Crashers and television programs including ER, Two and a Half Men, Without a Trace and
The West Wing. During the nine months ended September 30, 2005, the Company generated revenues of
$31.765 billion (up 3% from $30.980 billion in 2004), Operating Income before Depreciation and
Amortization of $4.760 billion (down 31% from $6.947 billion in 2004), Operating Income of $2.319
billion (down 49% from $4.562 billion in 2004), Net Income of $1.539 billion (down 31% from $2.237
billion in 2004) and Cash Provided by Operations of $5.597 billion (up 4% from $5.388 billion in
2004). The results for the nine months ended September 30, 2005 reflect the effects of a $3 billion
pretax charge related to securities litigation and the results for the three and nine months ended
September 30, 2004 include the effects of a $500 million pretax charge related to the government
investigations, as discussed further in “Other Recent Developments.”
Time Warner Businesses
Time Warner classifies its operations into five reportable segments: AOL, Cable, Filmed
Entertainment, Networks and Publishing.
AOL. America Online, Inc. (“AOL” or “America Online”) is a leader in interactive services, web
brands, Internet technologies and e-commerce services, with 26.2 million total AOL brand
subscribers in the U.S. and Europe at September 30, 2005. AOL reported total revenues of $6.271
billion (20% of the Company’s overall revenues), $1.557 billion in Operating Income before
Depreciation and Amortization and $994 million in Operating Income for the nine months ended
September 30, 2005. AOL generates its revenues primarily from subscription fees charged to
subscribers and from providing advertising services.
America Online is organized into four business units: Access, Audience, Digital Services and
International. This structure reflects AOL’s emphasis on increasing Advertising, including
paid-search, revenues which the Company believes will continue to grow for the foreseeable future.
Historically, AOL’s primary product offering has been an online subscription service that
includes a component of telephone dial-up Internet access. This product, offered under a variety of
different terms and price plans, generates the substantial majority of AOL’s revenues. Over the
past several years, the AOL Access business unit has experienced significant declines in U.S.
subscribers to the AOL service and related Subscription revenues, and these declines are expected
to continue. These decreases are primarily due to the continued industry-wide maturing of the
premium dial-up services business, as consumers migrate to high-speed broadband and lower-cost
dial-up services. AOL continues to develop, change, test and implement marketing and new product
strategies to attract and retain subscribers. AOL is also pursuing agreements, similar to an
existing agreement with Time Warner Cable, to combine the AOL service with broadband access.
America Online’s Audience business unit generates Advertising revenues from the sale of banner
advertising on a fixed impression or fixed placement basis, as well as from the sale of paid-search
and other pay-for-performance advertising on AOL’s and Advertising.com Inc.’s (“Advertising.com”)
networks of Internet properties, which include owned and third-party properties, as well as certain
Internet properties owned by other divisions of the Company. Currently, a majority of Advertising
revenues are generated from traffic on the AOL service, which is generally available only to
subscribers. The strategy of the Audience business unit focuses on generating Advertising revenue
by expanding its audience and increasing usage across all of its web properties, including
properties such as AOL.com, MapQuest, Moviefone and AOL Instant Messenger. A key component of this
strategy is the recent re-launch of the publicly available version of the AOL.com web portal that
includes a substantial portion of AOL’s content, features and tools that historically were
available only to AOL subscribers. AOL seeks to generate Advertising revenue from increased traffic
to AOL.com through sales of branded advertising and performance-based advertising, including
paid-search advertising, as well as from increased utilization and
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
optimization of AOL advertising inventory. The acquisition of Advertising.com in the third
quarter of 2004 has provided incremental growth in Advertising revenues, primarily through
third-party performance-based advertising.
AOL’s Digital Services business unit develops and offers premium subscription services to
subscribers to the AOL service and to Internet users generally, including safety and security,
education and learning, music and games, and voice services. The Digital Services business unit
also offers software products and services for wireless devices.
AOL’s International business unit, which primarily includes AOL Europe,
has also focused on increasing revenues from advertising and from paid services. Due to the
regulatory environment in the countries in which AOL Europe operates, AOL Europe is able to
competitively offer bundled broadband services to consumers, and accordingly its bundled broadband
subscribers are growing as a percentage of total subscribers as consumers migrate from dial-up
plans. This trend is expected to continue.
Cable. Time Warner’s cable business, Time Warner Cable Inc. and its subsidiaries (“TWC Inc.”),
is the second-largest cable operator in the U.S. (in terms of basic cable subscribers served). TWC
Inc. managed approximately 10.923 million basic cable subscribers (including approximately 1.588
million subscribers of unconsolidated investees) as of September 30, 2005, in highly clustered and
upgraded systems in 27 states. TWC Inc. delivered revenues of $6.998 billion (22% of the Company’s
overall revenues), $2.667 billion of Operating Income before Depreciation and Amortization and
$1.433 billion in Operating Income for the nine months ended September 30, 2005. As part of the
strategy to expand TWC Inc.’s cable footprint, on April 20, 2005, the Company entered into an
agreement to acquire, in conjunction with Comcast Corporation (“Comcast”), substantially all of the
assets of Adelphia Communications Corporation (“Adelphia”). Please refer to “Other Recent
Developments” for further details.
TWC Inc. principally offers three products — video, high-speed data and its newest service,
Digital Phone. Video is TWC Inc.’s largest product in terms of revenues generated; however, the
potential growth of its customer base for video cable service is limited, as the customer base has
matured and industry-wide competition has increased. Nevertheless, TWC Inc. is continuing to
increase its video revenues through rate increases and its offerings of advanced digital video
services such as Digital Video, Video-on-Demand (VOD), Subscription-Video-on-Demand (SVOD) and
Digital Video Recorders (DVRs), which are available in all of TWC Inc.’s 31 divisions. TWC Inc.’s
digital video subscriber base provides a broad base of potential customers for these advanced
services. Video programming costs represent a major component of TWC Inc.’s expenses and are
expected to continue to increase, reflecting an expansion of service offerings and contractual rate
increases across TWC Inc.’s programming lineup.
High-speed data service has been one of TWC Inc.’s fastest-growing products over the past
several years and is a key driver of its results. TWC Inc. expects continued strong growth in
residential high-speed data subscribers and revenues for the foreseeable future; however, the rate
of growth of both subscribers and revenue could be impacted by intensified competition with other
service providers for subscribers.
TWC Inc.’s new voice product, Digital Phone, has been launched in all of its divisions and is
available to over 75% of TWC Inc.’s homes passed as of September 30, 2005. Digital Phone customers
typically receive unlimited local, in-state and domestic long distance calling, as well as call
waiting, caller ID and enhanced “911” services for a monthly fixed fee. In the future, TWC Inc.
intends to offer additional plans with a variety of local and long distance options. Digital Phone
enables TWC Inc. to offer its customers a combined, convenient package of video, high-speed data
and voice services and to compete effectively against similar bundled products that are available
from its competitors.
In addition to the subscription services, TWC Inc. also earns revenue by selling advertising
time to national, regional and local businesses.
Filmed Entertainment. Time Warner’s Filmed Entertainment businesses, Warner Bros.
Entertainment Inc. (“Warner Bros.”) and New Line Cinema Corporation (“New Line”), generated
revenues of $8.300 billion (24% of the Company’s overall revenues), $882 million in Operating
Income before Depreciation and Amortization and $636 million in Operating Income for the nine
months ended September 30, 2005.
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
One of the world’s leading studios, Warner Bros. has diversified sources of revenues with its
film and television businesses, combined with an extensive film library and global distribution
infrastructure. This diversification has helped Warner Bros. deliver consistent long-term growth
and performance. New Line is the oldest independent film company in the world. Its primary source
of revenues is the creation and distribution of theatrical motion pictures.
Warner Bros. continues to develop its industry-leading television business, including the
successful releases of television series into the home video market. For the 2005-2006 television
season, Warner Bros. has more current prime-time productions on the air than any other studio, with
prime-time series on all six broadcast networks (including Two and a Half Men, Joey, ER, Without a
Trace, The O.C., Cold Case, Smallville and The West Wing).
The sale of DVDs has been one of the largest drivers of the segment’s profit growth over the
last few years and Warner Bros.’ library, consisting of more than 6,600 theatrical titles and
54,000 live-action and animated television titles, positions it to benefit from DVD sales; however,
the Company has begun to see slower growth in domestic DVD sales as player penetration approaches
maturation.
Piracy, including physical piracy as well as illegal online file-sharing, continues to be a
significant issue for the filmed entertainment industry. Piracy has expanded from music to movies
and television programming due to advances in technology. The Company has taken a variety of
actions to combat piracy over the last several years, including a pilot program releasing low-cost
DVDs in China and coordinating worldwide release dates for franchise films, and will continue to do
so, both individually and together with industry associations.
Networks. Time Warner’s Networks group comprises Turner Broadcasting System, Inc. (“Turner”),
Home Box Office (“HBO”) and The WB Television Network (“The WB Network”). The Networks segment
delivered revenues of $7.172 billion (21% of the Company’s overall revenues), $2.188 billion in
Operating Income before Depreciation and Amortization and $1.997 billion in Operating Income for
the nine months ended September 30, 2005.
The Turner networks — including such recognized brands as TBS, TNT, CNN, Cartoon Network and
CNN Headline News — are among the leaders in
advertising-supported cable TV networks. For more than
three consecutive years, more prime-time viewers watched advertising-supported cable TV networks
than the national broadcast networks. For the nine months ended September 30, 2005, TNT ranked
first among ad-supported cable networks in total day and prime-time delivery of its key
demographics, adults 18-49 and adults 25-54. TBS ranked third among ad-supported cable networks in
prime-time delivery of its key demographic, adults 18-34.
The Turner networks generate revenues principally from the sale of advertising time and
monthly subscriber fees paid by cable system operators, satellite companies and other affiliates.
Turner has benefited from strong ratings and a strong advertising market. Key contributors to
Turner’s success are its continued investments in high-quality programming focused on sports,
network premieres, licensed and original series, news and animation, as well as a strong brand and
operating efficiency.
HBO operates the HBO and Cinemax multichannel pay television programming services, with the
HBO service being the nation’s most widely distributed pay television network. HBO generates
revenues principally from monthly subscriber fees from cable system operators, satellite companies
and other affiliates. An additional source of revenue is the ancillary sales of its original
programming, including such programs as The Sopranos, Sex and the City, Six Feet Under, Band of
Brothers and Deadwood.
The WB Network is a broadcast television network whose target audience consists primarily of
young adults in the 12-34 age group demographic. The WB Network generates revenues almost
exclusively from the sale of advertising time. The WB Network experienced a 16% decline in its
audience of young adults in its target demographic during the 2004-2005 television season. This
loss in audience had a significant effect on The WB Network’s ability to generate Advertising
revenue during the 2004-2005 broadcast season. To offset this, a series of cost containment
initiatives were implemented during the year and The WB Network introduced an aggressive new slate
of programming this fall designed to increase viewership among adults 18-34, including shows such
as Supernatural, Twins and Related.
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Publishing. Time Warner’s Publishing segment consists principally of magazine publishing, book
publishing and a number of direct-marketing and direct-selling businesses. The segment generated
revenues of $4.119 billion (13% of the Company’s overall revenues), $811 million in Operating
Income before Depreciation and Amortization and $636 million in Operating Income for the nine
months ended September 30, 2005.
Time Inc. publishes 155 magazines globally, including People, Sports Illustrated, In Style,
Southern Living, Time, Entertainment Weekly, Fortune, Real Simple, What’s on TV and Cooking Light.
It generates revenues primarily from advertising, magazine subscription and newsstand sales, and
its growth is derived from higher circulation and advertising on existing magazines, new magazine
launches and acquisitions. Time Inc. owns IPC Media (the U.K.’s largest magazine company) and is
the majority shareholder of magazine subscription marketer Synapse Group, Inc. In addition, Time
Inc. continues to invest in new magazines, including Pick Me Up, a weekly women’s magazine, and TV
Easy, a weekly TV listings magazine, which IPC Media launched in the U.K. in January and May 2005,
respectively. In the first quarter of 2005, Time Inc. acquired the remaining 51% stake it did not
already own in Essence Communications Partners (“Essence”), the publisher of Essence. In the third
quarter of 2005, Time Inc. acquired Grupo Editorial Expansión, a Mexican magazine publisher, which
publishes 15 consumer and business magazines primarily for the Mexican market. Time Inc.’s book
publishing operations are conducted primarily by Time Warner Book Group, which had 53 books on the
New York Times bestseller list during the first nine months of 2005. Time Inc.’s direct-selling
division, Southern Living At Home, sells home decor products through approximately 35,000
independent consultants at parties hosted in people’s homes throughout the U.S. Recently, Time
Inc.’s results have been impacted by weakness in advertising at certain of its core magazine
titles, such as Time and Sports Illustrated, and it has mitigated such weakness through
acquisitions and magazine launches.
Other Recent Developments
Legal Reserves Related to Securities Litigation
In July 2005, the Company reached an agreement in principle for the settlement of the
securities class action lawsuits included in the matters consolidated under the caption In re: AOL
Time Warner Inc. Securities & “ERISA” Litigation and described in Note 10 to the accompanying
consolidated financial statements and in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2004 (the “2004 Form 10-K”). The settlement is reflected in a written agreement
between the lead plaintiff and the Company. On September 30, 2005, the court issued an order
granting preliminary approval of the settlement and certified the settlement class. The court has
scheduled the final approval hearing for February 22, 2006. At this time, there can be no assurance
that the settlement of the securities class action litigation will receive final court approval. In
connection with reaching the agreement in principle on the securities class action, the Company
established a reserve of $2.4 billion during the second quarter of 2005. Ernst & Young LLP also has
agreed to a settlement in this litigation matter and will pay $100 million. Pursuant to the
settlement, in October 2005 Time Warner paid $2.4 billion into a settlement fund (the “MSBI
Settlement Fund”) for the members of the class represented in the action. In addition, the $150
million previously paid by Time Warner into a fund in connection with the settlement of the
investigation by the U.S. Department of Justice (“DOJ”) was transferred to the MSBI Settlement
Fund, and Time Warner is using its best efforts to have the $300 million it previously paid in
connection with the settlement of its Securities and Exchange Commission (“SEC”) investigation
transferred to the MSBI Settlement Fund.
Although the Company has reached an agreement to settle the primary securities class action,
other related litigation remains pending, including shareholder derivative actions, lawsuits
alleging ERISA violations and securities actions brought by individual shareholders. In the second
quarter of 2005, the Company established an additional reserve totaling $600 million in connection
with the remaining related litigation matters pending against the Company. This $600 million amount
continues to represent the Company’s current best estimate of its potential financial exposure in
these matters.
During the third quarter of 2005, the Company reached an oral understanding with the carriers
on its directors and officers insurance policies in connection with the securities and derivative
action matters described in pages 38-42 of the 2004 Form 10-K (other than the actions alleging
violations of ERISA described on page 39 of the 2004 Form 10-K). At present, this agreement is
anticipated to provide an incremental recovery of approximately $200 million. Because the
understanding and related documentation have not been completed, and in light of the continuing
uncertainty as to what part, if any, of the incremental $200 million will ultimately be received by
the Company, the Company has not given any
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
accounting recognition for this incremental recovery at September 30, 2005. The understanding
and related documentation are expected to be completed in the fourth quarter of 2005 (Note 10).
Common Stock Repurchase Program
On July 29, 2005, Time Warner’s Board of Directors authorized a common stock repurchase
program that allows Time Warner to repurchase, from time to time, up to $5 billion of common stock
over a two-year period ending July 2007. On October 28, 2005, Time Warner’s Board of Directors
increased the amount authorized to be repurchased under the stock repurchase program to an
aggregate of up to $12.5 billion of common stock. Purchases under the stock repurchase program may be made from time to
time on the open market and in privately negotiated transactions. Size and timing of these
purchases will be based on a number of factors including price and business and market conditions.
From the program’s inception through October 31, 2005, the
Company has repurchased approximately 45 million
shares of common stock for approximately $809 million pursuant to a trading program under Rule
10b5-1 of the Securities Exchange Act of 1934, as amended.
Common Stock Dividend
On September 15, 2005, the Company paid a quarterly cash dividend of $0.05 per share on its
common stock, to shareholders of record on August 31, 2005, totaling $235 million. Such dividend
was the first dividend paid under the Company’s previously announced dividend program.
Magazine Circulation Practices Investigation
Time Inc. received a grand jury subpoena from the United States Attorney’s Office for the
Eastern District of New York in connection with an investigation of certain magazine
circulation-related practices. Time Inc. is responding to the subpoena and intends to cooperate
with the investigation. Time Inc. has also informed its advertisers that it is reviewing and
discussing with the Audit Bureau of Circulations (“ABC”) its reporting of sponsored sales
subscriptions under ABC rules.
Adelphia Acquisition Agreement
On April 20, 2005, a subsidiary of the Company, Time Warner NY Cable LLC (“TW NY”), and
Comcast each reached separate definitive agreements to, collectively, acquire substantially all the
assets of Adelphia for a total of $12.7 billion in cash (of which TW NY will pay $9.2 billion and
Comcast will pay the remaining $3.5 billion) and 16% of the common stock of TWC Inc.
At the same time that Comcast and TW NY entered into the Adelphia agreements, Comcast, TWC
Inc. and/or their respective affiliates entered into agreements providing for the redemption of
Comcast’s interests in TWC Inc. and Time Warner Entertainment Company, L.P. (“TWE”) (the “TWC Inc.
Redemption Agreement” and the “TWE Redemption Agreement,” respectively, and, collectively, the “TWC
Inc. and TWE Redemption Agreements”). Specifically, Comcast’s 17.9% interest in TWC Inc. will be
redeemed in exchange for stock of a subsidiary of TWC Inc. holding cable systems serving
approximately 587,000 subscribers (as of December 31, 2004), as well as approximately $1.9 billion
in cash. In addition, Comcast’s 4.7% interest in TWE will be redeemed in exchange for interests in
a subsidiary of TWE holding cable systems serving approximately 168,000 subscribers (as of December
31, 2004), as well as approximately $133 million in cash. TWC Inc., Comcast and their respective
subsidiaries will also swap certain cable systems to enhance their respective geographic clusters
of subscribers (“Cable Swaps”).
After giving effect to the transactions, TWC Inc. will gain systems passing approximately 7.5
million homes (as of December 31, 2004), with approximately 3.5 million basic subscribers. TWC Inc.
will then manage a total of approximately 14.4 million basic subscribers. Time Warner will own 84%
of TWC Inc.’s common stock (including 83% of the outstanding TWC Inc. Class A Common Stock, which
will become publicly traded at the time of closing, and all outstanding shares of TWC Inc. Class B
Common Stock) and own a $2.9 billion indirect economic interest in TW NY, a subsidiary of TWC Inc.
These transactions are subject to customary regulatory review and approvals, including
Hart-Scott-Rodino antitrust approval, Federal Communications Commission (“FCC”) and local franchise
approvals, as well as, in the case of the Adelphia acquisition, the Adelphia bankruptcy process,
which involves approvals by the bankruptcy court having
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
jurisdiction over Adelphia’s Chapter 11 case and Adelphia’s creditors. Closing of the Adelphia
acquisition is expected during the first half of 2006.
The purchase of Adelphia’s assets is not dependent on the closing of the Cable Swaps or the
transactions contemplated by the TWC Inc. and TWE Redemption Agreements. Furthermore, if Comcast
fails to obtain certain necessary governmental authorizations, TW NY has agreed that it will also
acquire the cable operations of Adelphia that would have been acquired by Comcast, with the
purchase price payable in cash or TWC Inc. stock at the Company’s discretion.
Government Investigations
As previously disclosed by the Company, the SEC and the DOJ had been conducting investigations
into the accounting and disclosure practices of the Company. Those investigations focused on
advertising transactions, principally involving the Company’s America Online segment, the methods
used by the America Online segment to report its subscriber numbers and the accounting related to
the Company’s interest in AOL Europe prior to January 2002.
The Company and its subsidiary, AOL, entered into a settlement with the DOJ in December 2004
that provided for a deferred prosecution arrangement for a two-year period. As part of the
settlement with the DOJ, in December 2004, the Company paid a penalty of $60 million and
established a $150 million fund, which the Company could use to settle related securities
litigation. The fund is reflected as restricted cash on the Company’s accompanying consolidated
balance sheet at December 31, 2004 and September 30, 2005. During October 2005, the $150 million
was transferred by the Company into the settlement fund for the members of the class covered by the
consolidated securities class action described above under the heading “Legal Reserves Related to
Securities Litigation.”
In addition, on March 21, 2005, the Company announced that the SEC has approved the Company’s
proposed settlement, which resolves the SEC’s investigation of the Company. In the third quarter of
2004, the Company established $500 million in legal reserves related to the government
investigations.
Under the terms of the settlement with the SEC, the Company agreed, without admitting or
denying the SEC’s allegations, to be enjoined from future violations of certain provisions of the
securities laws and to comply with the cease-and-desist order issued by the SEC to AOL in May 2000.
The settlement also required the Company to:
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Pay a $300 million penalty, which will be used for a Fair Fund, as authorized under the
Sarbanes-Oxley Act; |
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Adjust its historical accounting for Advertising revenues in certain transactions with
Bertelsmann, A.G. that were improperly or prematurely recognized, primarily in the second
half of 2000, during 2001 and during 2002; as well as adjust its historical accounting for
transactions involving three other AOL customers where there were Advertising revenues
recognized in the second half of 2000 and during 2001; |
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Adjust its historical accounting for its investment in and consolidation of AOL Europe;
and |
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Agree to the appointment of an independent examiner, who will either be or hire a
certified public accountant. The independent examiner will review whether the Company’s
historical accounting for transactions with 17 counterparties identified by the SEC staff,
principally involving online advertising revenues and including three cable programming
affiliation agreements with related advertising elements, was in conformity with GAAP, and
provide a report to the Company’s audit and finance committee of its conclusions within 180
days of being engaged. The transactions that would be reviewed were entered into between
June 1, 2000 and December 31, 2001, including subsequent amendments thereto, and involved
online advertising and related transactions for which revenue was principally recognized
before January 1, 2002. |
The Company paid the $300 million penalty in March 2005; however, it will not be able to
deduct the penalty for income tax purposes, be reimbursed or indemnified for such payment through
insurance or any other source, or use such payment to setoff or reduce any award of compensatory
damages to plaintiffs in related securities litigation pending against the Company. As described
above, in connection with the pending settlement of the consolidated securities class action, the
Company is using its best efforts to have the $300 million transferred to the settlement fund for
the members of the class
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
represented in the action. The historical accounting adjustments were reflected in the
restatement of the Company’s financial results for each of the years ended December 31, 2000
through December 31, 2003, which were included in the Company’s 2004 Form 10-K.
The independent examiner has begun its review, which as a result of an extension, is expected
to be completed in the second quarter of 2006. Depending on the independent examiner’s conclusions,
a further restatement might be necessary. It is also possible that, so long as there are unresolved
issues associated with the Company’s financial statements, the effectiveness of any registration
statement of the Company or its affiliates may be delayed.
Investment in Google Inc.
In May 2004, America Online exercised a warrant for approximately $22 million and received
approximately 7.4 million shares of Series D Preferred Stock of Google Inc. (“Google”). Each of
these shares converted automatically into shares of Google’s Class B common stock immediately prior
to the closing of Google’s initial public offering on August 24, 2004. In connection with this
offering, America Online converted approximately 2.4 million shares of its Google Class B common
stock into an equal number of shares of Google’s Class A common stock. Such Class A shares were
sold in the offering for $195 million, net of the underwriters’ discounts and commissions, and the
Company recorded a gain of approximately $188 million in the third quarter of 2004. Beginning in
March 2005, the Company entered into agreements to sell its remaining 5.1 million shares at an
average share price of approximately $185. The sales under such agreements settled on May 3, 2005,
and the Company received total cash consideration of approximately $940 million, resulting in a
gain of approximately $925 million recognized in the second quarter of 2005, which is included as a
component of Other income, net.
Mandatorily Convertible Preferred Stock
At December 31, 2004, the Company had outstanding one share of its Series A mandatorily
convertible preferred stock, par value $0.10 per share, face value of $1.5 billion (the “Series A
Preferred Stock”), held by a trust for the benefit of Comcast, that was issued on March 31, 2003,
as part of the TWE Restructuring. In accordance with the terms of the stock, on March 31, 2005, the
Series A Preferred Stock was automatically converted into 83,835,883 shares of common stock of the
Company, valued at $1.5 billion, and such amount was reclassified to equity in the accompanying
consolidated balance sheet. Prior to the conversion, an estimate of the number of shares of common
stock issuable upon the conversion of the Series A Preferred Stock based on the fair market value
of the common stock at the end of the applicable period was included only in the calculation of the
Company’s diluted earnings per share. Following the issuance of the common stock upon the
conversion of the Series A Preferred Stock, the shares issued are included in the calculation of
both the basic and diluted earnings per share.
Urban Cable Works of Philadelphia, L.P.
Urban Cable Works of Philadelphia, L.P. (“Urban Cable”) is an unconsolidated joint venture of
TWC Inc., with approximately 47,000 basic subscribers at September 30, 2005, that operates cable
television systems in Philadelphia, Pennsylvania. Urban Cable is 40% owned by TWC Inc. and 60%
owned by an investment group led by Inner City Broadcasting (“Inner City”). Under a management
agreement, TWC Inc. is responsible for the day-to-day management of Urban Cable. During 2004, TWC
Inc. made a cash payment of $34 million to Inner City to settle certain disputes regarding the
joint venture.
TWC Inc. has also agreed to purchase, subject to receipt of applicable regulatory approvals,
all of Inner City’s interests in the Urban Cable venture for approximately $53 million in cash. In
addition, upon closing, TWC Inc. will eliminate in consolidation $70 million of debt and interest
owed to it by Urban Cable and will assume $45 million of Urban Cable’s third-party debt. On March
3, 2005, the City Council of Philadelphia denied TWC Inc.’s request for approval of this
transaction. TWC Inc. believes the denial was invalid, but is unable to predict when the
transaction may be completed. In conjunction with the agreement to acquire substantially all of the
assets of Adelphia, Urban Cable would be transferred to Comcast as part of the Cable Swaps. For
additional details, please refer to the Adelphia/Comcast discussion above. For the nine months
ended September 30, 2005, Urban Cable’s revenues and Operating Income were $35 million and $3
million, respectively.
8
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
RESULTS OF OPERATIONS
New Accounting Principles To Be Adopted
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement of
Financial Accounting Standards (“Statement”) No. 123 (Revised), “Share-Based Payment” (“FAS 123R”).
FAS 123R requires all companies to measure compensation costs for all share-based payments
(including employee stock options) at fair value and recognize such costs in the statement of
operations. As a result, the application of the provisions of FAS 123R will have a significant
impact on Operating Income before Depreciation and Amortization, Operating Income, net income and
earnings per share. In April 2005, the SEC amended the compliance dates for FAS 123R from fiscal
periods beginning after June 15, 2005 to fiscal years beginning after June 15, 2005. The Company
will continue to account for share-based compensation using the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”),
until the Company’s adoption of FAS 123R beginning January 1, 2006.
In accordance with APB 25 and related interpretations, compensation expense for stock options
is recognized in income based on the excess, if any, of the quoted market price of the stock at the
grant date of the award or other measurement date over the amount an employee must pay to acquire
the stock. The compensation costs related to stock options recognized by the Company pursuant to
APB 25 were minimal. If a company measures share-based compensation using APB 25, it must also
disclose what the impact would have been if it had measured share-based compensation using the fair
value of the equity award on the date it is granted as provided in FAS 123, the predecessor of FAS
123R. See Note 1 for the pro forma impact if compensation costs for the Company’s stock option
plans had been determined based on the fair value method set forth in FAS 123.
Reclassifications
Certain reclassifications have been made to the prior year’s financial information to conform
to the September 30, 2005 presentation.
Significant Transactions and Other Items Affecting Comparability
As more fully described herein and in the related notes to the accompanying consolidated
financial statements, the comparability of Time Warner’s results from continuing operations has
been affected by certain significant transactions and other items in each period as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
9/30/05 |
|
|
9/30/04 |
|
| |
|
(millions) |
|
|
(millions) |
|
Legal reserves related to
securities litigation and
government investigations |
|
$ |
— |
|
|
$ |
(500 |
) |
|
$ |
(3,000 |
) |
|
$ |
(500 |
) |
Merger and restructuring costs |
|
|
(5 |
) |
|
|
— |
|
|
|
(28 |
) |
|
|
2 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
|
|
(10 |
) |
Gains on disposal of assets, net |
|
|
— |
|
|
|
13 |
|
|
|
18 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Operating Income |
|
|
(5 |
) |
|
|
(487 |
) |
|
|
(3,034 |
) |
|
|
(494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains, net |
|
|
10 |
|
|
|
296 |
|
|
|
1,015 |
|
|
|
342 |
|
Net gain on WMG option |
|
|
— |
|
|
|
— |
|
|
|
53 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on other income, net |
|
|
10 |
|
|
|
296 |
|
|
|
1,068 |
|
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax impact |
|
|
5 |
|
|
|
(191 |
) |
|
|
(1,966 |
) |
|
|
(152 |
) |
Income tax impact |
|
|
1 |
|
|
|
(32 |
) |
|
|
536 |
|
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax impact |
|
$ |
6 |
|
|
$ |
(223 |
) |
|
$ |
(1,430 |
) |
|
$ |
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
9
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Legal Reserves Related to Securities Litigation and Government Investigations
As previously discussed, the nine months ended September 30, 2005 include $3 billion in legal
reserves related to securities litigation. During the three and nine months ended September 30,
2004, the Company established $500 million in legal reserves related to the government
investigations (Note 10).
Merger and Restructuring Costs
Restructuring costs consist of charges related to employee terminations and exit activities.
During the three and nine months ended September 30, 2005, the Company incurred restructuring costs
of $1 million and $31 million, respectively, at the Cable segment. In addition, during the three
and nine months ended September 30, 2005 the Cable segment expensed approximately $2 million of
non-capitalizable merger-related costs associated with the proposed acquisition of Adelphia,
discussed above. Restructuring charges at the AOL segment reflect a $2 million charge and a $5
million net reduction in restructuring charges for the three and nine months ended September 30,
2005, respectively, primarily relating to changes in estimates of previously established
restructuring accruals. During the nine months ended September 30, 2004, the Company recorded a $2
million reduction in restructuring costs at the AOL segment, reflecting changes in estimates of
previously established restructuring accruals (Note 9).
Asset Impairments
For the nine months ended September 30, 2005, the Company recorded a $24 million noncash
impairment charge related to goodwill associated with America Online Latin America, Inc. (“AOLA”),
which announced that it intends to liquidate, sell or wind up its operations and is currently
operating under Chapter 11 of the U.S. Bankruptcy Code. For the nine months ended September 30,
2004, the Company recognized a $10 million impairment charge related to a building held for sale at
the AOL segment.
Gains on Disposal of Assets, Net
For the nine months ended September 30, 2005, the Company recorded an approximate $5 million
gain related to the sale of a building, a $5 million gain from the resolution of previously
contingent gains related to the 2004 sale of Netscape Security Solutions at the AOL segment and an
$8 million gain at the Publishing segment related to the collection of a loan made in conjunction
with the Company’s 2003 sale of Time Life Inc. (“Time Life”), which was previously fully reserved
due to concerns about recoverability.
For the three and nine months ended September 30, 2004, the Company recognized a $13 million
gain at the AOL segment related to the sale of AOL Japan. In addition, for the nine months ended
September 30, 2004, the Company recognized an $8 million gain at the Publishing segment related to
the sale of a building, partially offset by an approximate $7 million loss at the Networks segment
related to the sale of the winter sports teams.
Investment Gains, Net
For the three months ended September 30, 2005, the Company recognized net gains of $10 million
primarily related to the sale of investments, including an $8 million gain on the sale of its 7.5%
remaining interest in Columbia House Holdings Inc. (“Columbia House”) and simultaneous resolution
of a contingency for which the Company had previously accrued. Investment gains were partially
offset by a $13 million writedown of the Company’s investment in n-tv KG (“NTV – Germany”), a
German news broadcaster.
For the nine months ended September 30, 2005, the Company recognized net gains of $1.015
billion primarily related to the sale of investments, including a $925 million gain on the sale of
the Company’s remaining investment in Google, a $36 million gain, which was previously deferred,
related to the Company’s 2002 sale of a portion of its interest in Columbia House and an $8 million
gain on the sale of its 7.5% remaining interest in Columbia House and simultaneous resolution of a
contingency for which the Company had previously accrued. Investment gains were partially offset by
a $13 million writedown of the Company’s investment in NTV – Germany.
The three and nine months ended September 30, 2005 also include $3 million and $5 million,
respectively, of gains to reflect market fluctuations in equity derivative instruments.
10
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
For the three and nine months ended September 30, 2004, the Company recognized net gains of
$296 million and $342 million, respectively, primarily related to the sale of investments,
including a $188 million gain related to the sale of a portion of the Company’s interest in Google
and a $113 million gain related to the sale of the Company’s interest in VIVA Media AG (“VIVA”) and
VIVA Plus. Investment gains were partially offset by $5 million and $12 million, respectively, of
losses to reflect market fluctuations in equity derivative instruments.
Net Gain on WMG Option
In the first quarter of 2005, the Company entered into an agreement with Warner Music Group
(“WMG”) pursuant to which WMG agreed to a cash purchase of the Company’s option to acquire shares
of WMG that it received in connection with the sale of WMG in 2004. Under the agreement, the cash
purchase of the option would be made at the time of the WMG public offering at a price based on the
initial public offering price per share, net of any underwriters’ discounts. As a result of the
estimated public offering price range, the Company adjusted the value of the option in the first
quarter of 2005 from $85 million to $165 million. In the second quarter of 2005, WMG’s registration
statement was declared effective and it completed its initial public offering at a reduced price
from its initial estimated range, and the Company received approximately $138 million from the sale
of its option. As a result of these events, for the nine months ended September 30, 2005, the
Company recorded a $53 million net gain related to this option (Note 2).
Three and Nine Months Ended September 30, 2005 Compared to Three and Nine Months Ended September
30, 2004
Consolidated Results
Revenues. The components of revenues are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
|
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
|
| |
|
(millions) |
|
|
(millions) |
|
Subscription |
|
$ |
5,535 |
|
|
$ |
5,368 |
|
|
|
3% |
|
|
$ |
16,645 |
|
|
$ |
16,168 |
|
|
|
3% |
|
Advertising |
|
|
1,776 |
|
|
|
1,646 |
|
|
|
8% |
|
|
|
5,443 |
|
|
|
4,939 |
|
|
|
10% |
|
Content |
|
|
2,938 |
|
|
|
2,648 |
|
|
|
11% |
|
|
|
8,837 |
|
|
|
9,002 |
|
|
|
(2% |
) |
Other |
|
|
289 |
|
|
|
273 |
|
|
|
6% |
|
|
|
840 |
|
|
|
871 |
|
|
|
(4% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
10,538 |
|
|
$ |
9,935 |
|
|
|
6% |
|
|
$ |
31,765 |
|
|
$ |
30,980 |
|
|
|
3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in Subscription revenues for the three and nine months ended September 30, 2005
was primarily related to increases at the Cable and Networks segments, offset partially by a
decline at the AOL segment. The increase at the Cable segment for the three and nine months was
principally due to the continued penetration of advanced services (primarily high-speed data,
advanced digital video services and Digital Phone) and video rate increases. The increase at the
Networks segment for the three and nine months was due primarily to higher subscription rates at
Turner and HBO and, to a lesser extent, an increase in the number of subscribers at Turner. The AOL
segment declined for the three and nine months primarily as a result of lower domestic subscribers,
offset in part for the nine months by growth at AOL Europe. The growth at AOL Europe was primarily
due to the favorable effects of foreign currency exchange rates, offset in part by a decline in
subscribers and related revenues.
The increase in Advertising revenues for the three and nine months ended September 30, 2005
was primarily due to growth at the AOL and Networks segments. In addition, the nine months
benefited from growth at the Publishing segment. The increase at the AOL segment for the three and
nine months was due primarily to revenues associated with the acquisition of Advertising.com, which
was acquired on August 2, 2004, and growth in paid-search advertising. The increase at the Networks
segment for the three and nine months was primarily driven by higher CPMs (advertising cost per one
thousand viewers) and sellouts at Turner’s entertainment networks, partly offset by a decline at
The WB Network as a result of lower ratings. The increase at the Publishing segment for the nine
months was due to the acquisition of the remaining interest in the publisher of Essence,
contributions from new magazine launches, and growth at Real Simple, offset partly by lower
Advertising revenues from core magazines, including Sports Illustrated and Time, among others.
11
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
The increase in Content revenues for the three months ended September 30, 2005 was principally
due to increases at the Filmed Entertainment and Networks segments
and, to a lesser extent, the
Publishing segment. The decrease in Content revenues for the nine months ended September 30, 2005
was principally due to a decline at the Filmed Entertainment segment, partially offset by an
increase at the Networks and Publishing segments. The increase at the Filmed Entertainment segment
for the three months was driven by an increase in both television product and theatrical product
revenues. For the nine months, the decrease was driven by declines in both theatrical and
television product revenues. The increase at the Networks segment for the three and nine months was
due primarily to HBO’s broadcast syndication sales of Sex and
the City and, to a lesser extent,
increases in other ancillary sales of HBO’s original programming, partially offset by lower
licensing revenue at HBO associated with fewer episodes of Everybody Loves Raymond. In addition,
for the nine months ended September 30, 2005, the increase in Content revenues was partially offset
by the absence of the winter sports teams at Turner, which were sold at the end of the first
quarter of 2004. The increase at the Publishing segment for the three and nine months is primarily
due to a number of best-selling titles at Time Warner Book Group.
Other revenues increased slightly for the three months ended September 30, 2005 reflecting
growth at each segment, partially offset by a slight decline at the Filmed Entertainment segment.
For the nine months ended September 30, 2005, the decline in Other revenues was attributable to a
decline at the Networks segment, primarily due to the sale of the winter sports teams.
Each of the revenue categories is discussed in greater detail by segment in the “Business
Segment Results.”
Costs of Revenues. For the three months ended September 30, 2005 and 2004, costs of revenues
totaled $6.054 billion and $5.646 billion, respectively, and as a percentage of revenues were both
57%. For the nine months ended September 30, 2005 and 2004, costs of revenues totaled $18.303
billion and $17.959 billion, respectively, and as a percentage of revenues were both 58%. Costs of
revenues as a percentage of revenues were flat for the three and nine months, primarily as a result
of a decline in margin at the Filmed Entertainment segment, offset by an increase in margin at the
AOL segment. The segment variations are discussed in detail in “Business Segment Results.”
Selling, General and Administrative Expenses. For the three months ended September 30, 2005
and 2004, selling, general and administrative expenses increased 1% to $2.564 billion in 2005 from
$2.538 billion in 2004. For the nine months ended September 30, 2005 and 2004, selling, general and
administrative expenses increased 2% to $7.663 billion in 2005 from $7.498 billion in 2004. The
increase for the three and nine months resulted primarily from increases at all segments except the
AOL and Publishing segments. The segment variations are discussed in detail in “Business Segment
Results.”
Legal Reserves Related to Securities Litigation and Government Investigations. As previously
discussed in “Other Recent Developments,” the nine months ended September 30, 2005 include $3
billion in legal reserves related to securities litigation. During the three and nine months ended
September 30, 2004, the Company established $500 million in legal reserves related to government
investigations.
12
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Reconciliation of Operating Income before Depreciation and Amortization to Operating Income and Net
Income.
The following table reconciles Operating Income before Depreciation and Amortization to
Operating Income. In addition, the table provides the components from Operating Income to Net
Income for purposes of the discussions that follow:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
| |
|
(millions) |
|
(millions) |
Operating Income before
Depreciation and Amortization |
|
$ |
2,601 |
|
|
$ |
1,905 |
|
|
|
37 |
% |
|
$ |
4,760 |
|
|
$ |
6,947 |
|
|
|
(31 |
%) |
Depreciation |
|
|
(686 |
) |
|
|
(641 |
) |
|
|
7 |
% |
|
|
(1,995 |
) |
|
|
(1,918 |
) |
|
|
4 |
% |
Amortization |
|
|
(144 |
) |
|
|
(156 |
) |
|
|
(8 |
%) |
|
|
(446 |
) |
|
|
(467 |
) |
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
1,771 |
|
|
|
1,108 |
|
|
|
60 |
% |
|
|
2,319 |
|
|
|
4,562 |
|
|
|
(49 |
%) |
Interest expense, net |
|
|
(282 |
) |
|
|
(372 |
) |
|
|
(24 |
%) |
|
|
(952 |
) |
|
|
(1,159 |
) |
|
|
(18 |
%) |
Other income, net |
|
|
9 |
|
|
|
304 |
|
|
|
(97 |
%) |
|
|
1,109 |
|
|
|
368 |
|
|
|
201 |
% |
Minority interest expense, net |
|
|
(71 |
) |
|
|
(54 |
) |
|
|
31 |
% |
|
|
(202 |
) |
|
|
(172 |
) |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes,
discontinued operations and
cumulative effect of accounting
change |
|
|
1,427 |
|
|
|
986 |
|
|
|
45 |
% |
|
|
2,274 |
|
|
|
3,599 |
|
|
|
(37 |
%) |
Income tax provision |
|
|
(530 |
) |
|
|
(492 |
) |
|
|
8 |
% |
|
|
(735 |
) |
|
|
(1,511 |
) |
|
|
(51 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued
operations and cumulative effect
of accounting change |
|
|
897 |
|
|
|
494 |
|
|
|
82 |
% |
|
|
1,539 |
|
|
|
2,088 |
|
|
|
(26 |
%) |
Discontinued operations, net of tax |
|
|
— |
|
|
|
5 |
|
|
|
NM |
|
|
|
— |
|
|
|
115 |
|
|
|
NM |
|
Cumulative effect of accounting
change, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
34 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
897 |
|
|
$ |
499 |
|
|
|
80 |
% |
|
$ |
1,539 |
|
|
$ |
2,237 |
|
|
|
(31 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization. Time Warner’s Operating Income before
Depreciation and Amortization increased 37% to $2.601 billion for the three months ended September
30, 2005 from $1.905 billion for the three months ended September 30, 2004. Excluding the items
previously discussed under “Significant Transactions and Other Items Affecting Comparability”
totaling $5 million and $487 million of net expense for 2005 and 2004, respectively, Operating
Income before Depreciation and Amortization increased $214 million (or 9%) principally as a result
of growth at all segments except for the Filmed Entertainment segment.
For the nine months ended September 30, 2005, Operating Income before Depreciation and
Amortization decreased 31% to $4.760 billion compared to $6.947 billion in 2004. Excluding the
items previously discussed under “Significant Transactions and Other Items Affecting Comparability”
of $3.034 billion and $494 million of net expense for 2005 and 2004, respectively, Operating Income
before Depreciation and Amortization improved by $353 million (or 5%) principally as a result of
growth at all segments except for the Filmed Entertainment segment.
Excluding the items previously discussed under “Significant Transactions and Other Items
Affecting Comparability,” the Company anticipates that the rate of growth of Operating Income
before Depreciation and Amortization will increase in the fourth quarter and for the full year of
2005 as compared to the rate of growth achieved for the nine months ended September 30, 2005, as a
result of increases primarily at the Filmed Entertainment and Networks segments.
The segment variations are discussed in detail under “Business Segment Results.”
Depreciation Expense. Depreciation expense increased to $686 million and $1.995 billion for
the three and nine months ended September 30, 2005, respectively, from $641 million and $1.918 billion for the
three and nine months ended September 30, 2004, respectively. The increase in depreciation expense
for the three and nine months primarily related to the Cable segment, partially offset by a
decrease at the AOL segment. The increase in depreciation expense at the Cable segment for the
three and nine months reflects increased spending on customer premise equipment that is depreciated
over a shorter useful life compared to the mix of assets previously purchased. The decrease in
depreciation expense at the AOL segment for the three
13
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
and nine months ended September 30, 2005 relates primarily to a decline in network assets as a
result of membership declines, partially offset by a $13 million adjustment in the third quarter of
2004 to reduce excess depreciation inadvertently recorded at AOL over several years.
Amortization Expense. Amortization expense decreased to $144 million and $446 million for the
three and nine months ended September 30, 2005, respectively, from $156 million and $467 million
for the three and nine months ended September 30, 2004, respectively. The decrease relates
primarily to a decline in amortization at the Publishing segment as a result of certain intangibles
with short useful lives, such as customer lists, becoming fully amortized beginning in the latter
part of 2004.
Operating Income. Time Warner’s Operating Income increased to $1.771 billion for the three
months ended September 30, 2005 from $1.108 billion for the three months ended September 30, 2004.
Excluding the items previously discussed under “Significant Transactions and Other Items Affecting
Comparability” totaling $5 million and $487 million of net expense for 2005 and 2004, respectively,
Operating Income improved $181 million primarily as a result of the improvement in Operating Income
before Depreciation and Amortization, offset partially by the increase in depreciation expense as
discussed above.
Time Warner’s Operating Income decreased to $2.319 billion for the nine months ended September
30, 2005 from $4.562 billion for the nine months ended September 30, 2004. Excluding the items
previously discussed under “Significant Transactions and Other Items Affecting Comparability”
totaling $3.034 billion and $494 million of net expense for 2005 and 2004, respectively, Operating
Income increased by $297 million primarily as a result of the improvement in Operating Income
before Depreciation and Amortization, offset partially by the increase in depreciation expense as
discussed above.
These amounts reflect the changes in business segment Operating Income before Depreciation and
Amortization, and the increase in depreciation expense, as discussed above.
Interest Expense, Net. Interest expense, net, decreased to $282 million and $952 million for
the three and nine months ended September 30, 2005, respectively, from $372 million and $1.159
billion for the three and nine months ended September 30, 2004, respectively, due primarily to
lower average net debt levels and higher interest rates on cash investments.
Other Income, Net. Other income, net, detail is shown in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
9/30/05 |
|
|
9/30/04 |
|
| |
|
(millions) |
|
|
(millions) |
|
Investment gains, net |
|
$ |
10 |
|
|
$ |
296 |
|
|
$ |
1,015 |
|
|
$ |
342 |
|
Net gain on WMG option |
|
|
— |
|
|
|
— |
|
|
|
53 |
|
|
|
— |
|
Income (loss) from equity method investees |
|
|
(7 |
) |
|
|
1 |
|
|
|
40 |
|
|
|
33 |
|
Other |
|
|
6 |
|
|
|
7 |
|
|
|
1 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
$ |
9 |
|
|
$ |
304 |
|
|
$ |
1,109 |
|
|
$ |
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in investment gains, net, and the net gain on the WMG option are discussed above
in detail under “Significant Transactions and Other Items Affecting Comparability.” Excluding the
impact of these items, for the three months ended September 30, 2005, Other income, net, declined
as compared to the prior period, primarily from a decrease in income from equity method investees.
Excluding the impact of these items, for the nine months September 30, 2005, ended Other income,
net, improved as compared to the prior period, primarily from an increase in income from equity
method investees.
Minority Interest Expense, Net. Time Warner had $71 million and $202 million of minority
interest expense for the three and nine months ended September 30, 2005, respectively, compared to
$54 million and $172 million for the three and nine months ended September 30, 2004, respectively.
The increase relates primarily to larger profits recorded by TWC Inc., in which Comcast has a
minority interest.
14
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Income Tax Provision. Income tax expense from continuing operations was $530 million for the
three months ended September 30, 2005, compared to $492 million for the three months ended
September 30, 2004, and was $735 million for the nine months ended September 30, 2005, compared to
$1.511 billion for the nine months ended September 30, 2004. The Company’s effective tax rate from
continuing operations was 37% and 32% for the three and nine months ended September 30, 2005,
respectively, as compared to 50% and 42% for the three and nine months ended September 30, 2004,
respectively. The change in the effective tax rate is primarily a result of the favorable impact of
state tax law changes in Ohio and New York and realized capital loss carryforwards (partially
offset by non-deductible expense related to a portion of the settlement accrual for the securities
litigation) in 2005 compared with the unfavorable impact in 2004 of the nondeductible expenses for
the SEC and DOJ settlements.
The state law changes relate to the method of taxation in Ohio and the method of apportionment
in New York. In Ohio, the income tax is being phased-out and replaced with a gross receipts tax,
while in New York the methodology for income apportionment is changing over time to a single
receipts factor from a three factor formula. These tax law changes resulted in a reduction in
certain deferred tax liabilities related to these states. Accordingly, the Company has recognized
these reductions as noncash tax benefits totaling approximately $170 million for Ohio and $135
million for New York State in the second quarter of 2005.
Income before Discontinued Operations and Cumulative Effect of Accounting Change. Income
before discontinued operations and cumulative effect of accounting change was $897 million for the
three months ended September 30, 2005 compared to $494 million for the three months ended September
30, 2004. Basic and diluted net income per share before discontinued operations and cumulative
effect of accounting change were both $0.19 in 2005, compared to $0.11 and $0.10, respectively, for
basic and diluted net income per share before discontinued operations and cumulative effect of
accounting change in 2004. Excluding the items previously discussed under “Significant Transactions
and Other Items Affecting Comparability” totaling $6 million of income, net and $223 million of net
expense in 2005 and 2004, respectively, Income before discontinued operations and cumulative effect
of accounting change improved by $174 million primarily due to higher Operating Income, lower
interest expense and the change in income tax provision as discussed above.
Income before discontinued operations and cumulative effect of accounting change was $1.539
billion for the nine months ended September 30, 2005 compared to $2.088 billion for the nine months
ended September 30, 2004. Basic and diluted net income per share before discontinued operations and
cumulative effect of accounting change were both $0.33 in 2005, compared to $0.46 and $0.44 in
2004, respectively. Excluding the items previously discussed under “Significant Transactions and
Other Items Affecting Comparability” totaling $1.430 billion and $200 million of net expense in
2005 and 2004, respectively, Income before discontinued operations and cumulative effect of
accounting change improved by $681 million, primarily due to higher Operating Income and lower
income tax provision and interest expense as discussed above.
Discontinued Operations, Net of Tax. Included in the 2004 results for the three and nine
months ended September 30, 2004 are pre-tax income of $7 million and a loss of $9 million,
respectively, and a $2 million tax provision and $124 million tax benefit, respectively, from the
operations of the Music business (Note 2).
Cumulative Effect of Accounting Change, Net of Tax. The Company recorded a $34 million
benefit, net of tax, as a cumulative effect of accounting change upon the consolidation of AOLA in
the first quarter of 2004 in accordance with FASB Interpretation No. 46 (Revised), “Consolidation
of Variable Interest Entities.”
Net Income and Net Income Per Common Share. Net income was $897 million for the three months
ended September 30, 2005 compared to $499 million for the three months ended September 30, 2004.
Basic and diluted net income per common share were both $0.19 in 2005, compared to $0.11 for both
basic and diluted net income per common share in 2004. Net income was $1.539 billion for the nine
months ended September 30, 2005 compared to $2.237 billion for the nine months ended September 30,
2004. Basic and diluted net income per common share were both $0.33 in 2005, compared to $0.49 and
$0.48, respectively, in 2004. Net income includes the items previously addressed under “Significant
Transactions and Other Items Affecting Comparability,” discontinued operations, net of tax, and the
cumulative effect of accounting change, net of tax.
15
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Business Segment Results
AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of
the AOL segment for the three and nine months ended September 30, 2005 and 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
| |
|
(millions) |
|
(millions) |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
1,665 |
|
|
$ |
1,840 |
|
|
|
(10 |
%) |
|
$ |
5,173 |
|
|
$ |
5,661 |
|
|
|
(9 |
%) |
Advertising |
|
|
328 |
|
|
|
257 |
|
|
|
28 |
% |
|
|
959 |
|
|
|
692 |
|
|
|
39 |
% |
Other |
|
|
48 |
|
|
|
44 |
|
|
|
9 |
% |
|
|
139 |
|
|
|
156 |
|
|
|
(11 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,041 |
|
|
|
2,141 |
|
|
|
(5 |
%) |
|
|
6,271 |
|
|
|
6,509 |
|
|
|
(4 |
%) |
Costs of revenues (a) |
|
|
(937 |
) |
|
|
(1,046 |
) |
|
|
(10 |
%) |
|
|
(2,876 |
) |
|
|
(3,165 |
) |
|
|
(9 |
%) |
Selling, general and administrative (a) |
|
|
(621 |
) |
|
|
(645 |
) |
|
|
(4 |
%) |
|
|
(1,829 |
) |
|
|
(1,910 |
) |
|
|
(4 |
%) |
Gain on disposal of consolidated businesses |
|
|
— |
|
|
|
13 |
|
|
|
NM |
|
|
|
10 |
|
|
|
13 |
|
|
|
(23 |
%) |
Restructuring costs |
|
|
(2 |
) |
|
|
— |
|
|
|
NM |
|
|
|
5 |
|
|
|
2 |
|
|
|
150 |
% |
Asset impairment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
|
|
(10 |
) |
|
|
140 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
481 |
|
|
|
463 |
|
|
|
4 |
% |
|
|
1,557 |
|
|
|
1,439 |
|
|
|
8 |
% |
Depreciation |
|
|
(136 |
) |
|
|
(158 |
) |
|
|
(14 |
%) |
|
|
(426 |
) |
|
|
(498 |
) |
|
|
(14 |
%) |
Amortization |
|
|
(43 |
) |
|
|
(44 |
) |
|
|
(2 |
%) |
|
|
(137 |
) |
|
|
(127 |
) |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
302 |
|
|
$ |
261 |
|
|
|
16 |
% |
|
$ |
994 |
|
|
$ |
814 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The reduction in Subscription revenues for the three months ended September 30, 2005
compared to the similar 2004 period primarily reflects a decline in domestic Subscription revenues
(from $1.418 billion to $1.231 billion). AOL Europe’s subscription revenues were essentially flat
for the three months ended September 30, 2005 compared to the similar 2004 period (from $410
million to $409 million). The reduction in Subscription revenues for the nine months ended
September 30, 2005 primarily reflects a decrease in domestic Subscription revenues (from $4.352
billion to $3.822 billion), offset in part by an increase in Subscription revenues at AOL Europe
(from $1.246 billion to $1.288 billion). AOL’s domestic Subscription revenues declined due
primarily to a decrease in the number of domestic AOL brand subscribers and related revenues. For
the nine months ended September 30, 2005, AOL Europe’s Subscription revenues increased primarily as
a result of the favorable impact of foreign currency exchange rates ($49 million), partly offset by
a decline in subscribers and related revenues. In addition, the declines in Subscription revenues
for the three and nine months ended September 30, 2005 were offset partly by the revenues from the
consolidation of AOL Canada, beginning March 31, 2005.
The number of AOL brand domestic and European subscribers is as follows at September 30, 2005,
June 30, 2005 and September 30, 2004 (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
June 30, |
|
September 30, |
| |
|
2005 |
|
2005 |
|
2004 |
Subscriber category: |
|
|
|
|
|
|
|
|
|
|
|
|
AOL brand domestic(a) |
|
|
|
|
|
|
|
|
|
|
|
|
$15 and over |
|
|
14.7 |
|
|
|
15.6 |
|
|
|
18.1 |
|
Under $15 |
|
|
5.4 |
|
|
|
5.2 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AOL brand domestic |
|
|
20.1 |
|
|
|
20.8 |
|
|
|
22.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL Europe |
|
|
6.1 |
|
|
|
6.2 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
AOL includes in its subscriber count individuals, households or entities that
have provided billing information and completed the registration process sufficiently to allow
for an initial log-on to the AOL service. |
16
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
The average monthly Subscription revenue per subscriber (“ARPU”) for each significant
category of subscribers, calculated as total subscription revenue (including premium subscription
services revenues) for the category divided by the average subscribers in the category for the
applicable period, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
9/30/05 |
|
|
9/30/04 |
|
Subscriber category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL brand domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$15 and over |
|
$ |
21.15 |
|
|
$ |
21.02 |
|
|
$ |
20.84 |
|
|
$ |
20.93 |
|
Under $15 |
|
|
13.21 |
|
|
|
13.27 |
|
|
|
13.21 |
|
|
|
13.04 |
|
Total AOL brand domestic |
|
|
19.09 |
|
|
|
19.47 |
|
|
|
19.02 |
|
|
|
19.43 |
|
AOL Europe |
|
|
21.70 |
|
|
|
21.19 |
|
|
|
22.37 |
|
|
|
21.25 |
|
Domestic subscribers to the AOL brand service include subscribers during introductory
free-trial periods and subscribers at no or reduced monthly fees through member service and
retention programs. Total AOL brand domestic subscribers include free-trial and retention members
of approximately 11% at both September 30, 2005 and June 30, 2005 and 14% at September 30, 2004.
Domestic AOL brand subscribers also include subscribers to a bundled broadband service, which
combines the AOL service with high-speed Internet access provided by third-party broadband Internet
access providers such as cable companies and telephone companies. The AOL/TWC Inc. agreement
relating to the combination of the AOL service with broadband access has been launched in almost
all TWC Inc. markets. The impact of this agreement on the AOL segment, the Cable segment and Time
Warner’s consolidated financial results is not expected to be significant during 2005.
The largest component of the AOL brand domestic $15 and over price plans is the $23.90 price
plan, which provides unlimited access to the AOL service using America Online’s dial-up network and
unlimited usage of the AOL service through any other Internet connection. The largest component of
the AOL brand domestic under $15 price plans is the $14.95 per month price plan, which includes ten
hours of dial-up access and unlimited usage of the AOL service through an Internet connection not
provided by America Online, such as a high-speed broadband Internet connection via cable or digital
subscriber lines. America Online continues to develop, test, change and implement price plans,
service offerings and payment methods to attract and retain members to its AOL service and,
therefore, the composition of AOL’s subscriber base is expected to change over time.
The decline in AOL domestic brand subscribers on plans priced $15 and over per month for the
three and nine months ended September 30, 2005 resulted from a number of factors, principally the
continued maturing of dial-up services and subscribers adopting other dial-up and high-speed
services. Further, during the periods, subscribers migrated from the premium-priced unlimited
dial-up plans, including the $23.90 plan, to lower-priced dial-up plans, such as the $14.95 plan.
The decline in AOL brand subscribers overall, and specifically in the $15 and over per month price
plans, is expected to continue into the foreseeable future.
Growth in AOL domestic brand subscribers on plans below $15 per month for the three and nine
months ended September 30, 2005 was driven principally by the migration of subscribers from plans
$15 and over per month and, to a lesser extent, by new subscribers. AOL expects that the proportion
of its subscribers on lower-priced plans will continue to increase.
Within the $15 and over per month category, the increase in ARPU for the three months ended
September 30, 2005 as compared to the similar period in the prior year was due primarily to an
increase in the percentage of revenue generating customers, partially offset by a lower priced mix
of subscriber price plans. For the nine months ended September 30, 2005 as compared to the similar
period in the prior year, the decrease in ARPU was due primarily to a lower priced mix of
subscriber price plans, partially offset by an increase in the percentage of revenue generating
customers. Premium subscription services revenue included in ARPU for the three and nine months
ended September 30, 2005 were $23 million and $65 million, respectively, compared to $26 million
and $74 million for the three and nine months ended
September 30, 2004, respectively.
Within the under $15 per month category, the decrease in ARPU for the three months ended
September 30, 2005 as compared to the similar period in the prior year was due primarily to a lower
priced mix of subscriber price plans partially offset by an increase in the percentage of revenue
generating customers. For the nine months ended September 30, 2005 as
17
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
compared to the similar period in the prior year, the increase was due primarily to an
improved mix of subscriber price plans and an increase in the percentage of revenue generating
customers. Premium subscription services revenue included in ARPU for the three and nine months
ended September 30, 2005 were $8 million and $22 million, respectively, compared to $8 million and
$19 million for the three and nine months ended September 30, 2004, respectively.
AOL Europe offers a variety of price plans, including bundled broadband, unlimited access to
the AOL service using America Online’s dial-up network and limited access plans, which are
generally billed based on actual usage. AOL Europe continues to actively market bundled broadband
plans, as AOL Europe’s subscribers have been migrating from dial-up plans to bundled broadband
plans, and this trend is expected to continue.
The ARPU for European subscribers for the three and nine months ended September 30, 2005, as
compared to the similar periods in the prior year, increased due to a change in the mix of price
plans, with broadband subscribers growing as a percentage of total
subscribers, and an increase in
premium subscription services revenues. The migration of AOL Europe subscribers to broadband plans
is expected to continue to result in increases in ARPU for European subscribers. In addition, the
nine months benefited from the positive effect of changes in foreign currency exchange rates
related to the strengthening of the Euro and British Pound relative to the U.S. Dollar. The total
number of AOL brand subscribers at AOL Europe reflects a year-over-year decline in subscribers in
France and Germany partially offset by an increase in the U.K.
In addition to the AOL brand service, America Online has subscribers to lower-cost services,
both domestically and internationally, including the Netscape and CompuServe brands. These other
brand services are not a significant source of revenue.
Advertising revenues increased for the three and nine months ended September 30, 2005
primarily due to increased revenues from sales of advertising run on third-party websites generated
by Advertising.com, which was acquired in August 2004, and growth in paid-search advertising.
Advertising.com contributed $66 million and $186 million of revenues for the three and nine months
ended September 30, 2005, respectively, compared to $35 million for both the three and nine months
ended September 30, 2004. Paid-search revenues increased $31 million and $88 million for the three
and nine months ended September 30, 2005, respectively. AOL expects Advertising revenues to
continue to increase during the fourth quarter of 2005 due to expected growth in paid-search and
traditional online advertising and contributions from Advertising.com’s performance-based
advertising. However, the rate of growth is expected to be less than that experienced in the first
nine months of 2005 because the growth rate in the first nine months of 2005 benefited from the
absence in the prior year of Advertising.com, which was acquired on August 2, 2004.
Other revenues primarily include software licensing revenue, revenue from providing the Cable
segment access to the AOL Transit Data Network (“ATDN”) for high-speed access to the Internet and
the sale of modems to consumers in order to support high-speed access to the Internet. Other
revenues increased slightly for the three months ended September 30, 2005 due primarily to higher
revenue at AOL Europe from increased modem sales, partially offset by lower ATDN revenue from TWC
Inc., reflecting lower pricing under the terms of a new agreement and lower network usage. For the
nine months ended September 30, 2005, Other revenues decreased due primarily to lower ATDN revenue
from TWC Inc.
For the three and nine months ended September 30, 2005, costs of revenues decreased 10% and
9%, respectively, and, as a percentage of revenues, decreased to 46% for both the three and nine
months ended September 30, 2005 from 49% for both the three and nine months ended September 30,
2004. For the three and nine months ended September 30, 2005, the declines related primarily to
lower network-related expenses. Network-related expenses decreased 23% to $308 million and 29% to
$1.005 billion for the three and nine months, respectively, principally attributable to improved
pricing, decreased levels of fixed commitments and lower usage of AOL’s dial-up network associated
with the declining dial-up subscriber base. These factors are expected to result in continued
declines in network expenses during the fourth quarter of 2005, although at a rate less than that
experienced in the first nine months of 2005. Domestic network expenses are expected to continue to
decline in 2006, although at a lower rate than in 2005. However, this decline is expected to be
more than offset by increased network expenses at AOL Europe due to the continued migration of AOL
Europe dial-up subscribers to bundled broadband plans for which network expenses per subscriber are
significantly higher. The decline in Network costs also benefited from $9 million and $17 million,
respectively, of service credits at AOL Europe for the three and nine months ended September 30,
2005. The decline in network costs was partially offset by costs associated with Advertising.com,
which was acquired in August 2004.
18
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
For
the three and nine months ended September 30, 2004, AOL’s results included $15 million and
$48 million, respectively, of expense related to the November 2003 expiration of the federal
moratorium on Internet sales taxes. The nine months ended September 30, 2004 results also included
$15 million of benefits related to the favorable rulings on certain state sales tax matters. In the
fourth quarter of 2004, the federal moratorium on Internet sales taxes was retroactively reinstated
to November 2003 and extended through 2007. As a result of the retroactive application of the
legislation, the previously accrued amounts were reversed in the fourth quarter of 2004.
The decrease in selling, general and administrative expenses for the three and nine months
ended September 30, 2005 primarily related to a decrease in marketing costs, partially offset by
additional costs resulting from the acquisition of Advertising.com, a $10 million charge related to
a patent litigation settlement and higher general and administrative costs. The three and nine
months ended September 30, 2005 also include $8 million and $23 million of benefits, respectively,
related to the favorable resolution of European value-added tax matters. The decrease in marketing
costs primarily resulted from lower spending on member acquisition activities, partially offset by
an increase in brand advertising. The nine months ended September 30, 2004 also included an
approximate $25 million adjustment to reduce excess marketing accruals made in prior years,
primarily related to AOL Europe. Marketing costs are expected to continue to decrease during the
fourth quarter of 2005 compared to the prior year.
As previously discussed under “Significant Transactions and Other Items Affecting
Comparability,” the results for the three and nine months ended September 30, 2005 include a $2
million restructuring charge and a $5 million net reduction in restructuring charges, respectively,
primarily relating to changes in estimates of previously established restructuring accruals. The
nine month results also reflect an approximate $5 million gain on the sale of a building, a $5
million gain from the resolution of previously contingent gains related to the 2004 sale of
Netscape Security Solutions and a $24 million noncash goodwill impairment charge related to AOLA.
The three and nine months ended September 30, 2004 included a $13 million gain on the sale of AOL
Japan and the nine months ended September 30, 2004 included a $10 million impairment charge related
to a building that was held for sale and the reversal of $2 million of previously established
restructuring accruals that were no longer required.
The increases in Operating Income before Depreciation and Amortization and Operating Income
for the three and nine months are due primarily to lower costs of revenues and selling, general and
administrative expenses and higher Advertising revenues, partially offset by lower Subscription
revenues. For the nine months ended September 30, 2005, the increase was also partially offset by
the $24 million noncash goodwill impairment charge described above. Operating Income also improved
due to lower depreciation expense reflecting a decline in network assets as the result of
membership declines, partially offset by a $13 million adjustment in the third quarter of 2004 to
reduce excess depreciation inadvertently recorded at AOL over several years.
In response to the changing dynamics of AOL’s business, AOL continues to refine its business
strategy. As part of this refinement, AOL is undertaking efforts to realign its resources more
efficiently and will incur restructuring charges related to a reduction in headcount in October
2005 ranging from $15 million to $20 million. As AOL continues to analyze its resource needs,
further restructuring charges may be incurred later in the fourth quarter of 2005 or in the first
quarter of 2006.
19
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Cable. Revenues, Operating Income before Depreciation and Amortization and Operating Income of
the Cable segment for the three and nine months ended September 30, 2005 and 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
| |
|
(millions) |
|
(millions) |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
2,262 |
|
|
$ |
1,993 |
|
|
|
13 |
% |
|
$ |
6,610 |
|
|
$ |
5,917 |
|
|
|
12 |
% |
Advertising |
|
|
133 |
|
|
|
128 |
|
|
|
4 |
% |
|
|
388 |
|
|
|
363 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,395 |
|
|
|
2,121 |
|
|
|
13 |
% |
|
|
6,998 |
|
|
|
6,280 |
|
|
|
11 |
% |
Costs of revenues (a) |
|
|
(1,059 |
) |
|
|
(937 |
) |
|
|
13 |
% |
|
|
(3,128 |
) |
|
|
(2,777 |
) |
|
|
13 |
% |
Selling, general and administrative (a) |
|
|
(388 |
) |
|
|
(360 |
) |
|
|
8 |
% |
|
|
(1,170 |
) |
|
|
(1,112 |
) |
|
|
5 |
% |
Merger-related and restructuring charges |
|
|
(3 |
) |
|
|
— |
|
|
|
NM |
|
|
|
(33 |
) |
|
|
— |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
945 |
|
|
|
824 |
|
|
|
15 |
% |
|
|
2,667 |
|
|
|
2,391 |
|
|
|
12 |
% |
Depreciation |
|
|
(415 |
) |
|
|
(367 |
) |
|
|
13 |
% |
|
|
(1,177 |
) |
|
|
(1,068 |
) |
|
|
10 |
% |
Amortization |
|
|
(18 |
) |
|
|
(19 |
) |
|
|
(5 |
%) |
|
|
(57 |
) |
|
|
(56 |
) |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
512 |
|
|
$ |
438 |
|
|
|
17 |
% |
|
$ |
1,433 |
|
|
$ |
1,267 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The components of Subscription revenues are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
| |
|
(millions) |
|
(millions) |
Video services |
|
$ |
1,631 |
|
|
$ |
1,544 |
|
|
|
6 |
% |
|
$ |
4,872 |
|
|
$ |
4,616 |
|
|
|
6 |
% |
High-speed data |
|
|
548 |
|
|
|
442 |
|
|
|
24 |
% |
|
|
1,566 |
|
|
|
1,289 |
|
|
|
21 |
% |
Digital Phone |
|
|
83 |
|
|
|
7 |
|
|
|
NM |
|
|
|
172 |
|
|
|
12 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Subscription revenues |
|
$ |
2,262 |
|
|
$ |
1,993 |
|
|
|
13 |
% |
|
$ |
6,610 |
|
|
$ |
5,917 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2005, Subscription revenues increased due to
the continued penetration of advanced services (primarily high-speed data, advanced digital video
services and Digital Phone) and video rate increases. The high growth rates for Subscription
revenues associated with high-speed data and Digital Phone are expected to continue during the
fourth quarter of 2005.
TWC Inc. subscriber counts include all billable subscribers for each level of service
received. Basic cable subscribers include all subscribers who receive basic video cable service.
Digital video subscribers reflect all subscribers who receive any level of video service received
via digital technology. High-speed data subscribers include all subscribers who receive TWC Inc.’s
Road Runner Internet service, as well as other Internet services offered by TWC Inc. Digital Phone
subscribers include all subscribers who receive telephony service. At September 30, 2005, as
compared to September 30, 2004, basic cable subscribers increased 0.2% and totaled 10.923 million
(including 1.588 million subscribers of unconsolidated investees, which are managed by TWC Inc.),
digital video subscribers increased by 11% to 5.202 million (including 777,000 subscribers of
unconsolidated investees, which are managed by TWC Inc.), residential high-speed data subscribers
increased by 23% to 4.557 million (including 655,000 subscribers of unconsolidated investees, which
are managed by TWC Inc.) and commercial high-speed data subscribers increased by 25% to 203,000
(including 27,000 subscribers of unconsolidated investees, which are managed by TWC Inc.).
Additionally, Digital Phone subscribers totaled 854,000 (including 127,000 subscribers of
unconsolidated investees, which are managed by TWC Inc.).
The increase in Advertising revenues for the three and nine months ended September 30, 2005 is
due to growth of national and local advertising, including an increase in both the rates and volume
of advertising spots sold.
For the three and nine months ended September 30, 2005, costs of revenues increased 13%, and,
as a percentage of revenues, were 44% and 45% for the three and nine months ended September 30,
2005, respectively, compared to 44% for
20
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
both the three and nine months ended September 30, 2004. The increase in costs of revenues is
primarily related to increases in video programming costs, higher employee costs and an increase in
telephony service costs, partially offset by an $11 million reduction in accrued expense related to
changes in estimates of certain accruals. For the three and nine months ended September 30, 2005,
video programming costs increased 9% to $513 million and 12% to $1.555 billion, respectively, due
primarily to contractual rate increases across TWC Inc.’s programming line-up and the ongoing
deployment of new digital video services. These increases include a $10 million benefit related to
the resolution of terms with a programming vendor in the third quarter of 2005. In addition,
programming costs in the nine-month periods reflect a $14 million charge related to the resolution
of contractual terms with a program vendor in 2005 and the receipt of programming credits in 2004.
Video programming costs are expected to increase during the fourth quarter of 2005, and the full
year rate of increase is expected to be at a rate similar to that experienced during the first nine
months of 2005, reflecting the continued expansion of service offerings and contractual rate
increases across TWC Inc.’s programming line-up. Employee costs increased primarily due to merit
increases and higher headcount resulting from the roll-out of advanced services. Telephony service
costs increased due to the growth of Digital Phone subscribers. Despite the growth in high-speed
data subscribers, as discussed above, high-speed data connectivity costs declined 12% and 19% for
the three and nine months ended September 30, 2005, respectively, as connectivity costs have
continued to decrease on a per subscriber basis due to industry-wide cost declines.
The increase in selling, general and administrative expenses for the three and nine months
ended September 30, 2005 is primarily the result of higher employee and administrative costs due to
merit increases and higher headcount resulting from the continued roll-out of advanced services.
The nine months ended September 30, 2005 also reflects $8 million in reserves related to legal
matters. The nine months ended September 30, 2004 includes $34 million of costs incurred in
connection with the previously discussed Urban Cable dispute.
As previously discussed under “Significant Transactions and Other Items Affecting
Comparability,” the results for the three and nine months ended September 30, 2005 include
approximately $1 million and $31 million, respectively, of restructuring costs, primarily
associated with the early retirement of certain senior executives and the closing of several local
news channels. These changes are part of TWC Inc.’s broader plans to simplify its organization and
enhance its customer focus. TWC Inc. is in the process of executing this reorganization and expects
to incur additional costs associated with this reorganization as it is implemented during the
remainder of 2005. In addition, for the three and nine months ended
September 30, 2005, the Cable
segment expensed approximately $2 million of non-capitalizable merger-related costs associated with
the proposed acquisition of Adelphia discussed above. Merger-related costs associated with the
Adelphia and Comcast transactions discussed above are expected to increase between now and the
closing date. Closing of the transactions is expected during the first half of 2006.
Operating Income before Depreciation and Amortization for the three and nine months increased
principally as a result of revenue gains (particularly high margin high-speed data revenues),
offset in part by higher costs of revenues, selling, general and administrative expenses and the
restructuring charges discussed above.
Operating Income increased due primarily to the increase in Operating Income before
Depreciation and Amortization described above, offset in part by an increase in depreciation
expense. Depreciation expense increased $48 million and $109 million for the three and nine months,
respectively, due primarily to the increased spending on customer premise equipment in recent
years, which generally has a significantly shorter useful life compared to the mix of assets
previously purchased.
The increase in Operating Income before Depreciation and Amortization and Operating Income for
the fourth quarter and full-year of 2005 is expected to be less than the growth rate realized in
the third quarter of 2005 as the third quarter benefited from the $11 million reduction in expenses
related to a change in estimate and the $10 million related to the resolution of terms with a
programming vendor discussed above.
21
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Filmed Entertainment. Revenues, Operating Income before Depreciation and Amortization and
Operating Income of the Filmed Entertainment segment for the three and nine months ended September
30, 2005 and 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
| |
|
(millions) |
|
(millions) |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
$ |
1 |
|
|
$ |
2 |
|
|
|
(50 |
%) |
|
$ |
6 |
|
|
$ |
7 |
|
|
|
(14 |
%) |
Content |
|
|
2,620 |
|
|
|
2,461 |
|
|
|
6 |
% |
|
|
8,156 |
|
|
|
8,423 |
|
|
|
(3 |
%) |
Other |
|
|
29 |
|
|
|
40 |
|
|
|
(28 |
%) |
|
|
138 |
|
|
|
151 |
|
|
|
(9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,650 |
|
|
|
2,503 |
|
|
|
6 |
% |
|
|
8,300 |
|
|
|
8,581 |
|
|
|
(3 |
%) |
Costs of revenues (a) |
|
|
(2,022 |
) |
|
|
(1,792 |
) |
|
|
13 |
% |
|
|
(6,281 |
) |
|
|
(6,313 |
) |
|
|
(1 |
%) |
Selling, general and administrative (a) |
|
|
(375 |
) |
|
|
(350 |
) |
|
|
7 |
% |
|
|
(1,137 |
) |
|
|
(1,078 |
) |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
253 |
|
|
|
361 |
|
|
|
(30 |
%) |
|
|
882 |
|
|
|
1,190 |
|
|
|
(26 |
%) |
Depreciation |
|
|
(29 |
) |
|
|
(26 |
) |
|
|
12 |
% |
|
|
(89 |
) |
|
|
(75 |
) |
|
|
19 |
% |
Amortization |
|
|
(53 |
) |
|
|
(53 |
) |
|
|
— |
|
|
|
(157 |
) |
|
|
(159 |
) |
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
171 |
|
|
$ |
282 |
|
|
|
(39 |
%) |
|
$ |
636 |
|
|
$ |
956 |
|
|
|
(33 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
For the three months ended September 30, 2005, Content revenues increased as a result of
an increase in theatrical product (from $1.593 billion to $1.606 billion) and an increase in
television product (from $778 million to $885 million). For the nine months ended September 30,
2005, Content revenues decreased as a result of declines in both theatrical product (from $5.288
billion to $5.021 billion) and television product (from $2.788 billion to $2.772 billion). Content
revenues also include consumer product and other revenues, which combined increased $39 million to
$129 million for the three months ended September 30, 2005 and $16 million to $363 million for the
nine months ended September 30, 2005 primarily led by increased product license fees.
For the three months ended September 30, 2005, revenue from theatrical product improved due to
increases in television license fees and worldwide theatrical film revenues of $11 million and $7
million, respectively, partially offset by a decrease in worldwide home video sales of $5 million.
For the nine months ended September 30, 2005, revenue from theatrical product decreased due to
declines in theatrical film revenues and worldwide home video sales of $409 million and $49
million, respectively, partially offset by an increase in television license fees of $191 million.
The increase in worldwide theatrical film revenues for the three months ended September 30,
2005 was attributable to the success of current releases, including Charlie and the Chocolate
Factory, Wedding Crashers and Batman Begins, among others, offset in part by the 2004 international
success of Harry Potter and the Prisoner of Azkaban and Troy. The decrease in theatrical film
revenues for the nine months ended September 30, 2005 reflects difficult comparisons to the prior
year, which included the success of Harry Potter and the Prisoner of Azkaban and Troy and
international overages associated with The Lord of the Rings: The Return of the King, partially
offset by the increase for the three months as discussed above. The decline in home video sales for
the nine months ended September 30, 2005 was attributable to the 2004 key home video releases of
The Lord of the Rings: The Return of the King, The Matrix Revolutions and The Last Samurai,
partially offset by the first quarter 2005 home video release of Harry Potter and the Prisoner of
Azkaban in most international territories and the domestic home video release of Troy. For the
three and nine months ended September 30, 2005, the increase in theatrical product revenue from
television distribution primarily related to the timing and availability of various international
availabilities, including a greater number of significant titles in 2005.
The increase in television product revenues for the three months ended September 30, 2005 is
attributable to increases in home video sales and license fees of $92 million and $15 million,
respectively. The decrease in television product revenues for the nine months ended September 30,
2005 is attributable to a $280 million decline in license fees, partially offset by a $264 million
increase in home video sales.
22
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
The growth in home video sales of television product for the three and nine months ended
September 30, 2005 was primarily attributable to an increased number of titles released in this
format, including Seinfeld. The increase in worldwide license fees from television product for the
three months ended September 30, 2005 was primarily attributable to an increase in international
television availabilities across several titles, offset in part by syndication revenues from the
final broadcast seasons of Friends and The Drew Carey Show in 2004. The decrease in worldwide
license fees from television product for the nine months ended September 30, 2005 was primarily
attributable to difficult comparisons to 2004, which included the third-cycle syndication
continuance license arrangements for Seinfeld and network license fees and syndication revenues
associated with the final broadcast seasons of Friends and The Drew Carey Show.
The increase in costs of revenues for the three months ended September 30, 2005 resulted
primarily from higher advertising and print costs due to the quantity and mix of films released,
higher home video manufacturing and freight costs related to increased volume and an increase in
the ratio of television product and an increase in film costs ($1.189 billion for the three months
ended September 30, 2005 compared to $1.180 billion for the three months ended September 30, 2004).
The decrease in costs of revenues for the nine months ended September 30, 2005 resulted primarily
from lower film costs ($3.784 billion for the nine months ended September 30, 2005 compared to
$4.232 billion for the nine months ended September 30, 2004), offset partially by higher home video
manufacturing and freight costs related to increased volume and an increase in the ratio of
television product, as well as due to higher advertising and print costs resulting from the
quantity and mix of films released. Included in film costs for the three and nine months are
theatrical valuation adjustments, which, for the three months ended September 30, 2005, declined
from $88 million in 2004 to $36 million in 2005 and, for
the nine months ended September 30, 2005,
declined from $232 million in 2004 to $131 million in 2005. Costs of revenues as a percentage of
revenues increased to 76% for the three months ended September 30, 2005 from 72% for the three
months ended September 30, 2004, and to 76% for the nine months ended September 30, 2005 compared
to 74% for the nine months ended September 30, 2004, due to the quantity and mix of product
released.
Selling, general and administrative expenses increased for the three and nine months ended
September 30, 2005, primarily due to higher employee costs related to additional headcount and
salary increases. The increase for the nine months was partially offset by a decline related to the
distribution fees associated with the off-network television syndication of Seinfeld in the prior
year.
Operating Income before Depreciation and Amortization and Operating Income for the three
months ended September 30, 2005 decreased due to increases in costs of revenues and selling,
general and administrative costs, partially offset by increased revenues. For the nine months ended
September 30, 2005, Operating Income before Depreciation and Amortization and Operating Income
decreased due to lower revenues and increased selling, general and administrative expenses, which
were partially offset by the decrease in costs of revenues, as discussed above.
The Company anticipates growth in both Operating Income before Depreciation and Amortization
and Operating Income in the fourth quarter of 2005 as compared to the prior year due to higher
contribution from television product. In addition, the fourth quarter 2005 theatrical results,
which include the theatrical release of Harry Potter and the Goblet of Fire and the home video
releases of Batman Begins, Charlie and the Chocolate
Factory and The Polar Express, are expected to
be comparable to the fourth quarter of 2004 theatrical results, which included the home video
releases of Harry Potter and the Prisoner of Azkaban and Elf. However, the full year results are
expected to be an overall decline.
With the
changing dynamics of the filmed entertainment business, Warner Bros.
is undertaking efforts to reorganize its resources more efficiently,
which are expected to result in Warner Bros. incurring restructuring
charges related to a reduction in headcount in the fourth quarter of
2005 totaling approximately $25 million. As Warner Bros.
continues to analyze its resource needs, further restructuring
charges may be incurred.
23
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Networks. Revenues, Operating Income before Depreciation and Amortization and Operating Income
of the Networks segment for the three and nine months ended September 30, 2005 and 2004 are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
| |
|
(millions) |
|
|
(millions) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
1,344 |
|
|
$ |
1,275 |
|
|
|
5 |
% |
|
$ |
4,060 |
|
|
$ |
3,812 |
|
|
|
7 |
% |
Advertising |
|
|
705 |
|
|
|
651 |
|
|
|
8 |
% |
|
|
2,248 |
|
|
|
2,102 |
|
|
|
7 |
% |
Content |
|
|
304 |
|
|
|
221 |
|
|
|
38 |
% |
|
|
772 |
|
|
|
729 |
|
|
|
6 |
% |
Other |
|
|
45 |
|
|
|
41 |
|
|
|
10 |
% |
|
|
92 |
|
|
|
118 |
|
|
|
(22 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,398 |
|
|
|
2,188 |
|
|
|
10 |
% |
|
|
7,172 |
|
|
|
6,761 |
|
|
|
6 |
% |
Costs of revenues (a) |
|
|
(1,152 |
) |
|
|
(1,082 |
) |
|
|
6 |
% |
|
|
(3,604 |
) |
|
|
(3,499 |
) |
|
|
3 |
% |
Selling, general and administrative (a) |
|
|
(480 |
) |
|
|
(471 |
) |
|
|
2 |
% |
|
|
(1,380 |
) |
|
|
(1,224 |
) |
|
|
13 |
% |
Loss on sale of assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
766 |
|
|
|
635 |
|
|
|
21 |
% |
|
|
2,188 |
|
|
|
2,031 |
|
|
|
8 |
% |
Depreciation |
|
|
(61 |
) |
|
|
(55 |
) |
|
|
11 |
% |
|
|
(173 |
) |
|
|
(155 |
) |
|
|
12 |
% |
Amortization |
|
|
(6 |
) |
|
|
(6 |
) |
|
|
— |
|
|
|
(18 |
) |
|
|
(17 |
) |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
699 |
|
|
$ |
574 |
|
|
|
22 |
% |
|
$ |
1,997 |
|
|
$ |
1,859 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The increase in Subscription revenues for the three and nine months ended September 30,
2005 was due primarily to higher subscription rates at Turner and HBO and, to a lesser extent, an
increase in the number of subscribers at Turner. The nine months 2005 results also include a $22
million benefit from the resolution of certain contractual agreements at Turner and the nine months
2004 results included a benefit of approximately $50 million from the resolution of certain
contractual agreements at Turner and HBO.
The increase in Advertising revenues for the three and nine months ended September 30, 2005
was driven primarily by higher CPMs and sellouts at Turner’s entertainment networks, partially
offset by a decline at The WB Network as a result of lower ratings.
The increase in Content revenues for the three and nine months ended September 30, 2005 was
primarily due to HBO’s broadcast syndication sales of Sex and
the City and, to a lesser extent,
increases in other ancillary sales of HBO’s original programming, partially offset by lower
licensing revenues at HBO associated with fewer episodes of Everybody Loves Raymond. In addition,
for the nine months ended September 30, 2005, the increase in Content revenues was partially offset
by the absence of the winter sports teams at Turner, which were sold on March 31, 2004 and
contributed $22 million of Content revenues in 2004.
For the nine months ended September 30, 2005, the decline in Other revenues was primarily
attributable to the sale of the winter sports teams in the first quarter of 2004, which contributed
$39 million of Other revenues in the first quarter of 2004, partially offset by the increase in
Other revenues primarily related to the Atlanta Braves.
Costs of revenues increased 6% for the three months ended September 30, 2005 and, as a
percentage of revenues, was 48% and 49% for the three months ended September 30, 2005 and 2004,
respectively. Costs of revenues increased 3% for the nine months ended September 30, 2005 and, as a
percentage of revenues, was 50% and 52% for the nine months ended September 30, 2005 and 2004,
respectively. The increases in costs of revenues were primarily attributable to an increase in
programming costs and higher costs associated with increased ancillary sales of HBO’s original
programming. Also impacting the increases was the $14 million
reduction in
the third quarter of 2004 of prior
years’ distribution costs at HBO. For the nine months the increase was partially offset by lower
costs related to the absence of the winter sports teams due to their sale in March 2004.
Programming costs increased to $776 million for the three months ended September 30, 2005 as
compared to $770 million for the three months ended September 30, 2004 and to $2.549 billion for
the nine months ended September 30, 2005 from $2.478 billion for the nine months ended September
30, 2004. The increases in programming
24
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
expenses are primarily due to an increase in original series costs at Turner, partially offset
by lower acquired theatrical film costs at HBO. In addition, the increase in programming costs for
the nine months reflects increases in sports programming costs and news costs at Turner.
Selling, general and administrative expenses increased for the three and nine months ended
September 30, 2005 primarily due to higher marketing and promotional expenses to support new
programming primarily at Turner and higher general and administrative costs at Turner, partially
offset by a decline in marketing and promotional expenses at The WB Network. The three and nine
months ended September 30, 2004 includes approximately $14 million of lease termination costs at
HBO. In addition, the nine months ended September 30, 2004
reflects the reversal of bankruptcy-related bad debt reserves of $75 million at Turner and HBO on receivables from Adelphia.
As discussed in “Significant Transactions and Other Items Affecting Comparability,” the nine
months 2004 results include an approximate $7 million loss on the sale of the winter sports teams.
Operating Income before Depreciation and Amortization and Operating Income increased for the
three and nine months ended September 30, 2005 primarily due to an increase in revenues, partially
offset by higher costs of revenues and selling, general and administrative expenses, as described
above.
The Company anticipates that the rate of growth in both Operating Income before Depreciation
and Amortization and Operating Income during the fourth quarter of 2005 will be higher than that
experienced in the first nine months of 2005. The growth for the first nine months of 2005 was
negatively impacted, in part, by an approximate $28 million lower net benefit from the favorable
resolution of certain contractual agreements as well as the 2004 reversal of $75 million of
Adelphia-related bad debt reserves.
Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Publishing segment for the three and nine months ended September 30, 2005 and 2004
are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
| |
|
(millions) |
|
|
(millions) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
400 |
|
|
$ |
387 |
|
|
|
3 |
% |
|
$ |
1,202 |
|
|
$ |
1,164 |
|
|
|
3 |
% |
Advertising |
|
|
650 |
|
|
|
643 |
|
|
|
1 |
% |
|
|
1,963 |
|
|
|
1,880 |
|
|
|
4 |
% |
Content |
|
|
148 |
|
|
|
135 |
|
|
|
10 |
% |
|
|
445 |
|
|
|
370 |
|
|
|
20 |
% |
Other |
|
|
179 |
|
|
|
172 |
|
|
|
4 |
% |
|
|
509 |
|
|
|
513 |
|
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,377 |
|
|
|
1,337 |
|
|
|
3 |
% |
|
|
4,119 |
|
|
|
3,927 |
|
|
|
5 |
% |
Costs of revenues (a) |
|
|
(588 |
) |
|
|
(547 |
) |
|
|
7 |
% |
|
|
(1,739 |
) |
|
|
(1,603 |
) |
|
|
8 |
% |
Selling, general and administrative (a) |
|
|
(501 |
) |
|
|
(526 |
) |
|
|
(5 |
%) |
|
|
(1,577 |
) |
|
|
(1,541 |
) |
|
|
2 |
% |
Gain on sale of assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
|
|
8 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
288 |
|
|
|
264 |
|
|
|
9 |
% |
|
|
811 |
|
|
|
791 |
|
|
|
3 |
% |
Depreciation |
|
|
(32 |
) |
|
|
(27 |
) |
|
|
19 |
% |
|
|
(98 |
) |
|
|
(90 |
) |
|
|
9 |
% |
Amortization |
|
|
(24 |
) |
|
|
(34 |
) |
|
|
(29 |
%) |
|
|
(77 |
) |
|
|
(108 |
) |
|
|
(29 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
232 |
|
|
$ |
203 |
|
|
|
14 |
% |
|
$ |
636 |
|
|
$ |
593 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
For the three and nine months ended September 30, 2005, Subscription revenues increased
primarily reflecting revenues from new magazine launches and the acquisition of the remaining
interest in the publisher of Essence.
For the three and nine months ended September 30, 2005, Advertising revenues increased due to
contributions from the acquisition of the remaining interest in the publisher of Essence and new
magazine launches as well as growth at Real Simple, offset partly by lower Advertising revenues
from core magazines including Sports Illustrated and Time, among others. The Company anticipates
that the full year rate of growth in Advertising revenues will decline as compared to the
25
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
rate of growth experienced in the first nine months of 2005 due to continued soft market
conditions, particularly as such conditions relate to certain of the Company’s core magazines.
Content revenues increased for the three and nine months ended September 30, 2005 due to a
number of best-selling titles at Time Warner Book Group.
Costs of revenues increased 7% for the three months ended September 30, 2005 and, as a
percentage of revenues, were 43% and 41% for the three months ended September 30, 2005 and 2004,
respectively. Costs of revenues increased 8% for the nine months ended September 30, 2005 and, as a
percentage of revenues, were 42% and 41% for the nine months ended September 30, 2005 and 2004,
respectively. Costs of revenues for the magazine publishing business include manufacturing (paper,
printing and distribution) and editorial-related costs, which together increased 7% to $452 million
and 8% to $1.363 billion for the three and nine months ended September 30, 2005, respectively. The
increases for the three and nine months were primarily due to magazine launch-related costs, the
acquisition of the remaining interest in the publisher of Essence and increases in paper prices. In
addition, costs of revenues for the three and nine months increased due to costs related to
increased sales of several successful titles at Time Warner Book Group.
Selling, general and administrative expenses decreased 5% for the three months ended September
30, 2005 primarily due to the absence of costs associated with the sponsorship and coverage of the
2004 Summer Olympics and cost reduction efforts. These declines were offset partially by an
increase in magazine launch-related costs, the acquisition of the remaining interest in the
publisher of Essence, and higher selling expenses related to the success of several titles at Time
Warner Book Group. For the nine months ended September 30, 2005, selling, general and
administrative expenses increased 2% primarily due to magazine launch-related costs, the
acquisition of the remaining interest in the publisher of Essence, and higher selling expenses
related to the success of several titles at Time Warner Book Group, partially offset by the absence
of costs associated with the sponsorship and coverage of the 2004 Summer Olympics.
As previously discussed in “Significant Transactions and Other Items Affecting Comparability,”
the results for the nine months ended September 30, 2005 reflect an $8 million gain related to the
collection of a loan made in conjunction with the Company’s 2003 sale of Time Life, which was
previously fully reserved due to concerns about recoverability. The results for the nine months
ended September 30, 2004 reflect an $8 million gain on the sale of a building.
For the three months ended September 30, 2005, Operating Income before Depreciation and
Amortization increased primarily due to an increase in revenues and a decline in selling, general
and administrative expenses, partially offset by higher costs of revenues, including $3 million of
higher start-up losses on magazine launches. Operating Income before Depreciation and Amortization
for the nine months ended September 30, 2005 increased primarily due to an increase in revenues,
partially offset by higher costs of revenues and selling, general and administrative expenses,
including $20 million of higher start-up losses on magazine launches.
Operating Income for the three and nine months ended September 30, 2005 improved slightly,
benefiting from a decline in amortization expense as a result of certain short-lived intangibles,
such as customer lists, becoming fully amortized in the later part of 2004.
26
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Corporate. Operating Loss before Depreciation and Amortization and Operating Loss of the
Corporate segment for the three and nine months ended September 30, 2005 and 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
|
9/30/05 |
|
|
9/30/04 |
|
|
% Change |
| |
|
(millions) |
|
|
(millions) |
|
Legal reserves related to securities litigation
and government investigations |
|
$ |
— |
|
|
$ |
(500 |
) |
|
|
NM |
|
|
$ |
(3,000 |
) |
|
$ |
(500 |
) |
|
|
NM |
|
Selling, general and administrative (a) |
|
|
(113 |
) |
|
|
(115 |
) |
|
|
(2 |
%) |
|
|
(319 |
) |
|
|
(391 |
) |
|
|
(18 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss before Depreciation and Amortization |
|
|
(113 |
) |
|
|
(615 |
) |
|
|
(82 |
%) |
|
|
(3,319 |
) |
|
|
(891 |
) |
|
|
NM |
|
Depreciation |
|
|
(13 |
) |
|
|
(8 |
) |
|
|
63 |
% |
|
|
(32 |
) |
|
|
(32 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
$ |
(126 |
) |
|
$ |
(623 |
) |
|
|
(80 |
%) |
|
$ |
(3,351 |
) |
|
$ |
(923 |
) |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Selling, general and administrative expenses exclude depreciation. |
As previously discussed, the nine months ended September 30, 2005 results include $3
billion in legal reserves related to securities litigation. The three and nine months ended
September 30, 2004 results include $500 million in legal reserves related to the government
investigations.
In addition to corporate expenses, included in selling, general and administrative expenses
are legal and other professional fees related to the SEC and DOJ investigations into the Company’s
accounting and disclosure practices and the defense of various securities litigation matters ($16
million and $25 million for the three and nine months ended September 30, 2005, respectively,
compared to $9 million and $23 million for the three and nine months ended September 30, 2004,
respectively). Costs are expected to continue to be incurred in future periods.
Also included in selling, general and administrative expenses for the three and nine months
ended September 30, 2004, are charges associated with the relocation of the Company’s corporate
headquarters. During the first six months of 2004, the Company recorded a $67 million charge, of
which $14 million was reversed in the third quarter of 2004 as a result of an agreement having been
finalized to lease a portion of the space to the AOL business unit. Of the $53 million net charge,
approximately $26 million relates to a noncash write-off of a fair value lease adjustment, which
was established in purchase accounting at the time of the merger of America Online and Time Warner
Inc., now known as Historic TW Inc. (“Historic TW”). For the three and nine months ended September
30, 2005, the Company reversed approximately $2 million and $5 million, respectively, of this
charge, which was no longer required due to changes in estimates.
Excluding the items discussed above, Operating Loss before Depreciation and Amortization and
Operating Loss improved for the three and nine months ended September 30, 2005 due primarily to the
absence of a $20 million adjustment to increase self insurance reserves taken in the third quarter
of 2004, which was partially related to prior periods.
FINANCIAL CONDITION AND LIQUIDITY
Current Financial Condition
At September 30, 2005, Time Warner had $20.385 billion of debt, $7.959 billion of cash and
equivalents (net debt of $12.426 billion, defined as total debt less cash and equivalents) and
$63.386 billion of shareholders’ equity, including the conversion of $1.5 billion of mandatorily
convertible preferred stock to common stock in the first quarter of 2005, compared to $22.375
billion of debt, $6.139 billion of cash and equivalents (net debt of $16.236 billion) and $60.771
billion of shareholders’ equity at December 31, 2004.
27
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
The following table shows the significant items contributing to the decrease in net debt from
December 31, 2004 to September 30, 2005 (millions):
| |
|
|
|
|
Net debt at December 31, 2004 |
|
$ |
16,236 |
|
Cash provided by operations (a) |
|
|
(5,597 |
) |
Capital expenditures and product development costs |
|
|
2,259 |
|
Proceeds from sale of the Company’s remaining interest in Google |
|
|
(940 |
) |
Proceeds
from the sale of the WMG Option |
|
|
(138 |
) |
Dividends paid to common stock shareholders |
|
|
235 |
|
Common stock repurchases |
|
|
485 |
|
All other, net |
|
|
(114 |
) |
|
|
|
|
Net debt at September 30, 2005 (b) |
|
$ |
12,426 |
|
|
|
|
|
|
|
|
| (a) |
|
Cash provided by operations includes a $300 million payment related to the
government investigations. |
| |
| (b) |
|
Included in the net debt balance is approximately $267 million, which represents the
net unamortized fair value adjustment recognized as a result of the merger of America Online
and Historic TW. |
The Company began paying a quarterly cash dividend of $0.05 per share on its common stock
in the third quarter of this year.
As noted in “Other Recent Developments,” the Company has accrued $3 billion in legal reserves
related to the securities litigation. In connection with the settlement agreement for the MSBI
consolidated securities class action, in October 2005 the Company paid $2.4 billion into a
settlement fund. In addition, in October 2005 the Company also transferred $150 million that was
previously classified as restricted cash into the settlement fund.
As noted in “Other Recent Developments,” on July 29, 2005, the Company’s Board of Directors
authorized a common stock repurchase program that allows Time Warner to repurchase, from time to
time, up to $5 billion of common stock over a two-year period ending July 2007. On October 28,
2005, Time Warner’s Board of Directors increased the amount authorized to be repurchased under the
stock repurchase program to an aggregate of up to $12.5 billion
of common stock. Purchases under the stock repurchase
program may be made from time to time on the open market and in privately negotiated transactions.
Size and timing of these purchases will be based on a number of factors including price and
business and market conditions. From the program’s inception through October 31, 2005, the Company
has repurchased approximately 45 million shares of common stock for approximately $809 million pursuant to
a trading program under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.
In April 2005, the Company entered into an agreement to jointly acquire substantially all of
the assets of Adelphia with Comcast for a combination of cash and stock of TWC Inc. TWC Inc. also
has agreed to redeem Comcast’s interests in TWC Inc. and TWE following the Adelphia acquisition.
Upon closing, these transactions will impact the Company’s financial condition and liquidity. For
additional details, please see “Other Recent Developments.”
As discussed in more detail below, management believes that Time Warner’s cash provided by
operations, cash and equivalents, available borrowing capacity under its committed credit
facilities ($6.9 billion at Time Warner Inc. and
$2.7 billion at TWC Inc. as of September 30, 2005), planned additional borrowings as a result of the increased size of its stock
repurchase program, and availability under its commercial paper
programs should be sufficient to fund its capital and
liquidity needs for the foreseeable future, including the quarterly
dividend payments, the increased common
stock repurchase program, the proposed acquisition of Adelphia, the redemption of Comcast’s
interests in TWC Inc. and TWE and payments to be made in resolving pending securities litigation.
28
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Cash Flows
Cash and equivalents increased by $1.820 billion and $3.842 billion for the nine months ended
September 30, 2005 and 2004, respectively. Components of these changes are discussed in more detail
in the pages that follow.
Operating Activities
Sources of cash provided by operations are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/05 |
|
|
9/30/04 |
|
| |
|
(millions) |
|
Operating Income before Depreciation and Amortization |
|
$ |
4,760 |
|
|
$ |
6,947 |
|
Legal reserves related to securities litigation and government investigations |
|
|
3,000 |
|
|
|
500 |
|
Noncash asset impairments |
|
|
24 |
|
|
|
10 |
|
Net interest payments (a) |
|
|
(916 |
) |
|
|
(1,067 |
) |
Net income taxes paid (b) |
|
|
(361 |
) |
|
|
(280 |
) |
Adjustments relating to discontinued operations (c) |
|
|
(8 |
) |
|
|
130 |
|
Merger and restructuring payments (d) |
|
|
(88 |
) |
|
|
(81 |
) |
Domestic qualified pension plan contributions |
|
|
— |
|
|
|
(50 |
) |
Cash paid related to the government investigations |
|
|
(300 |
) |
|
|
— |
|
All other, net, including working capital changes |
|
|
(514 |
) |
|
|
(721 |
) |
|
|
|
|
|
|
|
Cash provided by operations |
|
$ |
5,597 |
|
|
$ |
5,388 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Includes interest income received of $174 million and $76 million in 2005 and
2004, respectively. |
| |
| (b) |
|
Includes income tax refunds received of $62 million and $92 million in 2005 and
2004, respectively. |
| |
| (c) |
|
Includes net income from discontinued operations of $115 million in 2004. Amounts
also include working capital related adjustments associated with discontinued operations of
$(8) million and $15 million in 2005 and 2004, respectively. |
| |
| (d) |
|
Includes payments for restructuring and merger related costs, as well as payments
for certain other merger-related liabilities. |
Cash provided by operations increased to $5.597 billion in 2005 compared to $5.388
billion in 2004. The increase in cash provided by operations is related primarily to an increase in
Operating Income before Depreciation and Amortization (excluding the legal reserves related to
securities litigation in 2005 and the government investigations in 2004, which had not been paid as
of September 30, 2005 and 2004, respectively), higher contributions from working capital changes
and lower interest payments. These increases were partially offset by a $300 million payment
related to the settlement of the SEC investigation in 2005, a reduction in cash relating to
discontinued operations and higher tax payments. The changes in components of working capital are
subject to wide fluctuations based on the timing of cash transactions related to production
schedules, the acquisition of programming, collection of accounts receivable and similar items. The
change in working capital between periods primarily reflects higher cash collections on
receivables, partially offset by higher theatrical production spending and the timing of accounts
payable and accrual payments.
29
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Investing Activities
Sources of cash provided (used) by investing activities are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/05 |
|
|
9/30/04 |
|
| |
|
(millions) |
|
Investment and acquisitions, net of cash acquired: |
|
|
|
|
|
|
|
|
Essence |
|
$ |
(129 |
) |
|
$ |
— |
|
Consolidation of AOLA (a) |
|
|
— |
|
|
|
33 |
|
Synapse |
|
|
— |
|
|
|
(120 |
) |
Advertising.com |
|
|
— |
|
|
|
(445 |
) |
All other, principally funding of joint ventures |
|
|
(362 |
) |
|
|
(227 |
) |
Capital expenditures and product development costs |
|
|
(2,259 |
) |
|
|
(2,021 |
) |
Proceeds from the sale of other available-for-sale securities |
|
|
51 |
|
|
|
44 |
|
Proceeds from the sale of the Company’s remaining interest in Google |
|
|
940 |
|
|
|
195 |
|
Net proceeds from the sale of WMG (b) |
|
|
— |
|
|
|
2,501 |
|
Proceeds from the sale of the WMG Option |
|
|
138 |
|
|
|
— |
|
Proceeds from the sale of investment in VIVA and VIVA Plus |
|
|
— |
|
|
|
134 |
|
All other investment and asset sale proceeds |
|
|
276 |
|
|
|
170 |
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities |
|
$ |
(1,345 |
) |
|
$ |
264 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Represents cash balance of AOLA upon consolidation. |
| |
| (b) |
|
Represents $2.6 billion of proceeds received from the sale of WMG less certain
working capital adjustments. |
Cash used by investing activities was $1.345 billion in 2005 compared to cash provided by
investing activities of $264 million in 2004. The change in cash provided (used) by investing
activities is primarily due to the absence of proceeds from the 2004 sale of WMG and an increase in
capital expenditures and product development costs, principally at TWC Inc., offset by increased
proceeds from the sale of the Company’s remaining interest in Google, the proceeds received upon
the sale of its WMG option and higher other investment proceeds.
Financing Activities
Sources of cash used by financing activities are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/05 |
|
|
9/30/04 |
|
| |
|
(millions) |
|
Borrowings |
|
$ |
1,142 |
|
|
$ |
1,273 |
|
Debt repayments |
|
|
(3,043 |
) |
|
|
(3,222 |
) |
Proceeds from exercise of stock options |
|
|
275 |
|
|
|
272 |
|
Principal payments on capital leases |
|
|
(94 |
) |
|
|
(148 |
) |
Repurchases of common stock |
|
|
(485 |
) |
|
|
— |
|
Dividends paid |
|
|
(235 |
) |
|
|
— |
|
Other financing activities |
|
|
8 |
|
|
|
15 |
|
|
|
|
|
|
|
|
Cash used by financing activities |
|
$ |
(2,432 |
) |
|
$ |
(1,810 |
) |
|
|
|
|
|
|
|
Cash used by financing activities was $2.432 billion in 2005 compared to $1.810 billion in
2004. The increase in cash used by financing activities was due principally to repurchases of
common stock made in connection with the Company’s common stock repurchase program and dividends
paid to common stock shareholders in 2005.
Capital Expenditures and Product Development Costs
Time Warner’s total capital expenditures and product development costs were $2.259 billion for
the nine months ended September 30, 2005 compared to $2.021 billion for the nine months ended
September 30, 2004. Capital expenditures and product development costs principally relate to the
Company’s Cable segment, which had capital expenditures of $1.410
30
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
billion for the nine months ended September 30, 2005 as compared to $1.127 billion for the
nine months ended September 30, 2004.
The Cable segment’s capital expenditures comprise the following categories:
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
9/30/05 |
|
|
9/30/04 |
|
| |
|
(millions) |
|
Cable Segment Capital Expenditures |
|
|
|
|
|
|
|
|
Customer premise equipment |
|
$ |
651 |
|
|
$ |
534 |
|
Scaleable infrastructure |
|
|
207 |
|
|
|
110 |
|
Line extensions |
|
|
197 |
|
|
|
166 |
|
Upgrade/rebuild |
|
|
95 |
|
|
|
92 |
|
Support capital |
|
|
260 |
|
|
|
225 |
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
1,410 |
|
|
$ |
1,127 |
|
|
|
|
|
|
|
|
TWC Inc. incurs expenditures associated with the construction and maintenance of its cable
systems. Costs associated with the construction of the cable transmission and distribution
facilities and new cable service installations are capitalized. TWC Inc. generally capitalizes
expenditures for tangible fixed assets having a useful life of greater than one year. Capitalized
costs include direct material, direct labor, overhead and, in some cases, interest. Sales and
marketing costs, as well as the costs of repairing or maintaining existing fixed assets, are
expensed as incurred. Types of capitalized expenditures include: customer premise equipment,
scaleable infrastructure, line extensions, plant upgrades and rebuilds and support capital. With
respect to customer premise equipment, which includes converters and cable modems, TWC Inc.
capitalizes installation charges only upon the initial deployment of these assets. All costs
incurred in subsequent disconnects and reconnects are expensed as incurred. Depreciation on these
assets is provided generally using the straight-line method over their estimated useful lives. For
converters and modems, useful life is generally 3 to 4 years and for plant upgrades, useful life is
up to 16 years.
Backlog
Backlog represents the amount of future revenue 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 $4.5 billion and $3.7 billion at September 30,
2005 and December 31, 2004, respectively. Included in these amounts is licensing of film product
from the Filmed Entertainment segment to the Networks segment of $682 million and $514 million at
September 30, 2005 and December 31, 2004, respectively.
RISK FACTORS AND CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
Risk Factors
If the events discussed in these risk factors occur, the Company’s business, financial
condition, results of operations or cash flows could be materially adversely affected. In such
case, the market price of the Company’s common stock could decline.
The Company’s America Online business continues to face substantial competition in maintaining
and growing its subscriber base, in developing compelling products and services, and in increasing
revenues from sources other than fees for the AOL service, and if America Online is unable to meet
its competitive challenges, the Company’s financial results could be adversely affected.
Historically, America Online’s primary product offering has been an online subscription service
that includes a component of telephone “dial-up” Internet access. This product, offered under a
variety of different terms and price plans, generates the substantial majority of America Online’s
revenues. During the last several years, the online services industry has been changing from one in
which the only way for a household to access the Internet was through telephone “dial-up” Internet
access provided by Internet service providers to one in which households can access the Internet
through a variety of connection methods, such as cable modems, DSL or wireless connections offered
by a number of different providers, including Internet service providers, cable companies and
telephone and other
31
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
telecommunications companies. As a result, significant price and service competition for
Internet access exists. Furthermore, unlike some of its competitors in the U.S., AOL does not own
or control access to the “last mile” of connectivity to the consumer that would enable it to easily
offer high-speed access to subscribers. Therefore, in order for America Online to provide
high-speed access in the U.S., it generally must negotiate and secure access from the providers
that control the last mile of infrastructure. In some cases, those companies provide products
competitive to AOL. To date, while America Online has reached and implemented agreements with
various high-speed access providers, significant price and service competition exists in the offer
of broadband Internet access services. America Online (together with the broadband access
providers) has had limited success in providing a competitive offering in the U.S., and there can
be no assurance that America Online will be able to compete successfully in the future. As a result
primarily of these factors, America Online has experienced declines in subscribers throughout 2003,
2004 and to date in 2005, and declines are expected to continue into the foreseeable future.
Declines in subscribers have resulted in decreased Subscription revenues and have had an adverse
impact on Advertising revenues and profitability.
Since late 2002, America Online’s strategy has focused on improving and expanding its Internet
products and services, including enhancement of or upgrade to the content and features provided
through the flagship AOL service, and introducing premium services, as well as reducing costs. In
late 2004, America Online reorganized its operating structure and expanded its strategy from
attracting and retaining subscribers, especially those who access the Internet via a high-speed
connection, to focus also on increasing the value of and maintaining or increasing the size of its
U.S. and worldwide audience to the America Online network of sites, content and services. America
Online’s strategy continues to include the development and offering of additional products and
services to existing subscribers, as well as to Internet users in general. This strategy includes
the potentially conflicting goals of maintaining and improving a subscription business while
increasing the audience for its Internet properties by making generally available to Internet users
without charge much of the content, features and tools that were previously only available to
subscribers. The success of America Online’s strategy will depend on a number of factors, including
competition, the rate of decline in the number of subscribers to the AOL service, the ability to
generate more activity on, and to attract more people to, its network of sites, content and
services, the growth of the online advertising business, the ability to secure and maintain
agreements with third parties for advertising and for distribution of America Online products and
services, accurate forecasting of consumer preferences, and the ability to anticipate and keep up
with technological developments. If America Online is unsuccessful, Time Warner’s financial
condition, results of operations and cash flows could be adversely affected.
With respect to telephone “dial-up” Internet access, America Online faces significant
competition from other Internet service providers, particularly those with low-priced offerings. To
meet this competition, America Online plans to continue to provide certain content, features and
tools that will only be available to its subscribers. America Online also operates lower-priced
Internet services to compete with the low-price ISPs. It is too early to determine whether these
services will compete successfully.
America Online expects to continue to experience declines in the number of subscribers. Each
year, a significant portion of AOL members cancel their membership or are terminated by America
Online either for non-payment of account charges or violation of one of the terms of service that
apply to members (for example, sending spam e-mails or violating community guidelines in chat
rooms). In addition, maintaining the subscriber base is difficult because the larger the subscriber
base, the greater the number of new subscribers required to offset those subscribers who cancel or
are terminated. America Online is not registering new members in numbers sufficient to replace the
subscribers who have canceled or have been terminated. Registrations have been declining for
several reasons, including declining registrations in response to marketing campaigns, competition
from broadband access providers, and reduced subscriber acquisition efforts; continuing decreases
in new registrations could adversely affect the rate of decline in the total number of subscribers.
Broadband DSL access providers have announced conditional offers that include price reductions that
could further adversely affect the rate of decline of America Online subscribers. As part of its
strategy announced in late 2004 and in connection with the recent re-launch of the AOL.com Website
as a portal, America Online during 2005 has moved certain proprietary content, features and tools
to the Internet, allowing all Internet users, not just members of the AOL service, to access such
content, features and tools without charge. This strategy could result in further declines in the
number of subscribers and may result in subscribers canceling their subscriptions at a faster rate
than in the past. In addition, America Online is seeking to enter into agreements with high-speed
access distributors, such as cable companies and telecommunications companies, to combine the AOL
service with broadband access. It is uncertain whether these agreements will result in America
Online attracting or retaining subscribers. Furthermore, even if this strategy is successful in
attracting or retaining subscribers, such agreements
32
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
are likely to be less profitable. America Online continues to develop, test, change, market
and implement price plans, service offerings and payment methods to identify effective ways to
attract and retain members.
America Online will need to develop other sources of revenues to offset the lower revenues
from service fees resulting from the decline in subscribers and migration of existing subscribers
to lower-priced plans. For the foreseeable future, Advertising revenues will be an increasingly
important source of revenues for America Online. To date, increases in Advertising revenues have
not been high enough to offset the losses in revenues resulting from the decline in subscribers and
migration of existing subscribers to lower-priced plans. Advertising revenues have been adversely
impacted by the loss in AOL subscribers because subscribers generate more usage than non-subscriber
Internet visitors to the America Online network of sites, services and content. America Online’s
Advertising revenues have improved in large part due to America Online’s acquisition of
Advertising.com, which provides strategic direct-response and brand marketing services to online
advertisers, and the paid-search relationship America Online has with Google, including a more
recent arrangement with AOL Europe. Increased competition for advertising inventory on third-party
Internet sites could adversely impact Advertising.com’s continued growth. In addition, expansion
of third-party search networks of competitors into the sale of banner advertising could adversely
impact America Online’s ability to grow Advertising revenues.
America Online’s ability to increase Advertising revenues depends in part on its ability to
maintain and increase the size and value of its audience using the America Online network of sites,
content and services. This audience currently includes AOL members, as well as Internet users
accessing America Online’s network of sites, content and services from the Internet either in the
U.S. or from another country. America Online hopes to increase the size and value of its audience
through the recent re-launch of the AOL.com Website as a portal. Although America Online has had
some success in attracting an audience outside of its member base at Internet sites like MapQuest
and Moviefone, America Online faces significant competition from third-party Internet sites, such
as Yahoo!, in attracting Internet users to its portal. It is unknown whether this strategy of
increasing content available on the Web through a portal will be successful in generating increased
activity by its audience or in maintaining or increasing its audience size, and thus whether this
strategy will lead to an increase in Advertising revenues.
A significant portion of the recent increase in AOL’s operating income is attributable to
decreases in costs. While network service costs were cut substantially in 2004 and in the first
three quarters of 2005, further decreases in network service costs in 2005 are expected to result
from improved pricing, decreased levels of fixed commitments and lower usage of AOL’s dial-up
network associated with the declining dial-up subscriber base. AOL expects that domestic network
expenses will continue to decline in 2006 although at a rate lower than in 2005. However, this
decline is expected to be more than offset by increased network expenses at AOL Europe due to the
continued migration of AOL Europe dial-up subscribers to bundled broadband plans for which network
expenses per subscriber are significantly higher. America Online is continuing to explore
opportunities for further cost reductions. America Online must continue to identify and implement
further cost reductions and develop alternative sources of revenues from advertising, digital
services and other sources to continue to generate growth in operating income. Accordingly, America
Online’s strategy includes continuing to sell both new and existing premium digital services, such
as safety and security, education and learning, music and games, and voice services, to subscribers
and non-subscribers. Developing and introducing digital services requires America Online to operate
outside of its core area of expertise and may subject America Online to new regulatory
requirements. America Online has launched the AOL TotalTalk service, an enhanced Voice Over
Internet Protocol service for new and current AOL subscribers as well as high-speed Internet users
generally. This new service involves an ongoing commitment of resources, and there can be no
assurance that it will be successful. Furthermore, revenues from digital premium services may be
adversely affected by a reduction in prices for these services or from incorporating them into the
standard AOL service offering rather than offering them separately as premium services, resulting
from pressure from competitors who may offer similar services over time at lower prices or at no
additional charge as part of their standard offerings. For example, a McAfee Virus Scan Online
product, which AOL previously sold separately to subscribers, is now provided to AOL subscribers at
no additional charge.
If the proposed Adelphia acquisition and/or related transactions with Comcast close, TWC Inc.
will face certain challenges regarding the integration of the newly acquired systems into its
existing managed systems. The successful integration of the acquired systems will depend primarily
on TWC Inc.’s ability to manage the combined operations and integrate the acquired systems
(including management information, marketing, purchasing, accounting and finance, sales, billing,
customer support and product distribution infrastructure, personnel, payroll and benefits,
regulatory compliance and
33
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
technology systems) into its operations. The integration of these systems, including the
anticipated upgrade of a significant portion of the Adelphia acquired systems, will require
significant capital expenditures and may require TWC Inc. to use financial resources it would
otherwise devote to the development of new products and services and the expansion of its existing
cable systems. Furthermore, these integration efforts will require substantial attention from TWC
Inc.’s management and may impose significant strains on technical resources. If TWC Inc. fails to
successfully integrate the acquired systems, it could have a negative impact on the performance of
the Company.
In addition, when appropriate, TWC Inc. intends to selectively pursue strategic acquisitions
of additional cable systems as part of its growth strategy. Time Warner cannot predict whether TWC
Inc. will be successful in buying additional cable systems. However, if TWC Inc. completes a
significant acquisition of additional cable systems prior to the integration of the systems
proposed to be acquired from Adelphia and Comcast, it could further complicate the integration
risks associated with the integration of the systems proposed to be acquired from Adelphia and
Comcast. Further, TWC Inc. might not be able to successfully integrate a significant acquisition of
additional cable systems. If TWC Inc. fails to integrate successfully systems acquired from
Adelphia, Comcast or from others, if TWC Inc. fails to manage its growth or if it encounters
unexpected difficulties during expansion, it could have a negative impact on the performance of TWC
Inc.’s systems (including the systems to be acquired in the Adelphia and Comcast transactions), as
well as on the operations, business or financial results of Time Warner.
TWC Inc. also faces certain integration challenges in connection with the internal control
over financial reporting and disclosure controls and procedures that have been implemented with
respect to the systems to be acquired from Adelphia in the proposed transactions. Certain
provisions of the Sarbanes-Oxley Act of 2002 require public companies to, among other things,
implement and maintain policies and procedures pertaining to the maintenance of records that
reflect the company’s transactions and disposition of assets in order to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements in accordance with U.S. generally accepted accounting principles such that, among other
things, (1) transactions are accurately and fairly recorded to permit the preparation of financial
statements in accordance with U.S. generally accepted accounting principles and that receipts and
expenditures are made only when properly authorized and (2) unauthorized transactions involving the
acquisition, use or disposition of assets that could have a material adverse effect on the
company’s financial statements are prevented or detected in a timely manner. Adelphia has disclosed
in its Annual Report on Form 10-K for the year ended December 31, 2004 (filed with the SEC on
October 6, 2005) that it has identified material weaknesses in its internal control over financial
reporting as of December 31, 2004 and that, as of such date, Adelphia did not maintain effective
internal control over financial reporting. While Adelphia has agreed to use reasonable efforts to
implement effective internal control over financial reporting prior to the consummation of the
proposed transactions, such policies and procedures may not be in place when TWC Inc. acquires such
systems in the proposed transactions. If TWC Inc. is required to devote significant time and
resources to implementing and ensuring that such controls are in place, it will further complicate
the integration of the Adelphia systems with its existing managed systems.
If the proposed Adelphia acquisition and/or related transactions with Comcast close, TWC Inc.
may not realize the anticipated benefits of such transactions. The proposed Adelphia acquisition
and related transactions with Comcast will combine cable systems of three companies that have
previously operated separately. Time Warner expects that TWC Inc. will realize cost savings and
other financial and operating benefits as a result of the proposed transactions. However, Time
Warner cannot predict with certainty when these cost savings and benefits will occur or the extent
to which they actually will be achieved, if at all. As described above, many systems must be
integrated and such integration and the anticipated upgrade of a significant portion of the systems
acquired from Adelphia will require significant financial resources and substantial attention from
TWC Inc.’s management and impose strains on TWC Inc.’s technical resources. If the proposed
transactions close, the diversion of management attention, the strains on technical resources and
the difficulties associated with integrating the acquired systems and TWC Inc.’s existing cable
systems could have a material adverse effect on Time Warner’s consolidated operating results and on
the value of Time Warner’s common stock.
The Company’s Cable segment has begun providing voice services over its cable systems and
faces risks inherent to entering into a new line of business, from competition and from regulatory
actions or requirements. As of December 31, 2004, TWC Inc.’s Digital Phone service had been
launched in all of its operating divisions. Coordinating the continued roll-out of a product with
which it has only limited operating experience may present significant challenges. First, although
TWC Inc. has launched Digital Phone service in all its divisions, it remains a relatively new
technology. Furthermore, the
34
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Digital Phone service depends on interconnection and related services provided by certain
third parties. TWC Inc. may encounter unforeseen difficulties as it introduces the product in new
operating areas or increases the scale of its offering in areas in which it has launched. Second,
TWC Inc. may face heightened customer expectations and regulatory requirements related to the
reliability of voice services as compared with video and high-speed data services. TWC Inc. has
undertaken significant training of customer service representatives and technicians, and it will
need to continue to have a highly trained workforce. If the service is not sufficiently reliable
or TWC Inc. otherwise fails to meet customer expectations or regulatory requirements, the Digital
Phone business could be impacted adversely. Third, the competitive landscape for voice services is
expected to be intense, with TWC Inc. facing competition from other providers of VoIP services, as
well as incumbent local telephone companies, cellular telephone service providers and others. The
incumbent local telephone companies have substantial capital and other resources, as well as
longstanding customer relationships. Some of these companies have entered into co-marketing
arrangements with direct-to-home satellite service providers to offer video services, and some have
begun fiber upgrades to their networks to enable the direct delivery of video services, together
with their telephone and DSL offerings. Such bundled offerings by telephone companies may compete
with TWC Inc.’s offerings and could adversely impact TWC Inc. Finally, the Company expects advances
in communications technology, as well as changes in the marketplace and the regulatory and
legislative environment. Consequently, the Company is unable to predict the effect that ongoing or
future developments in these areas might have on the Cable segment’s voice business and operations.
MCI, one of TWC Inc.’s two interconnect and provisioning partners in the Digital Phone business,
has announced that it has agreed to be acquired by Verizon, a regional phone company that competes
with TWC Inc. in some areas. It is currently not known whether, or to what extent, the proposed
acquisition will have any negative impact on the Digital Phone business and operations.
In addition, there are risks associated with TWC Inc.’s launch of voice services in the cable
systems acquired in the proposed Adelphia and Comcast transactions. Some of the acquired systems
may not currently have cable facilities with sufficient capacity to provide voice services using
VoIP technology. In such case, TWC Inc. will be required to upgrade the facilities prior to
launching any Digital Phone services. Additionally, TWC Inc. may need to obtain certain services
from third parties prior to deploying Digital Phone services in the cable systems acquired in the
proposed transactions.
The voice services business may also present additional regulatory risks. It is unclear
whether and to what extent traditional state and federal telephone regulations will apply to
telephony services provided using VoIP technology. In addition, regulators could allow utility pole
owners to charge cable operators offering voice services higher rates for pole rental than are
allowed for cable and high-speed services. The FCC recently initiated a rulemaking proceeding on
the regulatory approach to voice services utilizing VoIP technology, and Congress is considering
enacting new laws to govern it. The FCC held in November 2004 that one particular VoIP service is
not subject to traditional state public utility regulation and indicated that other providers
offering similar VoIP services would not be subject to state public utility regulation if they met
certain criteria. This decision has been appealed in federal court. In May 2005, the FCC adopted
rules requiring VoIP providers to supply enhanced “911” (E911) capabilities as a standard feature
to their subscribers. Additionally, VoIP providers must obtain affirmative acknowledgement from all
subscribers that they have been advised of the circumstances under which E911 services may not be
available. There are also court cases addressing the proper regulatory treatment for the service
and rulemakings and various other proceedings underway at the state level. Therefore, the Company
cannot be certain what impact regulation will have on the Digital Phone business and operations.
Pending securities litigation or failure to fulfill the obligations under the deferred
prosecution agreement with the U.S. Department of Justice or the Consent Order with the Securities
and Exchange Commission could adversely affect Time Warner’s operations. In connection with the
resolution of the investigation by the DOJ of the Company, America Online entered into a deferred
prosecution agreement with the DOJ. In accordance with the agreement, the DOJ filed a criminal
complaint against America Online in December 2004 for the conduct of certain employees in
connection with securities fraud by PurchasePro.com, but the DOJ will defer prosecution of AOL and
will dismiss the complaint in December 2006 provided the Company fulfills its obligations under the
deferred prosecution agreement, as described in the 2004 Form 10-K. If the Company does not satisfy
its obligations, the DOJ can proceed with the prosecution of America Online for actions in
connection with PurchasePro.com, as set forth in the complaint, and may consider additional actions
against the Company, which could have significant adverse effects on its operations and financial
results. The Company intends to satisfy its obligations under the deferred prosecution agreement.
In addition, in connection with the settlement with the SEC, the Company consented to entry of a
Consent Order requiring it to comply with federal securities laws and regulations and the terms of
an earlier order. If the Company is found to be in violation of the Consent Order, it may be
35
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
subject to increased penalties and consequences as a result of the prior actions. As of
October 31, 2005, 42 putative class action and shareholder derivative lawsuits alleging violations
of federal and state securities laws as well as purported breaches of fiduciary duties had been
filed against Time Warner, certain of its current and former executives, past and present members
of its Board of Directors and, in certain instances, America Online. There is also a consolidated
action making allegations of ERISA violations. The complaints purport to be made on behalf of
certain of the Company’s shareholders and allege, among other things, that Time Warner violated
various provisions of the securities laws. There are also actions filed by individual shareholders
pending in federal and state courts. Although the Company has reached an agreement to settle the
primary consolidated securities class action lawsuits, the settlement is subject to final court
approval, and some members of the class may elect to “opt out” of the settlement to pursue their
claims separately. In addition, the shareholder derivative, ERISA and individual securities actions
remain pending and the Company is unable to predict the outcome of these remaining related matters.
The Company has established a reserve of $3 billion, with $2.4 billion related to the proposed
settlement of the primary consolidated securities class actions and $600 million in connection with
the remaining shareholder derivative, ERISA and securities matters. The Company is incurring
expenses as a result of the pending litigation, and costs associated with judgments in or
additional settlements of these matters could adversely affect its financial condition and results
of operations. See Note 10, “Commitments and Contingencies—Securities Matters.”
Technological developments may adversely affect the Company’s competitive position and limit
its ability to protect its valuable intellectual property rights. Time Warner’s businesses operate
in the highly competitive, consumer-driven and rapidly changing media and entertainment industries.
These businesses, as well as the industries generally, are to a large extent dependent on the
ability to acquire, develop, adopt, and exploit new and existing technologies to distinguish their
products and services from those of their competitors. In addition, the Company may face legal and
practical limitations on its ability to enforce the Company’s intellectual property rights as a
result of technological developments that facilitate the theft and unlawful distribution of the
Company’s copyrighted works in digital form, including via the Internet. For example:
| |
• |
|
The Company’s cable business may be adversely affected by more
aggressive than expected competition from alternate technologies, such
as satellite, DSL, traditional phone, and wireless and power-line
services; by the failure to choose technologies appropriately; by the
failure of new equipment, such as digital set-top boxes or digital
video recorders; or by the failure of new services, such as digital
cable, high-speed data services, Digital Phone and Video-On-Demand, to
appeal to enough consumers, or to be available at prices consumers are
willing to pay, to function as expected or to be delivered in a timely
fashion; |
| |
| |
• |
|
The Company’s America Online business may be adversely affected by
competitors’ abilities to develop new technologies more quickly,
including more compelling features/functions and premium digital
services for Internet users, and by the uncertainty of the costs for
obtaining rights from third parties and for defending rights against
third party challengers, especially with respect to appropriate patent
licenses; and |
| |
| |
• |
|
The Company’s filmed entertainment and television network businesses
may be adversely affected by the impact of digital video recorders or
other technologies that change the nature of television advertising or
by the fragmentation of consumer leisure and entertainment time caused
by a greater number of choices resulting from technological
developments. |
Caution Concerning Forward-Looking Statements
The SEC encourages companies to disclose forward-looking information so that investors can
better understand a company’s future prospects and make informed investment decisions. This
document contains “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues,
Operating Income before Depreciation and Amortization and cash flow. 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
present 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.
36
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Additionally, Time Warner operates in highly competitive, consumer and technology-driven and
rapidly changing media, entertainment and Internet businesses. These businesses are affected by
government regulation, economic, strategic, political and social conditions, consumer response to
new and existing products and services, technological developments and, particularly in view of new
technologies, the continued ability to protect intellectual property rights. Time Warner’s actual
results could differ materially from management’s expectations because of changes in such factors.
Other factors and risks could adversely affect the operations, business or financial results of
Time Warner or its business segments in the future and could also cause actual results to differ
materially from those contained in the forward-looking statements, including those identified in
Time Warner’s other filings with the SEC, and the following factors and risks:
For Time Warner’s AOL business:
| |
• |
|
the ability to successfully implement its business strategy; |
| |
| |
• |
|
the ability to develop and introduce new products and services to remain competitive; |
| |
| |
• |
|
the ability to differentiate its products and services from its competitors; |
| |
| |
• |
|
the ability to develop, adopt or have access to new and existing technologies; |
| |
| |
• |
|
the ability to have access to distribution channels controlled by third parties; |
| |
| |
• |
|
the ability to manage its subscriber base profitably; |
| |
| |
• |
|
risks related to a non-compliance with the Deferred Prosecution Agreement and applicable
FTC Consent Decrees and Assurances of Voluntary Compliance; |
| |
| |
• |
|
the ability to provide adequate server, network and system capacity; |
| |
| |
• |
|
the risk of business interruption caused by computer viruses, worms or other malicious
activity, weather events, natural disasters, terrorist attacks, third-party supplier
failures, or unforeseen events; |
| |
| |
• |
|
the risk of unanticipated increased costs for network services; |
| |
| |
• |
|
the ability to maintain, and the cost of maintaining, the privacy and security of company
and customer information; |
| |
| |
• |
|
increased competition from providers of Internet services, including providers of
broadband access; |
| |
| |
• |
|
the ability to generate increased usage of sites, content and services that are part of
the America Online network, and the ability to maintain or expand the audience for its
sites, content and services; |
| |
| |
• |
|
the ability to attract additional traditional advertisers to the online advertising medium; |
| |
| |
• |
|
the ability to maintain, expand or renew existing advertising or marketing commitments; |
| |
| |
• |
|
the risk that the online advertising industry will not continue to grow, and that even if
the industry continues to grow, the risk that America Online will not successfully compete
in securing advertising relationships; |
| |
| |
• |
|
the ability to maintain or enter into new content, electronic commerce or marketing
arrangements and the risk that the cost of such arrangements may increase; |
| |
| |
• |
|
risks associated with state, local, federal or foreign taxation of online services and Internet access providers; |
| |
| |
• |
|
risks associated with foreign currency exchange rates; and |
37
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
| |
• |
|
the risks from changes in U.S. and international regulatory environments affecting interactive services. |
For Time Warner’s cable business:
| |
• |
|
more aggressive than expected competition, including price competition, from other
distributors of video programming, including direct to home satellite distributors, regional
incumbent telephone companies and from competitors using new technologies; |
| |
| |
• |
|
more aggressive than expected competition, including price competition, from other
distributors of high-speed data services, including DSL, satellite and terrestrial wireless
distributors, power companies and from competitors using new technologies; |
| |
| |
• |
|
more aggressive than expected competition, including price competition, from other
distributors of voice services, including regional telephone companies, long distance
providers, national VoIP providers, wireless distributors and from competitors using new
technologies; |
| |
| |
• |
|
additional competition fostered by the grant of additional cable franchises by
governmental authorities that enable competing operators to build cable systems in areas in
which TWC Inc. holds franchises; |
| |
| |
• |
|
greater than expected increases in programming or other costs, including costs of new
products and services, or difficulty in passing such costs to subscribers; |
| |
| |
• |
|
increases in government regulation of video services, including regulation that limits
cable operators’ ability to raise rates, that requires that particular programming be
carried or offered in a particular manner (for instance, “a la carte” or “multicast
must-carry”), or that dictates set-top box or other equipment features, functionalities or
specifications; |
| |
| |
• |
|
government regulation of other services, such as high-speed data and voice services,
including regulation that results in the imposition of pole fees for such services that are
higher than those permissible for video services; |
| |
| |
• |
|
government regulation that dictates the manner in which it operates its cable systems or
determines what to offer, such as the imposition of “forced access” rules or common carrier
type requirements; |
| |
| |
• |
|
increased difficulty in obtaining franchise renewals; |
| |
| |
• |
|
the failure of new equipment, such as digital set-top boxes or digital video recorders,
or by the failure of new services, such as digital cable service, high-speed data services,
voice service or video-on-demand, to appeal to enough consumers or to be available at prices
consumers are willing to pay, to function as expected or to be delivered in a timely
fashion; |
| |
| |
• |
|
fluctuations in spending levels by advertisers and consumers; |
| |
| |
• |
|
changes in technology and failure to anticipate technological developments or to choose
and implement technologies appropriately; |
| |
| |
• |
|
unanticipated funding obligations relating to its cable joint ventures; |
| |
| |
• |
|
a future decision by the FCC or Congress to require cable operators to contribute to the
federal “Universal Service Fund” based on the provision of cable modem service, which could
raise the price of cable modem service and impair TWC Inc.’s competitive position; |
| |
| |
• |
|
the award of franchises or similar grants of rights through state or federal legislation
that would allow competitors of cable providers to offer video service on terms
substantially more favorable than those afforded existing cable |
38
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
| |
|
|
operators (e.g., without the need to obtain local franchise approval or to comply with local
franchising regulations as cable operators currently must); |
| |
| |
• |
|
the risk of business interruption caused by computer viruses, worms or other malicious
activity, weather events, natural disasters, terrorist attacks, third-party supplier
failures, or unforeseen events, as well as the cost of repairing damage caused by such
events; and |
| |
| |
• |
|
the ability to maintain, and the cost of maintaining, the privacy and security of company
and customer information. |
For Time Warner’s filmed entertainment businesses:
| |
• |
|
the ability to continue to attract and select desirable talent and scripts at manageable costs; |
| |
| |
• |
|
general increases in production costs; |
| |
| |
• |
|
fragmentation of consumer leisure and entertainment time and its possible negative
effects on the broadcast and cable networks, which are significant customers of the filmed
entertainment businesses; |
| |
| |
• |
|
continued popularity of merchandising; |
| |
| |
• |
|
the uncertain impact of technological developments that facilitate theft and unlawful
distribution of the Company’s copyrighted works and by legal and practical limitations on
the ability to enforce the Company’s intellectual property rights; |
| |
| |
• |
|
the ability to develop and apply adequate protections for filmed entertainment content in
a digital delivery environment; |
| |
| |
• |
|
the ability to develop successful business models for the secure delivery of filmed
entertainment products in a digital environment; |
| |
| |
• |
|
risks associated with foreign currency exchange rates; |
| |
| |
• |
|
with respect to feature films, the risk that marketing costs associated with theatrical
film releases in a highly competitive marketplace will increase; |
| |
| |
• |
|
with respect to television programming, increased competition in viewership for broadcast
programming due to the increasing number of cable and pay television services; |
| |
| |
• |
|
with respect to home video, the threat that an impending format war over the next
generation of high definition DVD product might prevent a smooth transition from the current
DVD product to the next generation, thereby fragmenting and diminishing the potential market
while harming current DVD sales as the industry and consumers wait to see which format or
formats will prevail; |
| |
| |
• |
|
growth in domestic DVD sales may level as player penetration approaches
maturation; and |
| |
| |
• |
|
the ability to maintain an ad supported commercial television model in the face of
challenges posed by increased consumer usage of digital video recorders or other
technologies that change the nature of the advertising and other markets for television
products. |
For Time Warner’s network businesses:
| |
• |
|
increased competition from large media companies whose increasing scale could result in
competitive advantages, including competitive advantages in advertising sales, promotions,
programming and other areas; |
39
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
| |
• |
|
greater than expected newsgathering, programming or production costs; |
| |
| |
• |
|
increased resistance by cable and satellite distributors to wholesale price increases; |
| |
| |
• |
|
the negative impact on premium programmers of greater than anticipated basic cable rate
increases to consumers; |
| |
| |
• |
|
increased regulation of distribution agreements; |
| |
| |
• |
|
the sensitivity of network advertising to economic cycles and to new media technologies; |
| |
| |
• |
|
the negative impact of further consolidation of multiple-system cable operators; |
| |
| |
• |
|
theft and unlawful distribution of content by means of interception of cable and
satellite transmissions or Internet peer-to-peer file sharing; |
| |
| |
• |
|
the impact of digital video recorders or other technologies that change the nature of television advertising; |
| |
| |
• |
|
the development of new technologies that alter the role of programming networks and services; and |
| |
| |
• |
|
greater than expected fragmentation of consumer viewership, as well as the possible loss
of viewers, as a result of the increased number of programming services and the increased
popularity of alternatives to television. |
| |
| |
|
|
For Time Warner’s publishing businesses: |
| |
| |
• |
|
declines in spending levels by advertisers and consumers; |
| |
| |
• |
|
the ability in a challenging environment to continue to develop new profitable sources of circulation; |
| |
| |
• |
|
substantial postal rate increases expected during the first quarter of 2006; |
| |
| |
• |
|
further increases in paper prices; |
| |
| |
• |
|
increased costs and business disruption resulting from instability in the newsstand distribution channel; |
| |
| |
• |
|
increased competition from new magazine entrants, which may have an impact on its most
profitable magazines, including People; |
| |
| |
• |
|
risks associated with changes in foreign currency exchange rates; |
| |
| |
• |
|
changes in government regulation of direct marketing; |
| |
| |
• |
|
receipt of information identifying debit card purchasers which may require changes in
payment acceptance procedures for such purchasers, which could decrease subscription
renewals; |
| |
| |
• |
|
the introduction and increased popularity over the long term of alternative technologies
for the distribution of news and information; and |
| |
| |
• |
|
changes in ABC rules that may require reclassification of certain subscriptions, which
may have an adverse effect on spending by advertisers. |
For Time Warner generally, achieving the Company’s financial objectives, including growth in
operations, maintaining financial ratios and a strong balance sheet, could be adversely affected by
decreased liquidity in the capital markets, including any reduction in the ability to access either
the capital markets for debt securities or bank financings, failure to
40
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
meet earnings expectations, significant acquisitions such as the pending Adelphia acquisition
or other transactions such as the proposed redemption of Comcast’s interests in TWC Inc. and TWE,
economic slowdowns, the impact of terrorist acts and hostilities in Iraq and elsewhere in the
world, increased expenses as a result of the securities litigation pending against Time Warner, as
well as the risk of costs associated with judgments in or additional settlements of such matters,
and changes in the Company’s plans, strategies and intentions. In addition, lower than expected
valuations associated with the cash flows and revenues at Time Warner’s segments may result in its
inability to realize the value of recorded intangibles and goodwill at those segments.
41
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 Securities Exchange Act of 1934 (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 in
timely making known to them material information relating to the Company and the Company’s
consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted
under the Exchange Act. The Company has investments in certain unconsolidated entities. As the
Company does not control these entities, its disclosure controls and procedures with respect to
such entities are necessarily substantially more limited than those it maintains with respect to
its consolidated subsidiaries. The Company began consolidating the financial results of AOLA
effective March 31, 2004 pursuant to the requirements of FASB Interpretation No. 46 (Revised),
“Consolidation of Variable Interest Entities.” Because the Company does not control AOLA, the
Company’s disclosure controls and procedures with respect to information regarding AOLA also are
more limited than those for consolidated subsidiaries the Company controls.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2005, the Company’s AOL segment implemented a new
general ledger and consolidation system and certain other related financial information systems.
Except for the described systems implementation at the AOL segment, which is expected to enhance
the Company’s systems of internal control, there have not been any changes in the Company’s
internal control over financial reporting during the quarter ended September 30, 2005 that have
materially affected, or are reasonably likely to materially affect, its internal control over
financial reporting.
42
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(millions, except |
|
| |
|
per share amounts) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
7,959 |
|
|
$ |
6,139 |
|
Restricted cash |
|
|
150 |
|
|
|
150 |
|
Receivables, less allowances of $1.867 and $2.109 billion |
|
|
5,260 |
|
|
|
5,512 |
|
Inventories |
|
|
1,720 |
|
|
|
1,737 |
|
Prepaid expenses and other current assets |
|
|
1,108 |
|
|
|
920 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
16,197 |
|
|
|
14,458 |
|
Noncurrent inventories and film costs |
|
|
4,973 |
|
|
|
4,415 |
|
Investments, including available-for-sale securities |
|
|
3,538 |
|
|
|
4,703 |
|
Property, plant and equipment, net |
|
|
13,345 |
|
|
|
13,094 |
|
Intangible assets subject to amortization, net |
|
|
3,576 |
|
|
|
3,892 |
|
Intangible assets not subject to amortization |
|
|
39,701 |
|
|
|
39,656 |
|
Goodwill |
|
|
40,268 |
|
|
|
39,667 |
|
Other assets |
|
|
3,004 |
|
|
|
3,273 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
124,602 |
|
|
$ |
123,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,273 |
|
|
$ |
1,339 |
|
Participations payable |
|
|
2,078 |
|
|
|
2,580 |
|
Royalties and programming costs payable |
|
|
1,148 |
|
|
|
1,018 |
|
Deferred revenue |
|
|
1,559 |
|
|
|
1,653 |
|
Debt due within one year |
|
|
1,646 |
|
|
|
1,672 |
|
Other current liabilities |
|
|
8,236 |
|
|
|
6,468 |
|
Current liabilities of discontinued operations |
|
|
43 |
|
|
|
50 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
15,983 |
|
|
|
14,780 |
|
Long-term debt |
|
|
18,739 |
|
|
|
20,703 |
|
Deferred income taxes |
|
|
14,604 |
|
|
|
14,943 |
|
Deferred revenue |
|
|
706 |
|
|
|
749 |
|
Mandatorily convertible preferred stock |
|
|
— |
|
|
|
1,500 |
|
Other liabilities |
|
|
5,488 |
|
|
|
4,160 |
|
Noncurrent liabilities of discontinued operations |
|
|
7 |
|
|
|
38 |
|
Minority interests |
|
|
5,689 |
|
|
|
5,514 |
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Series LMCN-V common stock, $0.01 par value, 87.2 and 105.7 million shares outstanding |
|
|
1 |
|
|
|
1 |
|
Time Warner common stock, $0.01 par value, 4.590 and 4.483 billion shares outstanding |
|
|
46 |
|
|
|
45 |
|
Paid-in-capital |
|
|
157,569 |
|
|
|
156,252 |
|
Accumulated other comprehensive income, net |
|
|
99 |
|
|
|
106 |
|
Accumulated deficit |
|
|
(94,329 |
) |
|
|
(95,633 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
63,386 |
|
|
|
60,771 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
124,602 |
|
|
$ |
123,158 |
|
|
|
|
|
|
|
|
See accompanying notes.
43
TIME WARNER INC.
CONSOLIDATED STATEMENT
OF OPERATIONS
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
(millions, except per share amounts) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
5,535 |
|
|
$ |
5,368 |
|
|
$ |
16,645 |
|
|
$ |
16,168 |
|
Advertising |
|
|
1,776 |
|
|
|
1,646 |
|
|
|
5,443 |
|
|
|
4,939 |
|
Content |
|
|
2,938 |
|
|
|
2,648 |
|
|
|
8,837 |
|
|
|
9,002 |
|
Other |
|
|
289 |
|
|
|
273 |
|
|
|
840 |
|
|
|
871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues (a) |
|
|
10,538 |
|
|
|
9,935 |
|
|
|
31,765 |
|
|
|
30,980 |
|
Costs of revenues (a) |
|
|
(6,054 |
) |
|
|
(5,646 |
) |
|
|
(18,303 |
) |
|
|
(17,959 |
) |
Selling, general and administrative (a) |
|
|
(2,564 |
) |
|
|
(2,538 |
) |
|
|
(7,663 |
) |
|
|
(7,498 |
) |
Amortization of intangible assets |
|
|
(144 |
) |
|
|
(156 |
) |
|
|
(446 |
) |
|
|
(467 |
) |
Legal reserves related to securities litigation and
government investigations |
|
|
— |
|
|
|
(500 |
) |
|
|
(3,000 |
) |
|
|
(500 |
) |
Merger-related and restructuring costs |
|
|
(5 |
) |
|
|
— |
|
|
|
(28 |
) |
|
|
2 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
|
|
(10 |
) |
Gains on disposal of assets, net |
|
|
— |
|
|
|
13 |
|
|
|
18 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,771 |
|
|
|
1,108 |
|
|
|
2,319 |
|
|
|
4,562 |
|
Interest expense, net (a) |
|
|
(282 |
) |
|
|
(372 |
) |
|
|
(952 |
) |
|
|
(1,159 |
) |
Other income, net |
|
|
9 |
|
|
|
304 |
|
|
|
1,109 |
|
|
|
368 |
|
Minority interest expense, net |
|
|
(71 |
) |
|
|
(54 |
) |
|
|
(202 |
) |
|
|
(172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, discontinued operations
and cumulative effect of accounting change |
|
|
1,427 |
|
|
|
986 |
|
|
|
2,274 |
|
|
|
3,599 |
|
Income tax provision |
|
|
(530 |
) |
|
|
(492 |
) |
|
|
(735 |
) |
|
|
(1,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations and cumulative
effect of accounting change |
|
|
897 |
|
|
|
494 |
|
|
|
1,539 |
|
|
|
2,088 |
|
Discontinued operations, net of tax |
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change |
|
|
897 |
|
|
|
499 |
|
|
|
1,539 |
|
|
|
2,203 |
|
Cumulative effect of accounting change, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
897 |
|
|
$ |
499 |
|
|
$ |
1,539 |
|
|
$ |
2,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share before discontinued
operations and cumulative effect of accounting
change |
|
$ |
0.19 |
|
|
$ |
0.11 |
|
|
$ |
0.33 |
|
|
$ |
0.46 |
|
Discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.02 |
|
Cumulative effect of accounting change |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.19 |
|
|
$ |
0.11 |
|
|
$ |
0.33 |
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic common shares |
|
|
4,683.4 |
|
|
|
4,573.3 |
|
|
|
4,652.4 |
|
|
|
4,561.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share before discontinued
operations and cumulative effect of accounting
change |
|
$ |
0.19 |
|
|
$ |
0.10 |
|
|
$ |
0.33 |
|
|
$ |
0.44 |
|
Discontinued operations |
|
|
— |
|
|
|
0.01 |
|
|
|
— |
|
|
|
0.03 |
|
Cumulative effect of accounting change |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.19 |
|
|
$ |
0.11 |
|
|
$ |
0.33 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted common shares |
|
|
4,723.6 |
|
|
|
4,713.1 |
|
|
|
4,722.7 |
|
|
|
4,708.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share of common stock |
|
$ |
0.05 |
|
|
$ |
— |
|
|
$ |
0.05 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Includes the following income (expenses) resulting from transactions with
related companies: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
66 |
|
|
$ |
86 |
|
|
$ |
182 |
|
|
$ |
195 |
|
Costs of revenues |
|
|
(108 |
) |
|
|
(97 |
) |
|
|
(247 |
) |
|
|
(219 |
) |
Selling, general and administrative |
|
|
10 |
|
|
|
7 |
|
|
|
28 |
|
|
|
23 |
|
Interest income, net |
|
|
10 |
|
|
|
6 |
|
|
|
25 |
|
|
|
17 |
|
See accompanying notes.
44
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
Net income (a) |
|
$ |
1,539 |
|
|
$ |
2,237 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
Cumulative effect of accounting change, net of tax |
|
|
— |
|
|
|
(34 |
) |
Depreciation and amortization |
|
|
2,441 |
|
|
|
2,385 |
|
Amortization of film costs |
|
|
2,060 |
|
|
|
2,209 |
|
Asset impairments |
|
|
24 |
|
|
|
10 |
|
Gain on investments and other assets, net |
|
|
(1,081 |
) |
|
|
(364 |
) |
Equity in (income) losses of investee companies, net of cash distributions |
|
|
(23 |
) |
|
|
3 |
|
Legal reserves related to securities litigation and government investigations |
|
|
3,000 |
|
|
|
500 |
|
Changes in operating assets and liabilities, net of acquisitions (b) |
|
|
(2,355 |
) |
|
|
(1,573 |
) |
Adjustments relating to discontinued operations |
|
|
(8 |
) |
|
|
15 |
|
|
|
|
|
|
|
|
Cash provided by operations (c) |
|
|
5,597 |
|
|
|
5,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investments and acquisitions, net of cash acquired |
|
|
(491 |
) |
|
|
(759 |
) |
Capital expenditures and product development costs |
|
|
(2,259 |
) |
|
|
(2,021 |
) |
Investment proceeds from available-for-sale securities |
|
|
991 |
|
|
|
239 |
|
Other investment proceeds |
|
|
414 |
|
|
|
2,805 |
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities |
|
|
(1,345 |
) |
|
|
264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Borrowings |
|
|
1,142 |
|
|
|
1,273 |
|
Debt repayments |
|
|
(3,043 |
) |
|
|
(3,222 |
) |
Proceeds from exercise of stock options |
|
|
275 |
|
|
|
272 |
|
Principal payments on capital leases |
|
|
(94 |
) |
|
|
(148 |
) |
Repurchases of common stock |
|
|
(485 |
) |
|
|
— |
|
Dividends paid |
|
|
(235 |
) |
|
|
— |
|
Other |
|
|
8 |
|
|
|
15 |
|
|
|
|
|
|
|
|
Cash used by financing activities |
|
|
(2,432 |
) |
|
|
(1,810 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND EQUIVALENTS |
|
|
1,820 |
|
|
|
3,842 |
|
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
6,139 |
|
|
|
3,040 |
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
7,959 |
|
|
$ |
6,882 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Includes net income from discontinued operations of $115 million for the nine
months ended September 30, 2004. |
| |
| (b) |
|
For the nine months ended September 30, 2005, includes a $300 million payment
related to the government investigations. |
| |
| (c) |
|
For the nine months ended September 30, 2005, includes an approximate $36 million
use of cash related to changing the fiscal year end of certain international operations from
November 30 to December 31. |
See accompanying notes.
45
TIME
WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Nine Months Ended September 30,
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
BALANCE AT BEGINNING OF PERIOD |
|
$ |
60,771 |
|
|
$ |
56,213 |
|
Net income |
|
|
1,539 |
|
|
|
2,237 |
|
Other comprehensive income (loss)(a) |
|
|
(7 |
) |
|
|
351 |
|
|
|
|
|
|
|
|
Comprehensive income (b) |
|
|
1,532 |
|
|
|
2,588 |
|
Conversion of mandatorily convertible preferred stock |
|
|
1,500 |
|
|
|
— |
|
Cash dividends ($0.05 per common share) |
|
|
(235 |
) |
|
|
— |
|
Common stock repurchases |
|
|
(525 |
) |
|
|
— |
|
Other (c) |
|
|
343 |
|
|
|
509 |
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD |
|
$ |
63,386 |
|
|
$ |
59,310 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Other comprehensive income (loss) for the nine months ended September 30, 2005
includes an adjustment of $475 million for foreign currency translation related to goodwill,
including amounts that relate to prior periods (Note 6). |
| |
| (b) |
|
Comprehensive income was $1.366 billion and $883 million for the three months
ended September 30, 2005 and 2004, respectively. |
| |
| (c) |
|
For the nine months ended September 30, 2005, primarily includes approximately $360
million for shares issued pursuant to stock option and other benefit plans (including the
related income tax benefit of approximately $52 million) and an approximate $23 million net
loss related to changing the fiscal year end of certain international operations from November
30 to December 31 (including the related income tax benefit of approximately $9 million). For
the nine months ended September 30, 2004, includes approximately $410 million for shares
issued pursuant to stock option and other benefit plans (including the related income tax
benefit of approximately $83 million). |
See accompanying notes.
46
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS, RECENT TRANSACTIONS AND BASIS OF PRESENTATION
Description of Business
Time Warner Inc. (“Time Warner” or the “Company”) is a leading media and entertainment
company, whose businesses include interactive services, cable systems, filmed entertainment,
television networks and publishing. Time Warner classifies its business interests into five
reportable segments: AOL: consisting principally of interactive services; Cable: consisting
principally of interests in cable systems that provide video programming, high-speed data and
Digital Phone services; Filmed Entertainment: consisting principally of feature film, television
and home video production and distribution; Networks: consisting principally of cable television
and broadcast networks; and Publishing: consisting principally of magazine and book publishing.
Financial information for Time Warner’s various reportable segments is presented in Note 7.
Recent Transactions
Legal Reserves Related to Securities Litigation
In July 2005, the Company reached an agreement in principle for the settlement of the
securities class action lawsuits included in the matters consolidated under the caption In re: AOL
Time Warner Inc. Securities & “ERISA” Litigation and described in Note 10 below and in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 Form 10-K”).
The settlement is reflected in a written agreement between the lead plaintiff and the Company. On
September 30, 2005, the court issued an order granting preliminary approval of the settlement and
certified the settlement class. The court has scheduled the final approval hearing for February 22,
2006. At this time, there can be no assurance that the settlement of the securities class action
litigation will receive final court approval. In connection with reaching the agreement in
principle on the securities class action, the Company established a reserve of $2.4 billion during
the second quarter of 2005. Ernst & Young LLP also has agreed to a settlement in this litigation
matter and will pay $100 million. Pursuant to the settlement, in October 2005 Time Warner paid $2.4
billion into a settlement fund (the “MSBI Settlement Fund”) for the members of the class
represented in the action. In addition, the $150 million previously paid by Time Warner into a fund
in connection with the settlement of the investigation by the U.S. Department of Justice (“DOJ”)
was transferred to the MSBI Settlement Fund, and Time Warner is using its best efforts to have the
$300 million it previously paid in connection with the settlement of its Securities and Exchange
Commission (“SEC”) investigation transferred to the MSBI Settlement Fund.
Although the Company has reached an agreement to settle the primary securities class action,
other related litigation remains pending, including shareholder derivative actions, lawsuits
alleging violations of the Employee Retirement Income Security Act (“ERISA”) and securities actions
brought by individual shareholders. In the second quarter of 2005, the Company established an
additional reserve totaling $600 million in connection with the remaining related litigation
matters pending against the Company. This $600 million amount continues to represent the Company’s
current best estimate of its potential financial exposure in these matters.
During the third quarter of 2005, the Company reached an oral understanding with the carriers
on its directors and officers insurance policies in connection with the securities and derivative
action matters described in Note 10 below and in pages 38-42 of the 2004 Form 10-K (other than the
actions alleging violations of ERISA described on page 39 of the 2004 Form 10-K). At present, this
agreement is anticipated to provide an incremental recovery of approximately $200 million. Because
the understanding and related documentation have not been completed, and in light of the continuing
uncertainty as to what part, if any, of the incremental $200 million will ultimately be received by
the Company, the Company has not given any accounting recognition for this incremental recovery at
September 30, 2005. The understanding and related documentation are expected to be completed in the
fourth quarter of 2005 (Note 10).
47
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Common Stock Repurchase Program
On July 29, 2005, Time Warner’s Board of Directors authorized a common stock repurchase
program that allows Time Warner to repurchase, from time to time, up to $5 billion of common stock
over a two-year period ending July 2007. On October 28, 2005, Time Warner’s Board of Directors
increased the amount authorized to be repurchased under the stock repurchase program to an
aggregate of up to $12.5 billion of common stock. Purchases under the stock repurchase program may be made from time to
time on the open market and in privately negotiated transactions. Size and timing of these
purchases will be based on a number of factors including price and business and market conditions.
From the program’s inception through September 30, 2005, the
Company has repurchased approximately 29 million
shares of common stock for approximately $525 million pursuant to a trading program under Rule
10b5-1 of the Securities Exchange Act of 1934, as amended.
Common Stock Dividend
On September 15, 2005, the Company paid a quarterly cash dividend of $0.05 per share on its
common stock, to shareholders of record on August 31, 2005, totaling $235 million. Such dividend
was the first dividend paid under the Company’s previously announced dividend program.
Magazine Circulation Practices Investigation
Time Inc. received a grand jury subpoena from the United States Attorney’s Office for the
Eastern District of New York in connection with an investigation of certain magazine
circulation-related practices. Time Inc. is responding to the subpoena and intends to cooperate
with the investigation. Time Inc. has also informed its advertisers that it is reviewing and
discussing with the Audit Bureau of Circulations (“ABC”) its reporting of sponsored sales
subscriptions under ABC rules.
Investment in Google Inc.
In May 2004, America Online, Inc. (“America Online” or “AOL”) exercised a warrant for
approximately $22 million and received approximately 7.4 million shares of Series D Preferred Stock
of Google Inc. (“Google”). Each of these shares converted automatically into shares of Google’s
Class B common stock immediately prior to the closing of Google’s initial public offering on August
24, 2004. In connection with this offering, America Online converted approximately 2.4 million
shares of its Google Class B common stock into an equal number of shares of Google’s Class A common
stock. Such Class A shares were sold in the offering for $195 million, net of the underwriters’
discounts and commissions, and the Company recorded a gain of approximately $188 million in the
third quarter of 2004. Beginning in March 2005, the Company entered into agreements to sell its
remaining 5.1 million shares at an average share price of approximately $185. The sales under such
agreements settled on May 3, 2005, and the Company received total cash consideration of
approximately $940 million, resulting in a gain of approximately $925 million recognized in the
second quarter of 2005, which is included as a component of Other income, net.
Adelphia/Comcast
Adelphia Acquisition Agreement
On April 20, 2005, a subsidiary of the Company, Time Warner NY Cable LLC (“TW NY”), and
Comcast Corporation (“Comcast”) each reached separate definitive agreements to, collectively,
acquire substantially all the assets of Adelphia Communications Corporation (“Adelphia”) for a
total of $12.7 billion in cash (of which TW NY will pay $9.2 billion and Comcast will pay the
remaining $3.5 billion) and 16% of the common stock of Time Warner Cable Inc. (“TWC Inc.”).
At the same time that Comcast and TW NY entered into the Adelphia agreements, Comcast, TWC
Inc. and/or their respective affiliates entered into agreements providing for the redemption of
Comcast’s interests in TWC Inc. and Time Warner Entertainment Company, L.P. (“TWE”) (the “TWC Inc.
Redemption Agreement” and the “TWE Redemption Agreement,” respectively, and, collectively, the “TWC
Inc. and TWE Redemption Agreements”). Specifically, Comcast’s 17.9% interest in TWC Inc. will be
redeemed in exchange for stock of a subsidiary of TWC Inc. holding cable systems serving
approximately 587,000 subscribers (as of December 31, 2004), as well as approximately $1.9 billion
in cash. In addition, Comcast’s 4.7% interest in TWE will be redeemed in
48
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
exchange for interests in a subsidiary of TWE holding cable systems serving approximately
168,000 subscribers (as of December 31, 2004), as well as approximately $133 million in cash. TWC
Inc., Comcast and their respective subsidiaries will also swap certain cable systems to enhance
their respective geographic clusters of subscribers (“Cable Swaps”).
After giving effect to the transactions, TWC Inc. will gain systems passing approximately 7.5
million homes (as of December 31, 2004), with approximately 3.5 million basic subscribers. TWC Inc.
will then manage a total of approximately 14.4 million basic subscribers. Time Warner will own 84%
of TWC Inc.’s common stock (including 83% of the outstanding TWC Inc. Class A Common Stock, which
will become publicly traded at the time of closing, and all outstanding shares of TWC Inc. Class B
Common Stock) and own a $2.9 billion indirect economic interest in TW NY, a subsidiary of TWC Inc.
These transactions are subject to customary regulatory review and approvals, including
Hart-Scott-Rodino antitrust approval, Federal Communications Commission and local franchise
approvals, as well as, in the case of the Adelphia acquisition, the Adelphia bankruptcy process,
which involves approvals by the bankruptcy court having jurisdiction over Adelphia’s Chapter 11
case and Adelphia’s creditors. Closing of the Adelphia acquisition is expected during the first
half of 2006.
The purchase of Adelphia’s assets is not dependent on the closing of the Cable Swaps or the
transactions contemplated by the TWC Inc. and TWE Redemption
Agreements. Furthermore, if Comcast
fails to obtain certain necessary governmental authorizations, TW NY has agreed that it will also
acquire the cable operations of Adelphia that would have been acquired by Comcast, with the
purchase price payable in cash or TWC Inc. stock at the Company’s discretion.
Amendments to Existing Arrangements
In addition to entering into the agreements to purchase substantially all of Adelphia’s
assets, the TWC Inc. and TWE Redemption Agreements and Cable Swaps described above, the Company and
Comcast amended certain pre-existing agreements. The objective of these amendments is to terminate
these agreements contingent upon the completion of the transactions provided for in the TWC Inc.
and TWE Redemption Agreements described above. A brief description of these amendments is as
follows:
Registration Rights Agreement. In conjunction with the restructuring of TWE completed in 2003
(the “TWE Restructuring”), TWC Inc. granted Comcast and certain affiliates registration rights
related to the shares of TWC Inc. Class A common stock acquired by Comcast in the TWE
Restructuring. In connection with the entry into the TWC Inc. and TWE Redemption Agreements,
Comcast generally has agreed not to exercise or pursue registration rights with respect to the TWC
Inc. Class A common stock owned by it until such date as the TWC Inc. Redemption Agreement
described above is terminated in accordance with its terms.
Tolling and Optional Redemption Agreement. On April 20, 2005, a subsidiary of TWC Inc.,
Comcast and certain of its affiliates entered into an amendment (the “Second Tolling Amendment”) to
the Tolling and Optional Redemption Agreement, dated as of September 24, 2004, and previously
amended on February 17, 2005. Pursuant to the Second Tolling Amendment, the parties agreed that if
both the TWC Inc. and TWE Redemption Agreements terminate, TWC Inc. will redeem 23.8% of Comcast’s
17.9% ownership of TWC Inc. Class A common stock in exchange for 100% of the common stock of a TWC
Inc. subsidiary that will own certain cable systems serving approximately 148,000 basic subscribers
(as of December 31, 2004) plus approximately $422 million in cash.
A more complete description of the proposed transactions and amendments to existing agreements
described above may be found in the Company’s Current Reports on Form 8-K, each dated April 20,
2005 and filed with the SEC on April 21, 2005 and April 27, 2005.
Alternate Tolling and Optional Redemption Agreement. On May 31, 2005, a subsidiary of TWC
Inc., Comcast and certain of its affiliates and a trust established for the benefit of Comcast
entered into the Alternate Tolling and Optional Redemption Agreement (the “Alternate Tolling
Amendment”). Pursuant to the Alternate Tolling Amendment, the parties agreed that if the TWC Inc.
Redemption Agreement terminates, but the TWE Redemption Agreement is not terminated, TWC Inc. will
redeem 23.8% of Comcast’s 17.9% ownership of TWC Inc. Class A common stock in exchange for 100% of
the common stock of a TWC Inc. subsidiary which will own certain cable systems serving
approximately 148,000 basic subscribers (as of December 31, 2004) plus approximately $422 million
in cash.
49
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Basis of Presentation
Reclassifications
Certain reclassifications have been made to the prior year financial information to conform to
the September 30, 2005 presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and footnotes thereto. Actual results could differ from those
estimates.
Significant estimates inherent in the preparation of the accompanying consolidated financial
statements include reserves established for securities litigation matters, accounting for asset
impairments, allowances for doubtful accounts, film ultimate revenues, video and magazine returns,
business combinations, pensions and other postretirement benefits, income taxes and contingencies.
Interim Financial Statements
The accompanying 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 and the results of operations and
cash flows for the periods presented in conformity with GAAP applicable to interim periods. The
accompanying consolidated financial statements should be read in conjunction with the audited
consolidated financial statements of Time Warner included in the Company’s 2004 Form 10-K.
Income Per Common Share
Basic income per common share is computed by dividing the net income applicable to common
shares after preferred dividend requirements, if any, by the weighted average of common shares
outstanding during the period. Weighted-average common shares include shares of Time Warner’s
common stock and Series LMCN-V common stock. Diluted income per common share adjusts basic income
per common share for the effects of convertible securities, stock options, restricted shares,
restricted stock units and other potentially dilutive financial instruments, only in the periods in
which such effect is dilutive. The mandatorily convertible preferred stock was converted to common
stock on March 31, 2005 (Note 4).
Set forth below is a reconciliation of basic and diluted income per common share before
discontinued operations and cumulative effect of accounting change:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
(millions, except per share amounts) |
|
Income before discontinued operations and cumulative
effect of accounting change — basic and diluted |
|
$ |
897 |
|
|
$ |
494 |
|
|
$ |
1,539 |
|
|
$ |
2,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of common shares outstanding — basic |
|
|
4,683.4 |
|
|
|
4,573.3 |
|
|
|
4,652.4 |
|
|
|
4,561.4 |
|
Dilutive effect of stock options, restricted shares and
restricted stock units |
|
|
40.2 |
|
|
|
46.9 |
|
|
|
43.0 |
|
|
|
53.9 |
|
Dilutive effect of mandatorily convertible preferred stock |
|
|
— |
|
|
|
92.9 |
|
|
|
27.3 |
|
|
|
92.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of common shares outstanding — diluted |
|
|
4,723.6 |
|
|
|
4,713.1 |
|
|
|
4,722.7 |
|
|
|
4,708.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share before discontinued operations and
cumulative effect of accounting change: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
0.11 |
|
|
$ |
0.33 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.19 |
|
|
$ |
0.10 |
|
|
$ |
0.33 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Government Investigations
As previously disclosed by the Company, the SEC and the DOJ had been conducting investigations
into the accounting and disclosure practices of the Company. Those investigations focused on
advertising transactions, principally involving the Company’s America Online segment, the methods
used by the America Online segment to report its subscriber numbers and the accounting related to
the Company’s interest in AOL Europe prior to January 2002.
The Company and its subsidiary, AOL, entered into a settlement with the DOJ in December 2004
that provided for a deferred prosecution arrangement for a two-year period. As part of the
settlement with the DOJ, in December 2004, the Company paid a penalty of $60 million and
established a $150 million fund, which the Company could use to settle related securities
litigation. The fund is reflected as restricted cash on the Company’s accompanying consolidated
balance sheet at December 31, 2004 and September 30, 2005. During October 2005, the $150 million
was transferred by the Company into the settlement fund for the members of the class covered by the
consolidated securities class action described above under the heading “Legal Reserves Related to
Securities Litigation.”
In addition, on March 21, 2005, the Company announced that the SEC has approved the Company’s
proposed settlement, which resolves the SEC’s investigation of the Company. In the third quarter of
2004, the Company established $500 million in legal reserves related to the government
investigations.
Under the terms of the settlement with the SEC, the Company agreed, without admitting or
denying the SEC’s allegations, to be enjoined from future violations of certain provisions of the
securities laws and to comply with the cease-and-desist order issued by the SEC to AOL in May 2000.
The settlement also required the Company to:
| |
• |
|
Pay a $300 million penalty, which will be used for a Fair Fund, as authorized under the
Sarbanes-Oxley Act; |
| |
• |
|
Adjust its historical accounting for Advertising revenues in certain transactions with
Bertelsmann, A.G. that were improperly or prematurely recognized, primarily in the second
half of 2000, during 2001 and during 2002; as well as adjust its historical accounting for
transactions involving three other AOL customers where there were Advertising revenues
recognized in the second half of 2000 and during 2001; |
| |
| |
• |
|
Adjust its historical accounting for its investment in and consolidation of AOL Europe; and |
| |
| |
• |
|
Agree to the appointment of an independent examiner, who will either be or hire a
certified public accountant. The independent examiner will review whether the Company’s
historical accounting for transactions with 17 counterparties identified by the SEC staff,
principally involving online advertising revenues and including three cable programming
affiliation agreements with related advertising elements, was in conformity with GAAP, and
provide a report to the Company’s audit and finance committee of its conclusions within 180
days of being engaged. The transactions that would be reviewed were entered into between
June 1, 2000 and December 31, 2001, including subsequent amendments thereto, and involved
online advertising and related transactions for which revenue was principally recognized
before January 1, 2002. |
The Company paid the $300 million penalty in March 2005; however, it will not be able to
deduct the penalty for income tax purposes, be reimbursed or indemnified for such payment through
insurance or any other source, or use such payment to setoff or reduce any award of compensatory
damages to plaintiffs in related securities litigation pending against the Company. As described
above, in connection with the pending settlement of the consolidated securities class action, the
Company is using its best efforts to have the $300 million transferred to the settlement fund for
the members of the class represented in the action. The historical accounting adjustments were
reflected in the restatement of the Company’s financial results for each of the years ended
December 31, 2000 through December 31, 2003, which were included in the Company’s 2004 Form 10-K.
The independent examiner has begun its review, which as a result of an extension, is expected
to be completed in the second quarter of 2006. Depending on the independent examiner’s conclusions,
a further restatement might be necessary. It is also possible that, so long as there are unresolved
issues associated with the Company’s financial statements, the effectiveness of any registration
statement of the Company or its affiliates may be delayed.
51
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement of
Financial Accounting Standards (“Statement”) No. 123 (Revised), “Share-Based Payment” (“FAS 123R”).
FAS 123R requires all companies to measure compensation costs for all share-based payments
(including employee stock options) at fair value and recognize such costs in the statement of
operations. As a result, the application of the provisions of FAS 123R will have a significant
impact on Operating Income before Depreciation and Amortization, Operating Income, net income and
earnings per share. In April 2005, the SEC amended the compliance dates for FAS 123R from fiscal
periods beginning after June 15, 2005 to fiscal years beginning after June 15, 2005. The Company
will continue to account for share-based compensation using the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”)
until the Company’s adoption of FAS 123R beginning January 1, 2006.
In accordance with APB 25 and related interpretations, compensation expense for stock options
is recognized in income based on the excess, if any, of the quoted market price of the stock at the
grant date of the award or other measurement date over the amount an employee must pay to acquire
the stock. The compensation costs related to stock options recognized by the Company pursuant to
APB 25 were minimal. If a company measures share-based compensation using APB 25, it must also
disclose what the impact would have been if it had measured share-based compensation using the fair
value of the equity award on the date it is granted as provided in FAS 123, the predecessor of FAS
123R.
The Company recognizes compensation expense pursuant to the methods specified in FASB
Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option
Award Plans,” for its stock option incentive plans under APB 25 and in the FAS 123 pro forma
disclosure that follows. Had compensation cost for Time Warner’s stock option incentive plans been
determined based on the fair value method set forth in FAS 123, Time Warner’s net income and basic
and diluted net income per common share would have been changed to the following pro forma amounts:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
|
Nine Months |
|
| |
|
Ended September 30, |
|
|
Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
(millions, except per share amounts) |
|
Net income, as reported |
|
$ |
897 |
|
|
$ |
499 |
|
|
$ |
1,539 |
|
|
$ |
2,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects |
|
|
(37 |
) |
|
|
(81 |
) |
|
|
(151 |
) |
|
|
(232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
860 |
|
|
$ |
418 |
|
|
$ |
1,388 |
|
|
$ |
2,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.19 |
|
|
$ |
0.11 |
|
|
$ |
0.33 |
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.18 |
|
|
$ |
0.09 |
|
|
$ |
0.30 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.19 |
|
|
$ |
0.11 |
|
|
$ |
0.33 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.18 |
|
|
$ |
0.09 |
|
|
$ |
0.29 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For purposes of these disclosures for the 2005 period, the Company has refined certain of
its valuation approaches and inputs and believes such refinements are consistent with valuation
techniques required under FAS 123R. As guidance and interpretations in the area of equity-based
compensation evolve, the Company will continually assess its methodologies and processes in this
area to ensure compliance with FAS 123R. Before the first quarter of 2005, the Company estimated
the expected term of an option by computing the average period of time such options would remain
outstanding from the grant date to the exercise date. The historical expected term was previously
computed by segregating the employee base into two groups (senior executives and all other
employees). Beginning in the first quarter of 2005, the Company began to use historical exercise
patterns of previously granted options in relation to stock price movements to derive an employee
behavioral pattern used to forecast expected exercise dates. In evaluating expected employee
exercise behavior and related expected exercise dates, the Company separated employees into four
groups based on the number of options they were granted. The weighted average expected term
assumption used for the third quarter of 2005 was 4.79 years from the date of grant as compared to
3.48 years from the date of grant for the third quarter of 2004. In addition, historically during
2004, the volatility assumption was calculated using an average of historic and implied
volatilities. Beginning in the first quarter of 2005, the Company determined the volatility
assumption using implied volatilities based primarily on traded Time Warner options. The
52
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
weighted average volatility assumption used for the third quarter of 2005 was 25.8% as
compared to a weighted average volatility of 34.0% for the third quarter of 2004. Had the Company
used the methodologies employed in 2004 to estimate stock option valuation assumptions, the
weighted average fair value of an option granted in 2005 would have increased by approximately 1%.
Historically, the Company recognized pro forma stock-based compensation expense related to
retirement-age-eligible employees over the award’s contractual vesting period. During the first
quarter of 2005, based on recent accounting interpretations, the Company recorded a charge related
to the accelerated amortization of the fair value of options granted in prior periods to certain
retirement-age-eligible employees with no subsequent substantive service requirement (e.g., no
substantive non-compete agreement). As a result, pro forma stock-based compensation expense for the
nine months ended September 30, 2005 reflects approximately $20 million, net of tax, related to the
accelerated amortization of the fair value of options granted in prior years to certain
retirement-age-eligible employees with no subsequent substantive service requirement. In May 2005,
the staff of the SEC announced that companies that previously followed the contractual vesting
period approach must continue following that approach prior to adopting FAS 123R and apply the
recent accounting interpretation to new grants that have retirement eligibility provisions only
upon adoption of FAS 123R. As a result, pro forma stock-based compensation expense related to
awards granted subsequent to March 31, 2005 has been determined using the contractual vesting
period. For the three and nine months ended September 30, 2005, the impact of applying the
contractual vesting period approach as compared to the approach noted in the recent accounting
interpretations is not significant.
Conditional Asset Retirement Obligations
In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations — an Interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies
the timing of liability recognition for legal obligations associated with the retirement of a
tangible long-lived asset when the timing and/or method of settlement are conditional on a future
event. FIN 47 is effective for Time Warner no later than December 31, 2005. The application of FIN
47 is not expected to have a material impact on the Company’s consolidated financial statements.
Accounting for Rental Costs
In October 2005, the FASB issued FASB Staff Position (“FSP”) 13-1, “Accounting for Rental
Costs Incurred during a Construction Period” (“FSP 13-1”). FSP 13-1 requires rental costs
associated with ground or building operating leases that are incurred during a construction period
be recognized as rental expense and included in income from continuing operations. FSP 13-1 is
effective for fiscal periods beginning after December 15, 2005. The provisions of FSP 13-1 are not
expected to have a material impact on the Company’s consolidated financial statements.
2. SALE OF MUSIC SEGMENT
On March 1, 2004, the Company sold its Warner Music Group (“WMG”) recorded music and
Warner/Chappell music publishing operations to a private investment group (“Investment Group”) for
approximately $2.6 billion in cash and an option to reacquire a minority interest in the operations
sold. The Company has presented the results of operations and financial condition of the former
music operations as discontinued operations in the accompanying consolidated financial statements.
As of September 30, 2005, there were $50 million of net liabilities associated with the former
music operations recorded on the Company’s balance sheet. The liabilities are principally related
to severance payments to former employees of the music operations.
53
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Financial information of the music operations and adjustments to the initial estimates of the
assets sold and liabilities assumed included in discontinued operations in the accompanying
consolidated statement of operations for the three and nine months ended September 30, 2004, are as
follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, 2004 |
|
|
September 30, 2004 |
|
Total revenues |
|
$ |
— |
|
|
$ |
780 |
|
Pretax income (loss) |
|
|
7 |
|
|
|
(9 |
) |
Income tax (expense) benefit |
|
|
(2 |
) |
|
|
124 |
|
Net income |
|
|
5 |
|
|
|
115 |
|
As part of the sale of the WMG operations, the Company retained an option to reacquire a
minority interest in the WMG recorded music and music publishing business. This option was
accounted for in accordance with FASB Statement No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” In the first quarter of 2005, the Company entered into an agreement with WMG
pursuant to which WMG agreed to a cash purchase of the Company’s option at the time of the WMG
public offering at a price based on the initial public offering price per share, net of any
underwriters’ discounts. As a result of the estimated public offering price range, the Company
adjusted the value of the option in the first quarter of 2005 from $85 million to $165 million. In
the second quarter of 2005, WMG’s registration statement was declared effective at a reduced price
from its initial estimated range, and the Company received approximately $138 million from the sale
of its option. As a result of these events, for the nine months ended September 30, 2005, the
Company recorded a $53 million net gain related to this option, which is recorded in Other income,
net, in the accompanying consolidated statement of operations.
3. INVENTORIES AND FILM COSTS
Inventories and film costs consist of:
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
Programming costs, less amortization |
|
$ |
2,811 |
|
|
$ |
2,599 |
|
Videocassettes, DVDs, books, paper and other merchandise |
|
|
536 |
|
|
|
522 |
|
Film costs — Theatrical: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
817 |
|
|
|
893 |
|
Completed and not released |
|
|
426 |
|
|
|
60 |
|
In production |
|
|
844 |
|
|
|
843 |
|
Development and pre-production |
|
|
70 |
|
|
|
51 |
|
Film costs — Television: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
537 |
|
|
|
493 |
|
Completed and not released |
|
|
211 |
|
|
|
191 |
|
In production |
|
|
431 |
|
|
|
494 |
|
Development and pre-production |
|
|
10 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Total inventories and film costs (a) |
|
|
6,693 |
|
|
|
6,152 |
|
Less: current portion of inventory (b) |
|
|
(1,720 |
) |
|
|
(1,737 |
) |
|
|
|
|
|
|
|
Total noncurrent inventories and film costs |
|
$ |
4,973 |
|
|
$ |
4,415 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Does not include $2.974 billion and $3.137 billion of net film library costs as
of September 30, 2005 and December 31, 2004, respectively, which are included in intangible
assets subject to amortization in the accompanying consolidated balance sheet. |
| |
| (b) |
|
Current inventory as of September 30, 2005 and December 31, 2004, is comprised
primarily of programming inventory at the Networks segment ($1.181 billion and $1.215 billion,
respectively), books, magazines, paper and other merchandise at the Publishing segment ($247
million and $199 million, respectively), DVDs, and videocassettes at the Filmed Entertainment
segment ($286 million and $318 million, respectively) and general merchandise at the AOL
segment ($6 million and $5 million, respectively). |
54
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
4. MANDATORILY CONVERTIBLE PREFERRED STOCK
At December 31, 2004, the Company had outstanding one share of its Series A mandatorily
convertible preferred stock, par value $0.10 per share, face value of $1.5 billion (the “Series A
Preferred Stock”), held by a trust for the benefit of Comcast, that was issued on March 31, 2003,
as part of the TWE Restructuring. In accordance with the terms of the stock, on March 31, 2005, the
Series A Preferred Stock was automatically converted into 83,835,883 shares of common stock of the
Company, valued at $1.5 billion, and such amount was reclassified to equity in the accompanying
consolidated balance sheet. Prior to the conversion, an estimate of the number of shares of common
stock issuable upon the conversion of the Series A Preferred Stock based on the fair market value
of the common stock at the end of the applicable period was included only in the calculation of the
Company’s diluted earnings per share. Following the issuance of the common stock upon the
conversion of the Series A Preferred Stock, the shares issued are included in the calculation of
both the basic and diluted earnings per share.
5. SHAREHOLDERS’ EQUITY
At September 30, 2005, shareholders’ equity of Time Warner included 87.2 million shares of
Series LMCN-V common stock and 4.590 billion shares of common stock (net of approximately 111
million shares of common stock held in treasury). The outstanding shares of common stock include
the 83,835,883 shares of common stock issued upon conversion of the one share of Series A Preferred
Stock on March 31, 2005. Time Warner is authorized to issue up to 750 million shares of preferred
stock, up to 25 billion shares of common stock and up to 1.8 billion shares of additional classes
of common stock, including Series LMCN-V common stock. Shares of Series LMCN-V common stock have
substantially identical rights as shares of Time Warner’s common stock, except that shares of
Series LMCN-V common stock have limited voting rights and are nonredeemable. The holders of Series
LMCN-V common stock are entitled to 1/100 of a vote per share on the election of directors and do
not have any other voting rights, except as required by law or with respect to limited matters,
including amendments to the terms of the Series LMCN-V common stock adverse to such holders. The
Series LMCN-V common stock is not transferable, except in limited circumstances, and is not listed
on any securities exchange. Each share of Series LMCN-V common stock is convertible into one share
of Time Warner common stock at any time, assuming certain restrictive provisions have been met.
During the first nine months of 2005, approximately 18.5 million shares of LMCN-V common stock were
converted into an equal number of shares of common stock.
6. GOODWILL
A summary of changes in the Company’s goodwill for the nine months ended September 30, 2005 by
reportable segment is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
Acquisitions & |
|
|
|
|
|
|
Currency Translation |
|
|
September 30, |
|
| |
|
2004 |
|
|
Adjustments(a) |
|
|
Impairment(b) |
|
|
Adjustments(c) |
|
|
2005 |
|
AOL |
|
$ |
3,027 |
|
|
$ |
18 |
|
|
$ |
(24 |
) |
|
$ |
135 |
|
|
$ |
3,156 |
|
Cable |
|
|
1,921 |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
1,919 |
|
Filmed Entertainment |
|
|
5,218 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
5,217 |
|
Networks |
|
|
20,626 |
|
|
|
(38 |
) |
|
|
— |
|
|
|
— |
|
|
|
20,588 |
|
Publishing |
|
|
8,875 |
|
|
|
173 |
|
|
|
— |
|
|
|
340 |
|
|
|
9,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
39,667 |
|
|
$ |
150 |
|
|
$ |
(24 |
) |
|
$ |
475 |
|
|
$ |
40,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Includes $111 million at the Publishing segment related to the preliminary
purchase price allocation for the acquisition of the remaining ownership interest in Essence
Communications Partners, $60 million at the Publishing segment related to the preliminary
purchase price allocation for the acquisition of Grupo Editorial Expansión and $39 million at
the Networks segment related to reversals of purchase accounting reserves. |
| |
| (b) |
|
Relates to the $24 million impairment charge of America Online Latin America,
Inc. (“AOLA”) goodwill in the first quarter of 2005.
|
| |
| (c) |
|
Includes an adjustment related to periods prior to January 1, 2005. This
adjustment had no impact on consolidated net income or cash flows in the current or any prior
period. In addition, the adjustment is not considered material to the consolidated assets or
equity of the current or any prior period. |
55
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
7. SEGMENT INFORMATION
Time Warner classifies its business interests into five reportable segments: AOL, consisting
principally of interactive services; Cable, consisting principally of interests in cable systems
that provide video programming, high-speed data and Digital Phone services; Filmed Entertainment,
consisting principally of feature film, television and home video production and distribution;
Networks, consisting principally of cable television and broadcast networks; and Publishing,
consisting principally of magazine and book publishing.
Information as to the operations of Time Warner in each of its business segments is set forth
below based on the nature of the products and services offered. Time Warner evaluates performance
based on several factors, of which the primary financial measure is operating income before noncash
depreciation of tangible assets and amortization of intangible assets (“Operating Income before
Depreciation and Amortization”). Additionally, the Company has provided a summary of Operating
Income by segment.
Three Months Ended September 30, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
1,665 |
|
|
$ |
328 |
|
|
$ |
— |
|
|
$ |
48 |
|
|
$ |
2,041 |
|
Cable |
|
|
2,262 |
|
|
|
133 |
|
|
|
— |
|
|
|
— |
|
|
|
2,395 |
|
Filmed Entertainment |
|
|
— |
|
|
|
1 |
|
|
|
2,620 |
|
|
|
29 |
|
|
|
2,650 |
|
Networks |
|
|
1,344 |
|
|
|
705 |
|
|
|
304 |
|
|
|
45 |
|
|
|
2,398 |
|
Publishing |
|
|
400 |
|
|
|
650 |
|
|
|
148 |
|
|
|
179 |
|
|
|
1,377 |
|
Intersegment elimination |
|
|
(136 |
) |
|
|
(41 |
) |
|
|
(134 |
) |
|
|
(12 |
) |
|
|
(323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
5,535 |
|
|
$ |
1,776 |
|
|
$ |
2,938 |
|
|
$ |
289 |
|
|
$ |
10,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
1,840 |
|
|
$ |
257 |
|
|
$ |
— |
|
|
$ |
44 |
|
|
$ |
2,141 |
|
Cable |
|
|
1,993 |
|
|
|
128 |
|
|
|
— |
|
|
|
— |
|
|
|
2,121 |
|
Filmed Entertainment |
|
|
— |
|
|
|
2 |
|
|
|
2,461 |
|
|
|
40 |
|
|
|
2,503 |
|
Networks |
|
|
1,275 |
|
|
|
651 |
|
|
|
221 |
|
|
|
41 |
|
|
|
2,188 |
|
Publishing |
|
|
387 |
|
|
|
643 |
|
|
|
135 |
|
|
|
172 |
|
|
|
1,337 |
|
Intersegment elimination |
|
|
(127 |
) |
|
|
(35 |
) |
|
|
(169 |
) |
|
|
(24 |
) |
|
|
(355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
5,368 |
|
|
$ |
1,646 |
|
|
$ |
2,648 |
|
|
$ |
273 |
|
|
$ |
9,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
5,173 |
|
|
$ |
959 |
|
|
$ |
— |
|
|
$ |
139 |
|
|
$ |
6,271 |
|
Cable |
|
|
6,610 |
|
|
|
388 |
|
|
|
— |
|
|
|
— |
|
|
|
6,998 |
|
Filmed Entertainment |
|
|
— |
|
|
|
6 |
|
|
|
8,156 |
|
|
|
138 |
|
|
|
8,300 |
|
Networks |
|
|
4,060 |
|
|
|
2,248 |
|
|
|
772 |
|
|
|
92 |
|
|
|
7,172 |
|
Publishing |
|
|
1,202 |
|
|
|
1,963 |
|
|
|
445 |
|
|
|
509 |
|
|
|
4,119 |
|
Intersegment elimination |
|
|
(400 |
) |
|
|
(121 |
) |
|
|
(536 |
) |
|
|
(38 |
) |
|
|
(1,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
16,645 |
|
|
$ |
5,443 |
|
|
$ |
8,837 |
|
|
$ |
840 |
|
|
$ |
31,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Nine Months Ended September 30, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
5,661 |
|
|
$ |
692 |
|
|
$ |
— |
|
|
$ |
156 |
|
|
$ |
6,509 |
|
Cable |
|
|
5,917 |
|
|
|
363 |
|
|
|
— |
|
|
|
— |
|
|
|
6,280 |
|
Filmed Entertainment |
|
|
— |
|
|
|
7 |
|
|
|
8,423 |
|
|
|
151 |
|
|
|
8,581 |
|
Networks |
|
|
3,812 |
|
|
|
2,102 |
|
|
|
729 |
|
|
|
118 |
|
|
|
6,761 |
|
Publishing |
|
|
1,164 |
|
|
|
1,880 |
|
|
|
370 |
|
|
|
513 |
|
|
|
3,927 |
|
Intersegment elimination |
|
|
(386 |
) |
|
|
(105 |
) |
|
|
(520 |
) |
|
|
(67 |
) |
|
|
(1,078 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
16,168 |
|
|
$ |
4,939 |
|
|
$ |
9,002 |
|
|
$ |
871 |
|
|
$ |
30,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 revenue by licensing television and
theatrical programming to the Networks segment; |
| |
| |
• |
|
The Networks segment generating Subscription revenue by selling cable network programming
to the Cable segment; |
| |
| |
• |
|
The AOL, Cable, Networks and Publishing segments generating Advertising revenue by
cross-promoting the products and services of all Time Warner segments; and |
| |
| |
• |
|
The AOL segment generating Other revenue by providing the Cable segment’s customers
access to the AOL Transit Data Network for high-speed access to the Internet. |
These intersegment transactions are recorded by each segment at estimated fair value as if the
transactions were with third parties and, therefore, impact segment performance. While intersegment
transactions are treated like third-party transactions to determine segment performance, the
revenues (and corresponding expenses or assets recognized by the segment that is counterparty to
the transaction) are eliminated in consolidation and, therefore, do not themselves impact
consolidated results. Additionally, transactions between divisions within the same reporting
segment (e.g., a transaction between HBO and Turner Broadcasting System, Inc. within the Networks
segment) are eliminated in arriving at segment performance and, therefore, do not themselves impact
segment results. Revenues recognized by Time Warner’s segments on intersegment transactions are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
|
(millions) |
|
Intersegment Revenues (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
7 |
|
|
$ |
15 |
|
|
$ |
18 |
|
|
$ |
45 |
|
Cable |
|
|
12 |
|
|
|
11 |
|
|
|
32 |
|
|
|
37 |
|
Filmed Entertainment |
|
|
161 |
|
|
|
159 |
|
|
|
539 |
|
|
|
493 |
|
Networks |
|
|
119 |
|
|
|
148 |
|
|
|
440 |
|
|
|
443 |
|
Publishing |
|
|
24 |
|
|
|
22 |
|
|
|
66 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intersegment revenues |
|
$ |
323 |
|
|
$ |
355 |
|
|
$ |
1,095 |
|
|
$ |
1,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Intersegment revenues include intercompany Advertising revenues of $41 million
and $35 million for the three months ended September 30, 2005 and 2004, respectively, and $121
million and $105 million for the nine months ended September 30, 2005 and 2004, respectively. |
57
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
|
(millions) |
|
Operating Income before Depreciation and Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL (a) |
|
$ |
481 |
|
|
$ |
463 |
|
|
$ |
1,557 |
|
|
$ |
1,439 |
|
Cable |
|
|
945 |
|
|
|
824 |
|
|
|
2,667 |
|
|
|
2,391 |
|
Filmed Entertainment |
|
|
253 |
|
|
|
361 |
|
|
|
882 |
|
|
|
1,190 |
|
Networks (b) |
|
|
766 |
|
|
|
635 |
|
|
|
2,188 |
|
|
|
2,031 |
|
Publishing (c) |
|
|
288 |
|
|
|
264 |
|
|
|
811 |
|
|
|
791 |
|
Corporate (d) |
|
|
(113 |
) |
|
|
(615 |
) |
|
|
(3,319 |
) |
|
|
(891 |
) |
Intersegment elimination |
|
|
(19 |
) |
|
|
(27 |
) |
|
|
(26 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income before Depreciation and Amortization |
|
$ |
2,601 |
|
|
$ |
1,905 |
|
|
$ |
4,760 |
|
|
$ |
6,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the nine months ended September 30, 2005, includes a $24 million noncash
impairment charge related to goodwill associated with AOLA, a $5 million gain related to the
sale of a building and a $5 million gain from the resolution of a previously contingent gain
related to the 2004 sale of Netscape Security Solutions. For the three and nine months ended
September 30, 2004, includes a gain of $13 million related to the sale of AOL Japan and a $10
million impairment charge related to a building that was held for sale. |
| |
| (b) |
|
For the nine months ended September 30, 2004, includes an approximate $7 million
loss related to the sale of the winter sports teams. |
| |
| (c) |
|
For the nine months ended September 30, 2005, includes an $8 million gain related to
the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life Inc.
(“Time Life”), which was previously fully reserved due to concerns about recoverability. For
the nine months ended September 30, 2004, includes an $8 million gain related to the sale of a
building. |
| |
| (d) |
|
For the nine months ended September 30, 2005, includes $3 billion in legal reserves
related to securities litigation. For the three and nine months ended September 30, 2004,
includes $500 million in legal reserves related to the government investigations. For the nine
months ended September 30, 2004, includes $53 million of costs associated with the relocation
from the Company’s former corporate headquarters, which includes a $14 million reversal in the
third quarter of 2004 as a result of an agreement having been finalized to lease a portion of
the space to the AOL business unit. For the three and nine months ended September 30, 2005,
the Company reversed approximately $2 million and $5 million, respectively, of this charge,
which was no longer required due to changes in estimates. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
|
(millions) |
|
Depreciation of Property, Plant and Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
(136 |
) |
|
$ |
(158 |
) |
|
$ |
(426 |
) |
|
$ |
(498 |
) |
Cable |
|
|
(415 |
) |
|
|
(367 |
) |
|
|
(1,177 |
) |
|
|
(1,068 |
) |
Filmed Entertainment |
|
|
(29 |
) |
|
|
(26 |
) |
|
|
(89 |
) |
|
|
(75 |
) |
Networks |
|
|
(61 |
) |
|
|
(55 |
) |
|
|
(173 |
) |
|
|
(155 |
) |
Publishing |
|
|
(32 |
) |
|
|
(27 |
) |
|
|
(98 |
) |
|
|
(90 |
) |
Corporate |
|
|
(13 |
) |
|
|
(8 |
) |
|
|
(32 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation of property, plant and equipment |
|
$ |
(686 |
) |
|
$ |
(641 |
) |
|
$ |
(1,995 |
) |
|
$ |
(1,918 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
|
(millions) |
|
Amortization of Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
(43 |
) |
|
$ |
(44 |
) |
|
$ |
(137 |
) |
|
$ |
(127 |
) |
Cable |
|
|
(18 |
) |
|
|
(19 |
) |
|
|
(57 |
) |
|
|
(56 |
) |
Filmed Entertainment |
|
|
(53 |
) |
|
|
(53 |
) |
|
|
(157 |
) |
|
|
(159 |
) |
Networks |
|
|
(6 |
) |
|
|
(6 |
) |
|
|
(18 |
) |
|
|
(17 |
) |
Publishing |
|
|
(24 |
) |
|
|
(34 |
) |
|
|
(77 |
) |
|
|
(108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization of intangible assets |
|
$ |
(144 |
) |
|
$ |
(156 |
) |
|
$ |
(446 |
) |
|
$ |
(467 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
58
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
|
(millions) |
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL (a) |
|
$ |
302 |
|
|
$ |
261 |
|
|
$ |
994 |
|
|
$ |
814 |
|
Cable |
|
|
512 |
|
|
|
438 |
|
|
|
1,433 |
|
|
|
1,267 |
|
Filmed Entertainment |
|
|
171 |
|
|
|
282 |
|
|
|
636 |
|
|
|
956 |
|
Networks (b) |
|
|
699 |
|
|
|
574 |
|
|
|
1,997 |
|
|
|
1,859 |
|
Publishing (c) |
|
|
232 |
|
|
|
203 |
|
|
|
636 |
|
|
|
593 |
|
Corporate (d) |
|
|
(126 |
) |
|
|
(623 |
) |
|
|
(3,351 |
) |
|
|
(923 |
) |
Intersegment elimination |
|
|
(19 |
) |
|
|
(27 |
) |
|
|
(26 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
1,771 |
|
|
$ |
1,108 |
|
|
$ |
2,319 |
|
|
$ |
4,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the nine months ended September 30, 2005, includes a $24 million noncash
impairment charge related to goodwill associated with AOLA, a $5 million gain related to the
sale of a building and a $5 million gain from the resolution of a previously contingent gain
related to the 2004 sale of Netscape Security Solutions. For the three and nine months ended
September 30, 2004, includes a gain of $13 million related to the sale of AOL Japan and a $10
million impairment charge related to a building that was held for sale. |
| |
| (b) |
|
For the nine months ended September 30, 2004, includes an approximate $7 million
loss related to the sale of the winter sports teams. |
| |
| (c) |
|
For the nine months ended September 30, 2005, includes an $8 million gain related to
the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life, which
was previously fully reserved due to concerns about recoverability. For the nine months ended
September 30, 2004, includes an $8 million gain related to the sale of a building. |
| |
| (d) |
|
For the nine months ended September 30, 2005, includes $3 billion in legal reserves
related to securities litigation. For the three and nine months ended September 30, 2004,
includes $500 million in legal reserves related to the government investigations. For the nine
months ended September 30, 2004, includes $53 million of costs associated with the relocation
from the Company’s former corporate headquarters, which includes a $14 million reversal in the
third quarter of 2004 as a result of an agreement having been finalized to lease a portion of
the space to the AOL business unit. For the three and nine months ended September 30, 2005,
the Company reversed approximately $2 million and $5 million, respectively, of this charge,
which was no longer required due to changes in estimates. |
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
Assets |
|
|
|
|
|
|
|
|
AOL |
|
$ |
5,988 |
|
|
$ |
7,175 |
|
Cable |
|
|
43,343 |
|
|
|
43,165 |
|
Filmed Entertainment |
|
|
17,557 |
|
|
|
17,924 |
|
Networks |
|
|
33,615 |
|
|
|
33,042 |
|
Publishing |
|
|
14,487 |
|
|
|
14,012 |
|
Corporate |
|
|
9,612 |
|
|
|
7,840 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
124,602 |
|
|
$ |
123,158 |
|
|
|
|
|
|
|
|
59
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
8. BENEFIT PLANS
Time Warner and certain of its subsidiaries have both funded and unfunded noncontributory
defined benefit pension plans covering a majority of domestic employees and, to a lesser extent,
have various defined benefit plans covering international employees. Pension benefits are based on
formulas that reflect the employees’ years of service and compensation during their employment
period and participation in the plans. Time Warner uses a December 31 measurement date for the
majority of its plans. The components of the net periodic benefit costs recognized are as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Domestic |
|
|
International |
|
|
Domestic |
|
|
International |
|
| |
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
34 |
|
|
$ |
30 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
101 |
|
|
$ |
90 |
|
|
$ |
15 |
|
|
$ |
17 |
|
Interest cost |
|
|
43 |
|
|
|
39 |
|
|
|
9 |
|
|
|
8 |
|
|
|
128 |
|
|
|
117 |
|
|
|
26 |
|
|
|
23 |
|
Expected return on plan assets |
|
|
(52 |
) |
|
|
(43 |
) |
|
|
(10 |
) |
|
|
(9 |
) |
|
|
(156 |
) |
|
|
(130 |
) |
|
|
(31 |
) |
|
|
(27 |
) |
Amounts amortized |
|
|
15 |
|
|
|
14 |
|
|
|
2 |
|
|
|
2 |
|
|
|
44 |
|
|
|
41 |
|
|
|
6 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs |
|
$ |
40 |
|
|
$ |
40 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
117 |
|
|
$ |
118 |
|
|
$ |
16 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions |
|
$ |
5 |
|
|
$ |
54 |
|
|
$ |
22 |
|
|
$ |
5 |
|
|
$ |
14 |
|
|
$ |
62 |
|
|
$ |
30 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter, after considering the funded status of the Company’s domestic
funded defined benefit plans, movements in benchmark interest rates, investment performance and
related tax consequences, the Company may choose to make contributions to its defined benefit
pension plans up to the maximum amount allowable under applicable IRS regulations, which is
approximately $220 million. Currently, there are no minimum required contributions for domestic
funded plans.
For domestic unfunded plans, contributions will continue to be made to the extent benefits are
paid and are included in the table above. Expected benefit payments for domestic unfunded plans for
2005 are approximately $20 million. In addition, the Company expects to make contributions of
approximately $35 million in connection with its international plans during the fourth quarter
of 2005.
9. MERGER AND RESTRUCTURING COSTS
Merger Costs
In connection with the merger of America Online and Historic TW Inc. (“Historic TW”) (“America
Online-Historic TW Merger”), the Company reviewed its operations and implemented several plans to
restructure the operations of both companies (“restructuring plans”). As part of the restructuring
plans, the Company accrued a restructuring liability of approximately $1.031 billion during 2001.
These restructuring accruals relate to costs to exit and consolidate certain activities of Historic
TW, as well as costs to terminate employees across various Historic TW business units.
As of September 30, 2005, out of the remaining liability of $31 million, $8 million was
classified as a current liability, with the remaining $23 million classified as a long-term
liability in the accompanying consolidated balance sheet. Amounts are expected to be paid through
2012.
60
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Selected information relating to the restructuring costs included in the allocation of the
cost to acquire Historic TW is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee |
|
|
Other |
|
|
|
|
| |
|
Termination |
|
|
Exit Costs |
|
|
Total |
|
Initial accruals |
|
$ |
619 |
|
|
$ |
412 |
|
|
$ |
1,031 |
|
| |
|
|
|
|
|
|
|
|
|
|
Restructuring liability as of December 31, 2003 |
|
$ |
28 |
|
|
$ |
36 |
|
|
$ |
64 |
|
Cash paid
— 2004 (a) |
|
|
(14 |
) |
|
|
(7 |
) |
|
|
(21 |
) |
Noncash
reductions — 2004 (b) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring liability as of December 31, 2004 |
|
|
12 |
|
|
|
26 |
|
|
|
38 |
|
Cash paid
— 2005 (c) |
|
|
(5 |
) |
|
|
(2 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring liability as of September 30, 2005 |
|
$ |
7 |
|
|
$ |
24 |
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Of the $21 million paid in 2004, $3 million was paid for the three months ended
September 30, 2004 and $15 million was paid for the nine months ended September 30, 2004. |
| |
| (b) |
|
Noncash reductions represent adjustments to the restructuring accrual, with a
corresponding reduction in goodwill, as actual costs related to employee terminations and
other exit costs were less than originally estimated. Of the $5 million in noncash reductions
in 2004, no reductions were made during the three and nine months ended September 30, 2004. |
| |
| (c) |
|
Of the $7 million paid in 2005, $2 million was paid during the third quarter. |
2005 Merger Costs
For the three and nine months ended September 30, 2005, the Company incurred non-capitalizable
merger-related costs of approximately $2 million at the Cable segment related to consulting fees
covering integration planning for the proposed Adelphia acquisition. As of September 30, 2005,
payments of $1 million have been made against this accrual. The remaining $1 million was classified
as a current liability in the accompanying consolidated balance sheet.
Restructuring Costs
In addition to the costs of activities related to the America Online — Historic TW Merger, the
Company has also recognized restructuring costs that are unrelated to business combinations and are
expensed as incurred.
2005 Restructuring Costs
For the three and nine months ended September 30, 2005, the Company incurred restructuring
costs of $1 million and $31 million, respectively, at the Cable segment, primarily associated with
the early retirement of certain senior executives and terminations due to the closure of certain
news channels. The number of employees terminated as of September 30, 2005 was 67.
These changes are part of TWC Inc.’s broader plans to simplify its
organization and enhance its customer focus. TWC Inc. is in the process of executing this
reorganization and expects to incur additional costs associated with this reorganization as it is
implemented during the remainder of 2005. For both the three and nine months ended September 30,
2005, the Company also incurred restructuring costs of $2 million at the AOL segment primarily
related to a lease termination.
As of September 30, 2005, out of the remaining liability of $27 million, $11 million was
classified as a current liability, with the remaining $16 million classified as a long-term
liability in the accompanying consolidated balance sheet. Amounts are expected to be paid through
2011.
61
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Selected information relating to the 2005 restructuring costs is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee |
|
|
Other |
|
|
|
|
| |
|
Terminations |
|
|
Exit Costs |
|
|
Total |
|
2005 accruals |
|
$ |
27 |
|
|
$ |
6 |
|
|
$ |
33 |
|
Cash paid
— 2005 (a) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of September 30, 2005 |
|
$ |
22 |
|
|
$ |
5 |
|
|
$ |
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Of the $6 million paid in 2005, approximately $3 million was paid during the
third quarter. |
2004 Restructuring Costs
For the year ended December 31, 2004, the Company incurred restructuring costs of $55 million
related to employee terminations at the AOL segment. The number of employees terminated was 861
(770 domestic and 91 internationally) and all of the terminations had occurred by the end of the
first quarter of 2005. During the first quarter of 2005, the Company incurred additional
restructuring costs of $3 million related to the AOL segment as a result of changes in estimates of
previously established restructuring accruals.
As of September 30, 2005, out of the remaining liability of $7 million, $4 million was
classified as a current liability, with the remaining $3 million classified as a long-term
liability in the accompanying consolidated balance sheet. Amounts are expected to be paid through
2013.
Selected information relating to the 2004 restructuring costs is as follows (millions):
| |
|
|
|
|
| |
|
Employee |
|
| |
|
Terminations |
|
2004 accruals |
|
$ |
55 |
|
Cash paid
— 2004 (a) |
|
|
(5 |
) |
|
|
|
|
Remaining
liability as of December 31, 2004 |
|
|
50 |
|
Net additional accrual |
|
|
1 |
|
Cash paid
— 2005 (b) |
|
|
(44 |
) |
|
|
|
|
Remaining liability as of September 30, 2005 |
|
$ |
7 |
|
|
|
|
|
|
|
|
| (a) |
|
Of the $5 million paid in 2004, no payments were made during the three and nine
months ended September 30, 2004. |
| |
| (b) |
|
Of the $44 million paid in 2005, no payments were made during the third quarter. |
2003 Restructuring Costs
For the year ended December 31, 2003, the Company incurred restructuring costs related to
various employee and contractual terminations of $109 million, including $52 million at the AOL
segment, $21 million at the Networks segment, $21 million at the Publishing segment and $15 million
at the Cable segment. Employee termination costs occurred across each of the segments and ranged
from senior executives to line personnel. The number of employees terminated was 974 and all of the
terminations had occurred by the end of the first quarter of 2004.
As of September 30, 2005, out of the remaining liability of $13 million, $5 million was
classified as a current liability, with the remaining liability of $8 million classified as a
long-term liability in the accompanying consolidated balance sheet. Amounts are expected to be paid
through 2010.
62
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Selected information relating to the 2003 restructuring costs is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee |
|
|
Other |
|
|
|
|
| |
|
Terminations |
|
|
Exit Costs |
|
|
Total |
|
2003 accruals |
|
$ |
64 |
|
|
$ |
45 |
|
|
$ |
109 |
|
Cash paid — 2003 |
|
|
(17 |
) |
|
|
(1 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of December 31, 2003 |
|
|
47 |
|
|
|
44 |
|
|
|
91 |
|
Cash paid — 2004 (a) |
|
|
(42 |
) |
|
|
(4 |
) |
|
|
(46 |
) |
Noncash reductions - 2004 (b) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of December 31, 2004 |
|
|
3 |
|
|
|
37 |
|
|
|
40 |
|
Cash paid — 2005 (c) |
|
|
(3 |
) |
|
|
(16 |
) |
|
|
(19 |
) |
Noncash reductions - 2005 (b) |
|
|
— |
|
|
|
(8 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of September 30, 2005 |
|
$ |
— |
|
|
$ |
13 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Of the $46 million paid in 2004, $5 million was paid for the three months ended
September 30, 2004 and $45 million was paid for the nine months ended September 30, 2004. |
| |
| (b) |
|
Noncash reductions reflect changes in estimates of previously established
restructuring accruals. Of the $5 million noncash reductions in 2004, no reductions were made
for the three and nine months ended September 30, 2004. Of the $8 million noncash reductions
in 2005, no reductions were made during the third quarter. |
| |
| (c) |
|
Of the $19 million paid in 2005, $1 million was paid during the third quarter. |
2002 Restructuring Costs
During the year ended December 31, 2002, the Company incurred and accrued other restructuring
costs of $327 million related to various contractual terminations and obligations, including
certain contractual employee termination benefits. Of the $327 million of restructuring costs, $266
million related to the AOL segment, $46 million to the Corporate segment and $15 million to the
Cable segment.
As of September 30, 2005, out of the remaining liability of $16 million, $4 million was
classified as a current liability, with the remaining liability of $12 million classified as a
long-term liability in the accompanying consolidated balance sheet. Amounts are expected to be paid
through 2010.
Selected information relating to the 2002 restructuring costs is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee |
|
|
Other |
|
|
|
|
| |
|
Terminations |
|
|
Exit Costs |
|
|
Total |
|
Initial accruals |
|
$ |
92 |
|
|
$ |
235 |
|
|
$ |
327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining liability as of December 31, 2003 |
|
$ |
52 |
|
|
$ |
10 |
|
|
$ |
62 |
|
Cash paid — 2004 (a) |
|
|
(17 |
) |
|
|
(6 |
) |
|
|
(23 |
) |
Noncash reductions — 2004 (b) |
|
|
(12 |
) |
|
|
— |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of December 31, 2004 |
|
|
23 |
|
|
|
4 |
|
|
|
27 |
|
Cash paid — 2005 (c) |
|
|
(8 |
) |
|
|
(3 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of September 30, 2005 |
|
$ |
15 |
|
|
$ |
1 |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Of the $23 million paid in 2004, $4 million was paid for the three months ended
September 30, 2004 and $21 million was paid for the nine months ended September 30, 2004. |
| |
| (b) |
|
During the second quarter of 2004, a $12 million severance accrual, initially
established in 2002, was reversed in connection with the settlement of that accrual with the
issuance of options to purchase stock of the Company. The obligation related to the option
issuance was valued at $10 million and was reflected in shareholders’ equity. |
| |
| (c) |
|
Of the $11 million paid in 2005, $2 million was paid during the third quarter. |
63
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Other Charges
In connection with relocating its Corporate headquarters, the Company recorded certain exit
costs at the date various floors of the former headquarters facility were no longer being occupied
by employees of the Company. During the first six months of 2004, the Company recorded a $67
million charge, of which $14 million was reversed in the third quarter of 2004 as a result of an
agreement having been finalized to lease a portion of the space to the AOL business unit. Of the
$53 million net charge, approximately $26 million relates to a noncash write-off of a fair value
lease adjustment, which was established in purchase accounting at the time of the America Online -
Historic TW Merger. For the three and nine months ended September 30, 2005, the Company reversed
approximately $2 million and $5 million, respectively, of this charge, which was no longer required
due to changes in estimates. The remaining amount primarily relates to the accrual of the expected
loss on the sub-lease of the building, which is expected to be incurred over the remaining term of
the lease of approximately nine years, and represents the present value of such obligations.
Through September 30, 2005, payments and other miscellaneous adjustments of $26 million were
made against this liability.
10. COMMITMENTS AND CONTINGENCIES
Securities Matters
Consolidated Securities Class Action
As of October 31, 2005, 30 shareholder class action lawsuits have been filed naming as
defendants the Company, certain current and former executives of the Company and, in several
instances, America Online. These lawsuits were filed in U.S. District Courts for the Southern
District of New York, the Eastern District of Virginia and the Eastern District of Texas. The
complaints purport to be made on behalf of certain shareholders of the Company and allege that the
Company made material misrepresentations and/or omissions of material fact in violation of Section
10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 promulgated
thereunder, and Section 20(a) of the Exchange Act. Plaintiffs claim that the Company failed to
disclose America Online’s declining advertising revenues and that the Company and America Online
inappropriately inflated advertising revenues in a series of transactions. Certain of the lawsuits
also allege that certain of the individual defendants and other insiders at the Company improperly
sold their personal holdings of Time Warner stock, that the Company failed to disclose that the
America Online-Historic TW Merger was not generating the synergies anticipated at the time of the
announcement of the merger and, further, that the Company inappropriately delayed writing down more
than $50 billion of goodwill. The lawsuits seek an unspecified amount in compensatory damages. All
of these lawsuits have been centralized in the U.S. District Court for the Southern District of New
York for coordinated or consolidated pretrial proceedings (along with the federal derivative
lawsuits and certain lawsuits brought under ERISA described below) under the caption In re AOL Time
Warner Inc. Securities and “ERISA” Litigation. Additional lawsuits filed by individual shareholders
have also been (or are in the process of being) transferred and/or consolidated for pretrial
proceedings.
The Minnesota State Board of Investment (“MSBI”) has been designated lead plaintiff for the
consolidated securities actions and filed a consolidated amended complaint on April 15, 2003,
adding additional defendants including additional officers and directors of the Company, Morgan
Stanley & Co., Salomon Smith Barney Inc., Citigroup Inc., Banc of America Securities LLC and JP
Morgan Chase & Co. Plaintiffs also added additional allegations, including that the Company made
material misrepresentations in its registration statements and joint proxy statement-prospectus
related to the America Online-Historic TW Merger and in its registration statements pursuant to
which debt securities were issued in April 2001 and April 2002, allegedly in violation of Section
11 and Section 12 of the Securities Act of 1933. On July 14, 2003, the defendants filed a motion to
dismiss the consolidated amended complaint. On May 5, 2004, the district court granted in part the
defendants’ motion, dismissing all claims with respect to the registration statements pursuant to
which debt securities were issued in April 2001 and April 2002 and certain other claims against
other defendants, but otherwise allowing the remaining claims against the Company and certain other
defendants to proceed. On August 11, 2004, the court granted MSBI’s motion to file a second amended
complaint. On July 30, 2004, defendants filed a motion for summary judgment on the basis that
plaintiffs cannot establish loss causation for any of their claims, and thus plaintiffs do not have
any recoverable damages. On April 8, 2005, MSBI moved for leave to file a third amended complaint
to add certain new factual allegations and four additional individual defendants.
64
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
During the third quarter of 2005, the Company reached an agreement with MSBI for the
settlement of the consolidated securities actions. The settlement is reflected in a written
agreement between the lead plaintiff and the Company. On September 30, 2005, the court issued an
order granting preliminary approval of the settlement and certified the settlement class. The court
has scheduled the final approval hearing for February 22, 2006. At this time, there can be no
assurance that the settlement of the securities class action litigation will receive final court
approval. In connection with reaching the agreement in principle on the securities class action,
the Company established a reserve of $2.4 billion during the second quarter of 2005. Ernst & Young
LLP also has agreed to a settlement in this litigation matter and will pay $100 million. Pursuant
to the settlement, in October 2005 Time Warner paid $2.4 billion into a settlement fund (the “MSBI
Settlement Fund”) for the members of the class represented in the action. In addition, the $150
million previously paid by Time Warner into a fund in connection with the settlement of the
investigation by the DOJ was transferred to the MSBI Settlement Fund, and Time Warner is using its
best efforts to have the $300 million it previously paid in connection with the settlement of its
SEC investigation transferred to the MSBI Settlement Fund.
Other Related Securities Litigation Matters
As of October 31, 2005, three putative class action lawsuits have been filed alleging
violations of ERISA in the U.S. District Court for the Southern District of New York on behalf of
current and former participants in the Time Warner Savings Plan, the Time Warner Thrift Plan and/or
the TWC Savings Plan (the “Plans”). Collectively, these lawsuits name as defendants the Company,
certain current and former directors and officers of the Company and members of the Administrative
Committees of the Plans. The lawsuits allege that the Company and other defendants breached certain
fiduciary duties to plan participants by, inter alia, continuing to offer Time Warner stock as an
investment under the Plans, and by failing to disclose, among other things, that the Company was
experiencing declining advertising revenues and that the Company was inappropriately inflating
advertising revenues through various transactions. The complaints seek unspecified damages and
unspecified equitable relief. The ERISA actions have been consolidated as part of the In re AOL
Time Warner Inc. Securities and “ERISA” Litigation described above. On July 3, 2003, plaintiffs
filed a consolidated amended complaint naming additional defendants, including TWE, certain current
and former officers, directors and employees of the Company and Fidelity Management Trust Company.
On September 12, 2003, the Company filed a motion to dismiss the consolidated ERISA complaint. On
March 9, 2005, the court granted in part and denied in part the Company’s motion to dismiss. The
court dismissed two individual defendants and TWE for all purposes, dismissed other individuals
with respect to claims plaintiffs had asserted involving the TWC Savings Plan, and dismissed all
individuals who were named in a claim asserting that their stock sales had constituted a breach of
fiduciary duty to the Plans. The Company filed an answer to the consolidated ERISA complaint on May
20, 2005. The Company intends to defend against these lawsuits vigorously.
As of October 31, 2005, 11 shareholder derivative lawsuits have been filed naming as
defendants certain current and former directors and officers of the Company, as well as the Company
as a nominal defendant. Three have been filed in New York State Supreme Court for the County of New
York, four have been filed in the U.S. District Court for the Southern District of New York and
four have been filed in the Court of Chancery of the State of Delaware for New Castle County. The
complaints allege that defendants breached their fiduciary duties by causing the Company to issue
corporate statements that did not accurately represent that America Online had declining
advertising revenues, that the America Online-Historic TW Merger was not generating the synergies
anticipated at the time of the announcement of the merger, and that the Company inappropriately
delayed writing down more than $50 billion of goodwill, thereby exposing the Company to potential
liability for alleged violations of federal securities laws. The lawsuits further allege that
certain of the defendants improperly sold their personal holdings of Time Warner securities. The
lawsuits request that (i) all proceeds from defendants’ sales of Time Warner common stock, (ii) all
expenses incurred by the Company as a result of the defense of the shareholder class actions
discussed above and (iii) any improper salaries or payments, be returned to the Company. The four
lawsuits filed in the Court of Chancery for the State of Delaware for New Castle County have been
consolidated under the caption, In re AOL Time Warner Inc. Derivative Litigation. A consolidated
complaint was filed on March 7, 2003 in that action, and on June 9, 2003, the Company filed a
notice of motion to dismiss the consolidated complaint. On September 16, 2005, plaintiffs in that
action filed a motion for leave to file a second amended complaint. On May 2, 2003, the three
lawsuits filed in New York State Supreme Court for the County of New York were dismissed on forum
non conveniens grounds and plaintiffs’ time to appeal has expired. The four lawsuits pending in the
U.S. District Court for the Southern District of New York have been centralized for coordinated or
consolidated pre-trial proceedings with the securities and ERISA lawsuits described above under the
caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation. On October 6, 2004,
plaintiffs filed an amended consolidated complaint in three of these four cases. The Company
intends to defend against these lawsuits vigorously.
65
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
On July 1, 2003, Stichting Pensioenfonds ABP v. AOL Time Warner Inc. et al. was filed in the
U.S. District Court for the Southern District of New York against the Company, current and former
officers, directors and employees of the Company and Ernst & Young LLP. Plaintiff alleges that the
Company made material misrepresentations and/or omissions of material fact in violation of Section
10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, Section 11, Section 12, Section
14(a) and Rule 14a-9 promulgated thereunder, Section 18 and Section 20(a) of the Exchange Act. The
complaint also alleges common law fraud and negligent misrepresentation. The plaintiff seeks an
unspecified amount of compensatory and punitive damages. This lawsuit has been consolidated for
coordinated pretrial proceedings under the caption In re AOL Time Warner Inc. Securities and
“ERISA” Litigation described above. On July 16, 2004, plaintiff filed an amended complaint adding
certain institutional defendants, including Historic TW, and certain current directors of the
Company. On November 22, 2004, the Company filed a motion to dismiss the complaint. The Company
intends to defend against this lawsuit vigorously.
On November 11, 2002, Staro Asset Management, LLC filed a putative class action complaint in
the U.S. District Court for the Southern District of New York on behalf of certain purchasers of
Reliant 2.0% Zero-Premium Exchangeable Subordinated Notes for alleged violations of the federal
securities laws. Plaintiff is a purchaser of subordinated notes, the price of which was purportedly
tied to the market value of Time Warner stock. Plaintiff alleges that the Company made
misstatements and/or omissions of material fact that artificially inflated the value of Time Warner
stock and directly affected the price of the notes. Plaintiff seeks compensatory damages and/or
rescission. This lawsuit has been consolidated for coordinated pretrial proceedings under the
caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation described above. The Company
intends to defend against this lawsuit vigorously.
On April 14, 2003, Regents of the University of California et al. v. Parsons et al., was filed
in California Superior Court, County of Los Angeles, naming as defendants the Company, certain
current and former officers, directors and employees of the Company, Ernst & Young LLP, Citigroup
Inc., Salomon Smith Barney Inc. and Morgan Stanley & Co. Plaintiffs allege that the Company made
material misrepresentations in its registration statements related to the America Online-Historic
TW Merger and stock option plans in violation of Sections 11 and 12 of the Securities Act of 1933.
The complaint also alleges common law fraud and breach of fiduciary duties under California state
law. Plaintiffs seek disgorgement of alleged insider trading proceeds and restitution for their
stock losses. Three related cases have been filed in California Supreme Court and have been
coordinated in the County of Los Angeles. On January 26, 2004, certain individuals filed motions to
dismiss for lack of personal jurisdiction. On September 10, 2004, the Company filed a motion to
dismiss plaintiffs’ complaints and certain individual defendants (who had not previously moved to
dismiss plaintiffs’ complaints for lack of personal jurisdiction) filed a motion to dismiss
plaintiffs’ complaints. On April 22, 2005, the court granted certain motions to dismiss for lack of
personal jurisdiction and denied certain motions to dismiss for lack of personal jurisdiction. The
court issued a series of rulings on threshold issues presented by the motions to dismiss on May 12,
July 22 and August 2, 2005. These rulings granted in part and denied in part the relief sought by
defendants, subject to plaintiffs’ right to make a prima facie evidentiary showing to support
certain dismissed claims. The Company intends to defend against these lawsuits
vigorously.
On May 23, 2003, Treasurer of New Jersey v. AOL Time Warner Inc. et al., was filed in the
Superior Court of New Jersey, Mercer County, naming as defendants the Company, certain current and
former officers, directors and employees of the Company, Ernst & Young LLP, Citigroup Inc., Salomon
Smith Barney, Morgan Stanley, JP Morgan Chase and Banc of America Securities. The complaint is
brought by the Treasurer of New Jersey and purports to be made on behalf of the State of New
Jersey, Department of Treasury, Division of Investments (the “Division”) and certain funds
administered by the Division. Plaintiff alleges that the Company made material misrepresentations
in its registration statements in violation of Sections 11 and 12 of the Securities Act of 1933.
Plaintiff also alleges violations of New Jersey state law for fraud and negligent
misrepresentation. Plaintiffs seek an unspecified amount of damages. On October 29, 2003, the
Company moved to stay the proceedings or, in the alternative, dismiss the complaint. Also on
October 29, 2003, all named individual defendants moved to dismiss the complaint for lack of
personal jurisdiction. The parties have agreed to stay this action and to coordinate discovery
proceedings with the securities and ERISA lawsuits described above under the caption In re AOL Time
Warner Inc. Securities and “ERISA” Litigation. The Company intends to defend against this lawsuit
vigorously.
On July 18, 2003, Ohio Public Employees Retirement System et al. v. Parsons et al. was filed
in Ohio, Court of Common Pleas, Franklin County, naming as defendants the Company, certain current
and former officers, directors and employees of the Company, Citigroup Inc., Salomon Smith Barney
Inc., Morgan Stanley & Co. and Ernst & Young LLP. Plaintiffs allege that the Company made material
misrepresentations in its registration statements in violation of Sections 11 and 12 of the
Securities Act of 1933. Plaintiffs also allege violations of Ohio law, breach of fiduciary duty and
common law fraud. Plaintiffs seek disgorgement of alleged insider trading proceeds, restitution and
unspecified compensatory damages. On October 29, 2003, the Company moved to stay the
66
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
proceedings or, in the alternative, dismiss the complaint. Also on October 29, 2003, all named
individual defendants moved to dismiss the complaint for lack of personal jurisdiction. On October
8, 2004, the court granted in part the Company’s motion to dismiss plaintiffs’ complaint;
specifically, the court dismissed plaintiffs’ common law claims but otherwise allowed plaintiffs’
remaining statutory claims against the Company and certain other defendants to proceed. The Company
answered the complaint on February 22, 2005. The Company intends to defend against this lawsuit
vigorously.
On July 18, 2003, West Virginia Investment Management Board v. Parsons et al. was filed in
West Virginia, Circuit Court, Kanawha County, naming as defendants the Company, certain current and
former officers, directors and employees of the Company, Citigroup Inc., Salomon Smith Barney Inc.,
Morgan Stanley & Co., and Ernst & Young LLP. Plaintiff alleges the Company made material
misrepresentations in its registration statements in violation of Sections 11 and 12 of the
Securities Act of 1933. Plaintiff also alleges violations of West Virginia law, breach of fiduciary
duty and common law fraud. Plaintiff seeks disgorgement of alleged insider trading proceeds,
restitution and unspecified compensatory damages. On May 27, 2004, the Company filed a motion to
dismiss the complaint. Also on May 27, 2004, all named individual defendants moved to dismiss the
complaint for lack of personal jurisdiction. The Company intends to defend against this lawsuit
vigorously.
On January 28, 2004, McClure et al. v. AOL Time Warner Inc. et al. was filed in the District
Court of Cass County, Texas (purportedly on behalf of several purchasers of Company stock) naming
as defendants the Company and certain current and former officers, directors and employees of the
Company. Plaintiffs allege that the Company made material misrepresentations in its registration
statements in violation of Sections 11 and 12 of the Securities Act of 1933. Plaintiffs also allege
breach of fiduciary duty and common law fraud. Plaintiffs seek unspecified compensatory damages. On
May 8, 2004, the Company filed a general denial and a motion to dismiss for improper venue. Also on
May 8, 2004, all named individual defendants moved to dismiss the complaint for lack of personal
jurisdiction. The Company intends to defend against this lawsuit vigorously.
On February 24, 2004, Commonwealth of Pennsylvania Public School Employees’ Retirement System
et al. v. Time Warner Inc. et al. was filed in the Court of Common Pleas of Philadelphia County
naming as defendants the Company, certain current and former officers, directors and employees of
the Company, America Online, Historic TW, Morgan Stanley & Co., Inc., Citigroup Global Markets
Inc., Banc of America Securities LLC, J.P. Morgan Chase & Co and Ernst & Young LLP. Plaintiffs had
previously filed a request for a writ of summons notifying defendants of commencement of an action.
Plaintiffs allege that the Company made material misrepresentations in its registration statements
in violation of Sections 11 and 12 of the Securities Act of 1933. Plaintiffs also allege violations
of Pennsylvania law, breach of fiduciary duty and common law fraud. The plaintiffs seek unspecified
compensatory and punitive damages. Plaintiffs dismissed the four investment banks from the
complaint in exchange for a tolling agreement. The remaining parties have agreed to stay this
action and to coordinate discovery proceedings with the securities and ERISA lawsuits described
above under the caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation. Plaintiffs
filed an amended complaint on June 14, 2005. The Company intends to defend against this lawsuit
vigorously.
On April 1, 2004, Alaska State Department of Revenue et al. v. America Online, Inc. et al. was
filed in Superior Court in Juneau County, Alaska, naming as defendants the Company, certain current
and former officers, directors and employees of the Company, America Online, Historic TW, Morgan
Stanley & Co., Inc., and Ernst & Young LLP. Plaintiffs allege that the Company made material
misrepresentations in its registration statements in violation of Alaska law and common law fraud.
The plaintiffs seek unspecified compensatory and punitive damages. On July 26, 2004, all named
individual defendants moved to dismiss the complaint for lack of personal jurisdiction. On August
13, 2004, the Company filed a motion to dismiss plaintiffs’ complaint. On August 10, 2005, the
court issued an order granting in part and denying in part the motions to dismiss for failure to
state a claim. With respect to the jurisdictional motions, the court delayed its ruling 90 days to
permit plaintiffs to conduct additional discovery and supplement the allegations in the complaint.
On September 9, 2005, plaintiffs moved for leave to amend their complaint. That motion was granted
by the court on October 10, 2005. The Company intends to defend against this lawsuit vigorously.
On November 15, 2002, the California State Teachers’ Retirement System filed an amended
consolidated complaint in the U.S. District Court for the Central District of California on behalf
of a putative class of purchasers of stock in Homestore.com, Inc. (“Homestore”). Plaintiff alleges
that Homestore engaged in a scheme to defraud its shareholders in violation of Section 10(b) of the
Exchange Act. The Company and two former employees of its America Online division were named as
defendants in the amended consolidated complaint because of their alleged participation in the
scheme through certain advertising transactions entered into with Homestore. Motions to dismiss
filed by the Company and the two former employees were granted on March 7, 2003, and a final
67
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
judgment of dismissal was entered on March 8, 2004. On April 7, 2004, plaintiff filed a notice
of appeal in the Ninth Circuit Court of Appeals; that appeal was fully briefed as of January 10,
2005. The Company intends to defend against this lawsuit vigorously.
On April 30, 2004, a second amended complaint was filed in the U.S. District Court for the
District of Nevada on behalf of a putative class of purchasers of stock in PurchasePro.com, Inc.
(“PurchasePro”). Plaintiffs allege that PurchasePro engaged in a scheme to defraud its shareholders
in violation of Section 10(b) of the Exchange Act. The Company and four former officers and
employees were added as defendants in the second amended complaint and are alleged to have
participated in the scheme through certain advertising transactions entered into with PurchasePro.
Three similar putative class actions had previously been filed against the Company, America Online
and certain former officers and employees, and have been consolidated with the Nevada action. On
February 17, 2005, the Judge in the consolidated action granted the Company’s motion to dismiss the
second amended complaint with prejudice. On September 13, 2004, in a related matter, PurchasePro
filed an adversary proceeding against the Company in the U.S. Bankruptcy Court for the District of
Nevada alleging fraudulent conveyance and unjust enrichment in connection with PurchasePro warrants
issued to the Company. On December 15, 2004, the Bankruptcy Court granted the Company’s motion to
dismiss the complaint without prejudice. On January 26, 2005, PurchasePro filed an amended
complaint. On March 18, 2005, PurchasePro filed a second amended complaint, and on June 29, 2005,
the Bankruptcy Court denied the Company’s motion to dismiss the second amended complaint. The
Company filed a motion for reconsideration on July 11, 2005. The parties thereafter reached a
settlement. On August 29, 2005, PurchasePro filed a motion to approve the settlement agreement. The
Court held a hearing on that motion on October 5, 2005 and entered a final order approving the
settlement agreement on October 13, 2005.
In addition to the $2.4 billion reserve established in connection with the agreement in
principle regarding the settlement of the MSBI consolidated securities class action, during the
second quarter of 2005, the Company established an additional reserve totaling $600 million in
connection with the remaining related litigation matters described in this section that are pending
against the Company. This $600 million amount continues to represent the Company’s current best
estimate of its potential financial exposure in the remaining related litigation matters, including
the remaining individual shareholder suits, the derivative actions and the actions alleging
violations of ERISA.
During the third quarter of 2005, the Company reached an oral understanding with the carriers
on its directors and officers insurance policies in connection with the securities and derivative
action matters described above and in pages 38-42 of the 2004 Form 10-K (other than the actions
alleging violations of ERISA described on page 39 of the 2004 Form 10-K). At present, this
agreement is anticipated to provide an incremental recovery of approximately $200 million. Because
the understanding and related documentation have not been completed, and in light of the continuing
uncertainty as to what part, if any, of the incremental $200 million will ultimately be received by
the Company, the Company has not given any accounting recognition for this incremental recovery at
September 30, 2005. The understanding and related documentation are expected to be completed in the
fourth quarter of 2005.
Government Investigations
As previously disclosed by the Company, the SEC and the DOJ had been conducting investigations
into the accounting and disclosure practices of the Company. Those investigations focused on
advertising transactions, principally involving the Company’s America Online segment, the methods
used by the America Online segment to report its subscriber numbers and the accounting related to
the Company’s interest in AOL Europe prior to January 2002.
The Company and its subsidiary, AOL, entered into a settlement with the DOJ in December 2004
that provided for a deferred prosecution arrangement for a two-year period. As part of the
settlement with the DOJ, in December 2004, the Company paid a penalty of $60 million and
established a $150 million fund, which the Company could use to settle related securities
litigation. The fund is reflected as restricted cash on the Company’s accompanying consolidated
balance sheet at December 31, 2004 and September 30, 2005. During October 2005, the $150 million
was transferred by the Company into the MSBI Settlement Fund for the members of the class covered
by the MSBI consolidated securities class action described above.
In addition, on March 21, 2005, the Company announced that the SEC has approved the Company’s
proposed settlement, which resolves the SEC’s investigation of the Company. Under the terms of the
settlement with the SEC, the Company agreed, without admitting or denying the SEC’s allegations, to
be enjoined from future violations of certain provisions of the securities laws and to comply with
the cease-and-desist order issued by the SEC to AOL in May 2000. The settlement also required the
Company to:
68
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
| |
• |
|
Pay a $300 million penalty, which will be used for a Fair Fund, as authorized under the
Sarbanes-Oxley Act; |
| |
| |
• |
|
Adjust its historical accounting for Advertising revenues in certain transactions with
Bertelsmann, A.G. that were improperly or prematurely recognized, primarily in the second
half of 2000, during 2001 and during 2002; as well as adjust its historical accounting for
transactions involving three other AOL customers where there were Advertising revenues
recognized in the second half of 2000 and during 2001; |
| |
| |
• |
|
Adjust its historical accounting for its investment in and consolidation of AOL Europe;
and |
| |
| |
• |
|
Agree to the appointment of an independent examiner, who will either be or hire a
certified public accountant. The independent examiner will review whether the Company’s
historical accounting for transactions with 17 counterparties identified by the SEC staff,
principally involving online advertising revenues and including three cable programming
affiliation agreements with related advertising elements, was in conformity with GAAP, and
provide a report to the Company’s audit and finance committee of its conclusions within 180
days of being engaged. The transactions that would be reviewed were entered into between
June 1, 2000 and December 31, 2001, including subsequent amendments thereto, and involved
online advertising and related transactions for which revenue was principally recognized
before January 1, 2002. |
The Company paid the $300 million penalty in March 2005; however, it will not be able to
deduct the penalty for income tax purposes, be reimbursed or indemnified for such payment through
insurance or any other source, or use such payment to setoff or reduce any award of compensatory
damages to plaintiffs in related securities litigation pending against the Company. As described
above, in connection with the pending settlement of the consolidated securities class action, the
Company is using its best efforts to have the $300 million transferred to the settlement fund for
the members of the class represented in the action. The historical accounting adjustments were
reflected in the restatement of the Company’s financial results for each of the years ended
December 31, 2000 through December 31, 2003, which were included in the Company’s 2004 Form 10-K.
The independent examiner has begun its review, which as a result of an extension, is expected
to be completed in the second quarter of 2006. Depending on the independent examiner’s conclusions,
a further restatement might be necessary. It is also possible that, so long as there are unresolved
issues associated with the Company’s financial statements, the effectiveness of any registration
statement of the Company or its affiliates may be delayed.
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 Inc. (“Warner Bros.”) in Brazil and acts as a service provider to the Warner
Bros. home video licensee. All of the ongoing tax litigation involves WBS’ distribution activities
prior to January 2004, when WBS conducted both theatrical and home video distribution. Much of the
tax litigation stems from WBS’ position that in distributing videos to rental retailers, it was
conducting a distribution service, subject to a municipal service tax, and not the
“industrialization” or sale of videos, subject to Brazilian federal and state VAT-like taxes. Both
the federal tax authorities and the State of Sao Paulo, where WBS is based, have challenged this
position. In 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 all of these various tax cases
vigorously, but is unable to predict the outcome of these suits.
As of October 31, 2005, 22 putative consumer class action suits have been filed in various
state and federal courts naming as defendants the Company or America Online. Plaintiffs allege that
America Online violated various consumer protection laws by charging members for services or goods
without authorization, including unauthorized secondary accounts offered in connection with America
Online’s “Spin-Off a Second Account” (“SOSA”) program, and/or by continuing to charge members for
services after receiving requests for cancellation. Motions to dismiss have been denied in O’Leary
v. America Online, Inc., which was filed in the Circuit Court for St. Clair County, Illinois, and
White v. America Online, Inc., which was filed in the Circuit Court for Madison County, Illinois.
Eleven class actions involving SOSA accounts have been transferred by the Judicial Panel on
Multidistrict Litigation to the U.S. District Court for the Central District of California for
consolidated or coordinated pretrial proceedings (In re America Online Spin-Off Accounts
Litigation), and the Company’s motion to dismiss that complaint has been denied. On January 5,
2004, the SOSA case pending in the Superior Court of Washington, Spokane County, titled Dix v. ICT
Group and America Online, was dismissed without prejudice based on the forum selection clause set
forth in the plaintiffs’ Member Agreement with AOL. On
69
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
February 17, 2005, the Washington Court of Appeals reversed the lower court’s dismissal. The
Company’s petition for an appeal to the Washington Supreme Court is pending. On October 12, 2004,
the SOSA case pending in the Court of Common Pleas of Hamilton County, Ohio, titled Robert Schwartz
v. America Online, Inc., was dismissed based on the forum selection clause and that dismissal is
now final. McCall v America Online, Inc., the SOSA case which was pending in the Superior Court of
Cape May County, New Jersey, has been voluntarily dismissed. America Online has filed or will file
motions to dismiss in the remaining cases. On April 7, 2005, the Circuit Court for St. Clair
County, Illinois entered orders that permit an amended filing and consolidation of several cases
and preliminarily approve a proposed nationwide class settlement, over the objection of counsel in
several other cases. Plaintiff in the consolidated action in California subsequently obtained an
injunction from the California district court that purports to bar the parties from seeking final
approval of that settlement. America Online filed an expedited appeal of this decision before the
U.S. Court of Appeals for the Ninth Circuit. America Online has since engaged in mediation with
plaintiffs in both the consolidated California action and the Illinois action, and the parties have
agreed upon certain modifications to the proposed nationwide settlement. The proposed settlement,
in both its original and modified form, is not material to the Company. On October 20, 2005,
plaintiffs’ counsel in the California action filed a motion to dissolve the previously-obtained
injunction.
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 America Online and AOL Community, Inc. The plaintiffs allege that,
in serving as Community Leader volunteers, they were acting as employees rather than volunteers for
purposes of the FLSA and New York state law and are entitled to minimum wages. On December 8, 2000,
defendants filed a motion to dismiss on the ground that the plaintiffs were volunteers and not
employees covered by the FLSA. The motion to dismiss is pending. 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 has been stayed
pending the outcome of the Hallissey motion to dismiss. Three related class actions have been filed
in state courts in New Jersey, California and Ohio, alleging violations of the FLSA and/or the
respective state laws. The New Jersey and Ohio cases were removed to federal court and subsequently
transferred to the U.S. District Court for the Southern District of New York for consolidated
pretrial proceedings with Hallissey. The California action was remanded to California state court,
and on January 6, 2004 the court denied plaintiffs’ motion for class certification. Plaintiffs
appealed the trial court’s denial of their motion for class certification to the California Court
of Appeals. On May 26, 2005, a three-justice panel of the California Court of Appeals unanimously
affirmed the trial court’s order denying class certification. The plaintiffs’ petition for review
in the California Supreme Court was denied. The trial court has set a January 22, 2006 scheduling
conference for the remaining individual claims. The Company intends to defend against these
lawsuits vigorously. The Company is unable to predict the outcome of these suits or reasonably
estimate a range of possible loss.
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, America Online 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, America Online and AOL Community,
Inc. filed a motion to dismiss and the Administrative Committees filed a motion for judgment on the
pleadings. Both of these motions are pending. The Company intends to defend against these lawsuits
vigorously, but is unable to predict the outcome of these suits.
On October 7, 2003, Kim Sevier and Eric M. Payne vs. Time Warner Inc. and Time Warner Cable
Inc., a putative nationwide consumer class action, was filed in the U.S. District Court for the
Southern District of New York, and on October 23, 2003, Heidi D. Knight v. Time Warner Inc. and
Time Warner Cable Inc., also a putative nationwide consumer class action, was filed in the same
court. In each case, the plaintiffs allege that defendants unlawfully tie the provision of
high-speed cable Internet service to leases of cable modem equipment, because they do not provide a
discount to customers who provide their own cable modems, in violation of Section 1 of the Sherman
Act and the New York Donnelly Act, and, further, that defendants’ conduct resulted in unjust
enrichment. This matter has been settled on terms that are not material to the Company. The
district court granted final approval of the settlement on September 17, 2005.
On June 16, 1998, plaintiffs in Andrew Parker and Eric DeBrauwere, et al. v. Time Warner
Entertainment Company, L.P. and Time Warner Cable filed a purported nationwide class action in U.S.
District Court for the Eastern District of New York claiming that TWE sold its subscribers’
personally identifiable information and failed to inform subscribers of their privacy rights in
violation of the Cable Communications Policy Act of 1984 and common law. The plaintiffs are seeking
damages and declaratory and injunctive relief.
70
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
On August 6, 1998, TWE filed a motion to dismiss, which was denied on September 7, 1999. On
December 8, 1999, TWE filed a motion to deny class certification, which was granted on January 9,
2001 with respect to monetary damages, but denied with respect to injunctive relief. On June 2,
2003, the U.S. Court of Appeals for the Second Circuit vacated the District Court’s decision
denying class certification as a matter of law and remanded the case for further proceedings on
class certification and other matters. On May 4, 2004, plaintiffs filed a motion for class
certification, which the Company has opposed. This lawsuit has been settled on terms that are not
material to the Company. The court granted preliminary approval of the class settlement on October
25, 2005.
Time Inc. has received a grand jury subpoena from the United States Attorney’s Office for the
Eastern District of New York in connection with an investigation of certain magazine
circulation-related practices. Time Inc. is responding to the subpoena and intends to cooperate
with the investigation. Time Inc. has also informed its advertisers that it is reviewing and
discussing with the ABC its reporting of sponsored sales subscriptions under ABC rules.
On October 20, 2005, a group of syndicate participants, including BNZ Investments Limited,
filed three related actions in the High Court of New Zealand, Auckland Registry, against New Line
Productions Inc. and New Line Cinema Corporation (collectively “New Line”), wholly owned
subsidiaries of the Company. The complaints allege breach of contract, breach of duties of good
faith and fair dealing, and other common law and statutory claims under California and New Zealand
law. Plaintiffs contend, among other things, they have not received proceeds from certain
financing transactions they entered into with New Line relating to three motion pictures: The Lord
of the Rings: The Fellowship of the Ring; The Lord of the Rings: The Two Towers; and The Lord of
the Rings: The Return of the King. The Company intends to defend against these lawsuits vigorously,
but is unable to predict the outcome of these suits.
In the normal course of business, the Company’s tax returns are subject to examination by
various domestic and foreign taxing authorities. Such examinations may result in future tax and
interest assessments on the Company. In instances where the Company believes that it is probable
that it will be assessed, it has accrued a liability. The Company does not believe that these
liabilities are material, individually or in the aggregate, to its financial condition or
liquidity. Similarly, the Company does not expect the final resolution of tax examinations to have
a material impact on the Company’s financial results.
From time to time, the Company receives notices from third parties claiming that it infringes
their intellectual property rights. Claims of intellectual property infringement could require
Time Warner to enter into royalty or licensing agreements on unfavorable terms, incur substantial
monetary liability or be enjoined preliminarily or permanently from further use of the intellectual
property in question. In addition, certain agreements entered into by the Company may require the
Company to indemnify the other party for certain third-party intellectual property infringement
claims, which could increase the Company’s damages and its costs of defending against such claims.
Even if the claims are without merit, defending against the claims can be time-consuming and
costly.
The costs and other effects of pending or future litigation, governmental investigations,
legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments
and investigations, claims and changes in those matters (including those matters described above),
and developments or assertions by or against the Company relating to intellectual property rights
and intellectual property licenses, could have a material adverse effect on the Company’s business,
financial condition and operating results.
71
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
11. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
Additional financial information with respect to cash payments and receipts is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
Cash payments made for interest |
|
$ |
(1,090 |
) |
|
$ |
(1,143 |
) |
Interest income received |
|
|
174 |
|
|
|
76 |
|
|
|
|
|
|
|
|
Cash interest expense, net |
|
$ |
(916 |
) |
|
$ |
(1,067 |
) |
|
|
|
|
|
|
|
Cash payments made for income taxes |
|
$ |
(423 |
) |
|
$ |
(372 |
) |
Income tax refunds received |
|
|
62 |
|
|
|
92 |
|
|
|
|
|
|
|
|
Cash taxes, net |
|
$ |
(361 |
) |
|
$ |
(280 |
) |
|
|
|
|
|
|
|
Interest Expense, Net
Interest expense, net, consists of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
|
(millions) |
|
Interest income |
|
$ |
106 |
|
|
$ |
59 |
|
|
$ |
269 |
|
|
$ |
153 |
|
Interest expense |
|
|
(388 |
) |
|
|
(431 |
) |
|
|
(1,221 |
) |
|
|
(1,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense, net |
|
$ |
(282 |
) |
|
$ |
(372 |
) |
|
$ |
(952 |
) |
|
$ |
(1,159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income, Net
Other income, net, consists of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
|
(millions) |
|
Investment gains, net |
|
$ |
10 |
|
|
$ |
296 |
|
|
$ |
1,015 |
|
|
$ |
342 |
|
Net gain on WMG option |
|
|
— |
|
|
|
— |
|
|
|
53 |
|
|
|
— |
|
Income (loss) on equity method investees |
|
|
(7 |
) |
|
|
1 |
|
|
|
40 |
|
|
|
33 |
|
Losses on accounts receivable securitization programs |
|
|
(10 |
) |
|
|
(6 |
) |
|
|
(26 |
) |
|
|
(15 |
) |
Miscellaneous |
|
|
16 |
|
|
|
13 |
|
|
|
27 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
$ |
9 |
|
|
$ |
304 |
|
|
$ |
1,109 |
|
|
$ |
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Other Current Liabilities
Other current liabilities consist of:
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(millions) |
|
Accrued expenses (a) |
|
$ |
6,981 |
|
|
$ |
5,050 |
|
Accrued compensation |
|
|
1,132 |
|
|
|
1,261 |
|
Accrued income taxes |
|
|
123 |
|
|
|
157 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
8,236 |
|
|
$ |
6,468 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
At September 30, 2005, includes $3.150 billion in legal reserves related to
securities litigation and the DOJ settlement. At December 31, 2004, amount includes $450
million in legal reserves related to the DOJ settlement and SEC investigation. |
73
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
America Online, Inc. (“America Online”), Historic TW Inc. (“Historic TW”), Time Warner
Companies, Inc. (“TW Companies”) and Turner Broadcasting System, Inc. (“TBS” and, together with
America Online, Historic TW and TW Companies, the “Guarantor Subsidiaries”) are wholly-owned
subsidiaries of Time Warner Inc. (“Time Warner”). Time Warner, America Online, Historic TW, TW
Companies and TBS have fully and unconditionally, jointly and severally, and directly or
indirectly, guaranteed all of the outstanding publicly traded indebtedness of each other. Set forth
below are condensed consolidating financial statements of Time Warner, including each of the
Guarantor Subsidiaries, presented for the information of each company’s public debtholders. The
following condensed consolidating financial statements present the results of operations, financial
position and cash flows of (i) America Online, Historic TW, TW Companies and TBS (in each case,
reflecting investments in its consolidated subsidiaries under the equity method of accounting),
(ii) the direct and indirect non-guarantor subsidiaries of Time Warner and (iii) the eliminations
necessary to arrive at the information for Time Warner on a consolidated basis. There are no
restrictions on Time Warner’s ability to obtain funds from any of its wholly-owned subsidiaries
through dividends, loans or advances. During the second quarter of 2005, Time Warner transferred
goodwill reported as part of the Time Warner Corporate legal entity to the respective divisional
legal entities to conform to its segment reporting. The result of this transfer was to reduce
goodwill at Time Warner by approximately $1.8 billion, with a corresponding increase in goodwill at
Non-Guarantor Subsidiaries. These condensed consolidating financial statements should be read in
conjunction with the accompanying consolidated financial statements of Time Warner.
Consolidating Statement of Operations
For The Three Months Ended September 30, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
America |
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
Online |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
Revenues |
|
$ |
— |
|
|
$ |
1,345 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
269 |
|
|
$ |
8,994 |
|
|
$ |
(70 |
) |
|
$ |
10,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(633 |
) |
|
|
— |
|
|
|
— |
|
|
|
(136 |
) |
|
|
(5,353 |
) |
|
|
68 |
|
|
|
(6,054 |
) |
Selling, general and
administrative |
|
|
(13 |
) |
|
|
(486 |
) |
|
|
(13 |
) |
|
|
(5 |
) |
|
|
(45 |
) |
|
|
(2,005 |
) |
|
|
3 |
|
|
|
(2,564 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(137 |
) |
|
|
— |
|
|
|
(144 |
) |
Merger-related and restructuring
costs |
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(13 |
) |
|
|
217 |
|
|
|
(13 |
) |
|
|
(5 |
) |
|
|
88 |
|
|
|
1,496 |
|
|
|
1 |
|
|
|
1,771 |
|
Equity in pretax income (loss)
of consolidated subsidiaries |
|
|
1,519 |
|
|
|
57 |
|
|
|
1,265 |
|
|
|
1,148 |
|
|
|
283 |
|
|
|
— |
|
|
|
(4,272 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(93 |
) |
|
|
— |
|
|
|
(22 |
) |
|
|
(199 |
) |
|
|
(23 |
) |
|
|
56 |
|
|
|
(1 |
) |
|
|
(282 |
) |
Other income (expense), net |
|
|
14 |
|
|
|
15 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
39 |
|
|
|
51 |
|
|
|
(110 |
) |
|
|
9 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(71 |
) |
|
|
— |
|
|
|
(71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,427 |
|
|
|
289 |
|
|
|
1,229 |
|
|
|
945 |
|
|
|
387 |
|
|
|
1,532 |
|
|
|
(4,382 |
) |
|
|
1,427 |
|
Income tax benefit (provision) |
|
|
(530 |
) |
|
|
(85 |
) |
|
|
(229 |
) |
|
|
(133 |
) |
|
|
(133 |
) |
|
|
(344 |
) |
|
|
924 |
|
|
|
(530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
897 |
|
|
$ |
204 |
|
|
$ |
1,000 |
|
|
$ |
812 |
|
|
$ |
254 |
|
|
$ |
1,188 |
|
|
$ |
(3,458 |
) |
|
$ |
897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Statement of Operations
For The Three Months Ended September 30, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
America |
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
Online |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
Revenues |
|
$ |
— |
|
|
$ |
1,507 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
255 |
|
|
$ |
8,212 |
|
|
$ |
(39 |
) |
|
$ |
9,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(777 |
) |
|
|
— |
|
|
|
— |
|
|
|
(139 |
) |
|
|
(4,775 |
) |
|
|
45 |
|
|
|
(5,646 |
) |
Selling, general and
administrative |
|
|
(12 |
) |
|
|
(516 |
) |
|
|
(12 |
) |
|
|
(5 |
) |
|
|
(32 |
) |
|
|
(1,963 |
) |
|
|
2 |
|
|
|
(2,538 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(144 |
) |
|
|
— |
|
|
|
(156 |
) |
Legal reserves related to
government investigations |
|
|
(500 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(500 |
) |
Gains on
disposal of assets, net |
|
|
— |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(512 |
) |
|
|
215 |
|
|
|
(12 |
) |
|
|
(5 |
) |
|
|
84 |
|
|
|
1,330 |
|
|
|
8 |
|
|
|
1,108 |
|
Equity in pretax income (loss)
of consolidated subsidiaries |
|
|
1,635 |
|
|
|
14 |
|
|
|
1,258 |
|
|
|
1,054 |
|
|
|
324 |
|
|
|
— |
|
|
|
(4,285 |
) |
|
|
— |
|
Interest expense, net |
|
|
(151 |
) |
|
|
(1 |
) |
|
|
(22 |
) |
|
|
(143 |
) |
|
|
(14 |
) |
|
|
(36 |
) |
|
|
(5 |
) |
|
|
(372 |
) |
Other income (expense), net |
|
|
14 |
|
|
|
172 |
|
|
|
1 |
|
|
|
— |
|
|
|
36 |
|
|
|
196 |
|
|
|
(115 |
) |
|
|
304 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(54 |
) |
|
|
— |
|
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes and discontinued
operations |
|
|
986 |
|
|
|
400 |
|
|
|
1,225 |
|
|
|
906 |
|
|
|
430 |
|
|
|
1,436 |
|
|
|
(4,397 |
) |
|
|
986 |
|
Income tax benefit (provision) |
|
|
(492 |
) |
|
|
(176 |
) |
|
|
(565 |
) |
|
|
(468 |
) |
|
|
(135 |
) |
|
|
(650 |
) |
|
|
1,994 |
|
|
|
(492 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
discontinued operations |
|
|
494 |
|
|
|
224 |
|
|
|
660 |
|
|
|
438 |
|
|
|
295 |
|
|
|
786 |
|
|
|
(2,403 |
) |
|
|
494 |
|
Discontinued operations, net of
tax |
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
|
|
(15 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
499 |
|
|
$ |
224 |
|
|
$ |
665 |
|
|
$ |
443 |
|
|
$ |
295 |
|
|
$ |
791 |
|
|
$ |
(2,418 |
) |
|
$ |
499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Statement of Operations
For The Nine Months Ended September 30, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
America |
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
Online |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
Revenues |
|
$ |
— |
|
|
$ |
4,158 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
820 |
|
|
$ |
26,921 |
|
|
$ |
(134 |
) |
|
$ |
31,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(1,937 |
) |
|
|
— |
|
|
|
— |
|
|
|
(388 |
) |
|
|
(16,102 |
) |
|
|
124 |
|
|
|
(18,303 |
) |
Selling, general and
administrative |
|
|
(35 |
) |
|
|
(1,432 |
) |
|
|
(35 |
) |
|
|
(15 |
) |
|
|
(138 |
) |
|
|
(6,023 |
) |
|
|
15 |
|
|
|
(7,663 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
(23 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(423 |
) |
|
|
— |
|
|
|
(446 |
) |
Legal reserves related to
securities litigation |
|
|
(3,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,000 |
) |
Merger-related and restructuring
costs |
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(36 |
) |
|
|
— |
|
|
|
(28 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
|
|
— |
|
|
|
(24 |
) |
Gains on disposal of
assets, net |
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
9 |
|
|
|
— |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(3,035 |
) |
|
|
782 |
|
|
|
(35 |
) |
|
|
(15 |
) |
|
|
295 |
|
|
|
4,322 |
|
|
|
5 |
|
|
|
2,319 |
|
Equity in pretax income (loss)
of consolidated subsidiaries |
|
|
5,605 |
|
|
|
129 |
|
|
|
3,793 |
|
|
|
3,376 |
|
|
|
887 |
|
|
|
— |
|
|
|
(13,790 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(336 |
) |
|
|
(8 |
) |
|
|
(66 |
) |
|
|
(561 |
) |
|
|
(62 |
) |
|
|
81 |
|
|
|
— |
|
|
|
(952 |
) |
Other income (expense), net |
|
|
40 |
|
|
|
957 |
|
|
|
51 |
|
|
|
1 |
|
|
|
113 |
|
|
|
294 |
|
|
|
(347 |
) |
|
|
1,109 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(202 |
) |
|
|
— |
|
|
|
(202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,274 |
|
|
|
1,860 |
|
|
|
3,743 |
|
|
|
2,801 |
|
|
|
1,233 |
|
|
|
4,495 |
|
|
|
(14,132 |
) |
|
|
2,274 |
|
Income tax benefit (provision) |
|
|
(735 |
) |
|
|
(661 |
) |
|
|
(1,130 |
) |
|
|
(776 |
) |
|
|
(464 |
) |
|
|
(1,421 |
) |
|
|
4,452 |
|
|
|
(735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,539 |
|
|
$ |
1,199 |
|
|
$ |
2,613 |
|
|
$ |
2,025 |
|
|
$ |
769 |
|
|
$ |
3,074 |
|
|
$ |
(9,680 |
) |
|
$ |
1,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Statement of Operations
For The Nine Months Ended September 30, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
America |
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
Online |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
Revenues |
|
$ |
— |
|
|
$ |
4,622 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
753 |
|
|
$ |
25,738 |
|
|
$ |
(133 |
) |
|
$ |
30,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(2,391 |
) |
|
|
— |
|
|
|
— |
|
|
|
(374 |
) |
|
|
(15,322 |
) |
|
|
128 |
|
|
|
(17,959 |
) |
Selling, general and administrative |
|
|
(42 |
) |
|
|
(1,538 |
) |
|
|
(42 |
) |
|
|
(19 |
) |
|
|
(118 |
) |
|
|
(5,744 |
) |
|
|
5 |
|
|
|
(7,498 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
(29 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(438 |
) |
|
|
— |
|
|
|
(467 |
) |
Legal reserves
related to government
investigations |
|
|
(500 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(500 |
) |
Merger-related and restructuring costs |
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
Asset impairments |
|
|
— |
|
|
|
(10 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
Gains (losses) on disposal of assets, net |
|
|
— |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
8 |
|
|
|
— |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(542 |
) |
|
|
669 |
|
|
|
(42 |
) |
|
|
(19 |
) |
|
|
254 |
|
|
|
4,242 |
|
|
|
— |
|
|
|
4,562 |
|
Equity in pretax income (loss) of
consolidated subsidiaries |
|
|
4,583 |
|
|
|
50 |
|
|
|
3,772 |
|
|
|
3,092 |
|
|
|
1,048 |
|
|
|
— |
|
|
|
(12,545 |
) |
|
|
— |
|
Interest expense, net |
|
|
(470 |
) |
|
|
(35 |
) |
|
|
(68 |
) |
|
|
(406 |
) |
|
|
(43 |
) |
|
|
(137 |
) |
|
|
— |
|
|
|
(1,159 |
) |
Other income (expense), net |
|
|
28 |
|
|
|
232 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
103 |
|
|
|
361 |
|
|
|
(353 |
) |
|
|
368 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(172 |
) |
|
|
— |
|
|
|
(172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes,
discontinued operations and cumulative
effect of accounting change |
|
|
3,599 |
|
|
|
916 |
|
|
|
3,660 |
|
|
|
2,666 |
|
|
|
1,362 |
|
|
|
4,294 |
|
|
|
(12,898 |
) |
|
|
3,599 |
|
Income tax benefit (provision) |
|
|
(1,511 |
) |
|
|
(390 |
) |
|
|
(1,499 |
) |
|
|
(1,145 |
) |
|
|
(490 |
) |
|
|
(1,745 |
) |
|
|
5,269 |
|
|
|
(1,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before discontinued
operations and cumulative effect of
accounting change |
|
|
2,088 |
|
|
|
526 |
|
|
|
2,161 |
|
|
|
1,521 |
|
|
|
872 |
|
|
|
2,549 |
|
|
|
(7,629 |
) |
|
|
2,088 |
|
Discontinued operations, net of tax |
|
|
115 |
|
|
|
— |
|
|
|
115 |
|
|
|
115 |
|
|
|
— |
|
|
|
115 |
|
|
|
(345 |
) |
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of
accounting change |
|
|
2,203 |
|
|
|
526 |
|
|
|
2,276 |
|
|
|
1,636 |
|
|
|
872 |
|
|
|
2,664 |
|
|
|
(7,974 |
) |
|
|
2,203 |
|
Cumulative effect of change, net of tax |
|
|
34 |
|
|
|
34 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
34 |
|
|
|
(68 |
) |
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,237 |
|
|
$ |
560 |
|
|
$ |
2,276 |
|
|
$ |
1,636 |
|
|
$ |
872 |
|
|
$ |
2,698 |
|
|
$ |
(8,042 |
) |
|
$ |
2,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Balance Sheet
September 30, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
America |
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
Online |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
7,460 |
|
|
$ |
4 |
|
|
$ |
(3 |
) |
|
$ |
61 |
|
|
$ |
19 |
|
|
$ |
418 |
|
|
$ |
— |
|
|
$ |
7,959 |
|
Restricted cash |
|
|
— |
|
|
|
150 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
150 |
|
Receivables, net |
|
|
26 |
|
|
|
217 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,017 |
|
|
|
— |
|
|
|
5,260 |
|
Inventories |
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
1,713 |
|
|
|
— |
|
|
|
1,720 |
|
Prepaid expenses and other
current assets |
|
|
150 |
|
|
|
85 |
|
|
|
19 |
|
|
|
— |
|
|
|
13 |
|
|
|
841 |
|
|
|
— |
|
|
|
1,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
7,636 |
|
|
|
459 |
|
|
|
16 |
|
|
|
61 |
|
|
|
36 |
|
|
|
7,989 |
|
|
|
— |
|
|
|
16,197 |
|
Noncurrent inventories and
film costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,973 |
|
|
|
— |
|
|
|
4,973 |
|
Investments in and amounts due
to and from consolidated
subsidiaries |
|
|
82,091 |
|
|
|
1,203 |
|
|
|
78,103 |
|
|
|
65,617 |
|
|
|
17,605 |
|
|
|
— |
|
|
|
(244,619 |
) |
|
|
— |
|
Investments, including
available-for-sale
securities |
|
|
28 |
|
|
|
152 |
|
|
|
284 |
|
|
|
— |
|
|
|
402 |
|
|
|
4,308 |
|
|
|
(1,636 |
) |
|
|
3,538 |
|
Property, plant and
equipment, net |
|
|
522 |
|
|
|
949 |
|
|
|
— |
|
|
|
— |
|
|
|
144 |
|
|
|
11,730 |
|
|
|
— |
|
|
|
13,345 |
|
Intangible assets subject to
amortization, net |
|
|
— |
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,558 |
|
|
|
— |
|
|
|
3,576 |
|
Intangible assets not
subject to amortization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
641 |
|
|
|
39,060 |
|
|
|
— |
|
|
|
39,701 |
|
Goodwill |
|
|
— |
|
|
|
1,477 |
|
|
|
— |
|
|
|
— |
|
|
|
2,626 |
|
|
|
36,165 |
|
|
|
— |
|
|
|
40,268 |
|
Other assets |
|
|
1,082 |
|
|
|
241 |
|
|
|
602 |
|
|
|
— |
|
|
|
22 |
|
|
|
2,047 |
|
|
|
(990 |
) |
|
|
3,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
91,359 |
|
|
$ |
4,499 |
|
|
$ |
79,005 |
|
|
$ |
65,678 |
|
|
$ |
21,476 |
|
|
$ |
109,830 |
|
|
$ |
(247,245 |
) |
|
$ |
124,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6 |
|
|
$ |
73 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
40 |
|
|
$ |
1,154 |
|
|
$ |
— |
|
|
$ |
1,273 |
|
Participations payable |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,078 |
|
|
|
— |
|
|
|
2,078 |
|
Royalties and programming
costs payable |
|
|
— |
|
|
|
14 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,134 |
|
|
|
— |
|
|
|
1,148 |
|
Deferred revenue |
|
|
— |
|
|
|
322 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,237 |
|
|
|
— |
|
|
|
1,559 |
|
Debt due within one year |
|
|
1,000 |
|
|
|
76 |
|
|
|
— |
|
|
|
551 |
|
|
|
— |
|
|
|
19 |
|
|
|
— |
|
|
|
1,646 |
|
Other current liabilities |
|
|
3,685 |
|
|
|
857 |
|
|
|
94 |
|
|
|
80 |
|
|
|
32 |
|
|
|
3,643 |
|
|
|
(155 |
) |
|
|
8,236 |
|
Current liabilities of
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
43 |
|
|
|
— |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
4,691 |
|
|
|
1,342 |
|
|
|
94 |
|
|
|
631 |
|
|
|
72 |
|
|
|
9,308 |
|
|
|
(155 |
) |
|
|
15,983 |
|
Long-term debt |
|
|
8,961 |
|
|
|
123 |
|
|
|
1,488 |
|
|
|
4,186 |
|
|
|
318 |
|
|
|
4,653 |
|
|
|
(990 |
) |
|
|
18,739 |
|
Debt due (from) to affiliates |
|
|
(990 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,647 |
|
|
|
990 |
|
|
|
(1,647 |
) |
|
|
— |
|
Deferred income taxes |
|
|
14,604 |
|
|
|
(39 |
) |
|
|
14,643 |
|
|
|
13,158 |
|
|
|
1,565 |
|
|
|
14,723 |
|
|
|
(44,050 |
) |
|
|
14,604 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
706 |
|
|
|
— |
|
|
|
706 |
|
Other liabilities |
|
|
707 |
|
|
|
54 |
|
|
|
1,146 |
|
|
|
311 |
|
|
|
259 |
|
|
|
4,265 |
|
|
|
(1,254 |
) |
|
|
5,488 |
|
Noncurrent liabilities of
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
7 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,027 |
|
|
|
(1,338 |
) |
|
|
5,689 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due (to) from Time Warner
and subsidiaries |
|
|
— |
|
|
|
(2,138 |
) |
|
|
(3,414 |
) |
|
|
(5,216 |
) |
|
|
(4,754 |
) |
|
|
(15,055 |
) |
|
|
30,577 |
|
|
|
— |
|
Other shareholders’ equity |
|
|
63,386 |
|
|
|
5,157 |
|
|
|
65,048 |
|
|
|
52,608 |
|
|
|
22,369 |
|
|
|
83,206 |
|
|
|
(228,388 |
) |
|
|
63,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
63,386 |
|
|
|
3,019 |
|
|
|
61,634 |
|
|
|
47,392 |
|
|
|
17,615 |
|
|
|
68,151 |
|
|
|
(197,811 |
) |
|
|
63,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders’ equity |
|
$ |
91,359 |
|
|
$ |
4,499 |
|
|
$ |
79,005 |
|
|
$ |
65,678 |
|
|
$ |
21,476 |
|
|
$ |
109,830 |
|
|
$ |
(247,245 |
) |
|
$ |
124,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Balance Sheet
December 31, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
America |
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
Online |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
5,568 |
|
|
$ |
12 |
|
|
$ |
(1 |
) |
|
$ |
84 |
|
|
$ |
(15 |
) |
|
$ |
491 |
|
|
$ |
— |
|
|
$ |
6,139 |
|
Restricted cash |
|
|
— |
|
|
|
150 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
150 |
|
Receivables, net |
|
|
30 |
|
|
|
201 |
|
|
|
— |
|
|
|
(2 |
) |
|
|
(7 |
) |
|
|
5,290 |
|
|
|
— |
|
|
|
5,512 |
|
Inventories |
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
1,729 |
|
|
|
— |
|
|
|
1,737 |
|
Prepaid expenses and other
current assets |
|
|
50 |
|
|
|
113 |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
753 |
|
|
|
— |
|
|
|
920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
5,648 |
|
|
|
479 |
|
|
|
(1 |
) |
|
|
82 |
|
|
|
(13 |
) |
|
|
8,263 |
|
|
|
— |
|
|
|
14,458 |
|
Noncurrent inventories and film
costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,415 |
|
|
|
— |
|
|
|
4,415 |
|
Investments in and amounts due to and
from consolidated subsidiaries |
|
|
79,253 |
|
|
|
860 |
|
|
|
84,668 |
|
|
|
72,077 |
|
|
|
17,646 |
|
|
|
— |
|
|
|
(254,504 |
) |
|
|
— |
|
Investments, including
available-for-sale securities |
|
|
19 |
|
|
|
1,175 |
|
|
|
381 |
|
|
|
— |
|
|
|
397 |
|
|
|
4,149 |
|
|
|
(1,418 |
) |
|
|
4,703 |
|
Property, plant and equipment, net |
|
|
538 |
|
|
|
1,085 |
|
|
|
— |
|
|
|
— |
|
|
|
107 |
|
|
|
11,364 |
|
|
|
— |
|
|
|
13,094 |
|
Intangible assets subject to
amortization, net |
|
|
— |
|
|
|
38 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,854 |
|
|
|
— |
|
|
|
3,892 |
|
Intangible assets not subject to
amortization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
641 |
|
|
|
39,015 |
|
|
|
— |
|
|
|
39,656 |
|
Goodwill |
|
|
1,795 |
|
|
|
1,477 |
|
|
|
— |
|
|
|
— |
|
|
|
2,795 |
|
|
|
33,600 |
|
|
|
— |
|
|
|
39,667 |
|
Other assets |
|
|
1,165 |
|
|
|
331 |
|
|
|
653 |
|
|
|
— |
|
|
|
23 |
|
|
|
2,156 |
|
|
|
(1,055 |
) |
|
|
3,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
88,418 |
|
|
$ |
5,445 |
|
|
$ |
85,701 |
|
|
$ |
72,159 |
|
|
$ |
21,596 |
|
|
$ |
106,816 |
|
|
$ |
(256,977 |
) |
|
$ |
123,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
8 |
|
|
$ |
96 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
1,233 |
|
|
$ |
— |
|
|
$ |
1,339 |
|
Participations payable |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,580 |
|
|
|
— |
|
|
|
2,580 |
|
Royalties and programming costs
payable |
|
|
— |
|
|
|
21 |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
995 |
|
|
|
— |
|
|
|
1,018 |
|
Deferred revenue |
|
|
— |
|
|
|
371 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,282 |
|
|
|
— |
|
|
|
1,653 |
|
Debt due within one year |
|
|
1,000 |
|
|
|
112 |
|
|
|
— |
|
|
|
502 |
|
|
|
2 |
|
|
|
56 |
|
|
|
— |
|
|
|
1,672 |
|
Other current liabilities |
|
|
909 |
|
|
|
897 |
|
|
|
17 |
|
|
|
184 |
|
|
|
129 |
|
|
|
4,341 |
|
|
|
(9 |
) |
|
|
6,468 |
|
Current liabilities of
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
50 |
|
|
|
— |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,917 |
|
|
|
1,497 |
|
|
|
17 |
|
|
|
686 |
|
|
|
135 |
|
|
|
10,537 |
|
|
|
(9 |
) |
|
|
14,780 |
|
Long-term debt |
|
|
10,024 |
|
|
|
154 |
|
|
|
1,483 |
|
|
|
4,752 |
|
|
|
320 |
|
|
|
5,026 |
|
|
|
(1,056 |
) |
|
|
20,703 |
|
Debt due (from) to affiliates |
|
|
(1,056 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,647 |
|
|
|
1,056 |
|
|
|
(1,647 |
) |
|
|
— |
|
Deferred income taxes |
|
|
14,943 |
|
|
|
(175 |
) |
|
|
15,118 |
|
|
|
13,349 |
|
|
|
1,849 |
|
|
|
15,198 |
|
|
|
(45,339 |
) |
|
|
14,943 |
|
Deferred revenue |
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
747 |
|
|
|
— |
|
|
|
749 |
|
Mandatorily convertible preferred
stock |
|
|
1,500 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,500 |
|
Other liabilities |
|
|
319 |
|
|
|
65 |
|
|
|
689 |
|
|
|
— |
|
|
|
13 |
|
|
|
3,074 |
|
|
|
— |
|
|
|
4,160 |
|
Noncurrent liabilities of
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
20 |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
— |
|
|
|
38 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,981 |
|
|
|
(1,467 |
) |
|
|
5,514 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due (to) from Time Warner and
subsidiaries |
|
|
— |
|
|
|
(454 |
) |
|
|
(1,544 |
) |
|
|
(4,700 |
) |
|
|
(3,963 |
) |
|
|
(23,018 |
) |
|
|
33,679 |
|
|
|
— |
|
Other shareholders’ equity |
|
|
60,771 |
|
|
|
4,356 |
|
|
|
69,918 |
|
|
|
58,072 |
|
|
|
21,595 |
|
|
|
87,197 |
|
|
|
(241,138 |
) |
|
|
60,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
60,771 |
|
|
|
3,902 |
|
|
|
68,374 |
|
|
|
53,372 |
|
|
|
17,632 |
|
|
|
64,179 |
|
|
|
(207,459 |
) |
|
|
60,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders’ equity |
|
$ |
88,418 |
|
|
$ |
5,445 |
|
|
$ |
85,701 |
|
|
$ |
72,159 |
|
|
$ |
21,596 |
|
|
$ |
106,816 |
|
|
$ |
(256,977 |
) |
|
$ |
123,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Statement of Cash Flows
For The Nine Months Ended September 30, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
America |
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
Online |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,539 |
|
|
$ |
1,199 |
|
|
$ |
2,613 |
|
|
$ |
2,025 |
|
|
$ |
769 |
|
|
$ |
3,074 |
|
|
$ |
(9,680 |
) |
|
$ |
1,539 |
|
Adjustments for noncash and nonoperating
items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
32 |
|
|
|
384 |
|
|
|
— |
|
|
|
— |
|
|
|
27 |
|
|
|
1,998 |
|
|
|
— |
|
|
|
2,441 |
|
Amortization of film costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,060 |
|
|
|
— |
|
|
|
2,060 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24 |
|
|
|
— |
|
|
|
24 |
|
(Gain) loss on investments and other assets, net |
|
|
— |
|
|
|
(946 |
) |
|
|
(53 |
) |
|
|
— |
|
|
|
13 |
|
|
|
(95 |
) |
|
|
— |
|
|
|
(1,081 |
) |
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries |
|
|
(5,604 |
) |
|
|
(129 |
) |
|
|
(3,793 |
) |
|
|
(3,377 |
) |
|
|
(887 |
) |
|
|
— |
|
|
|
13,790 |
|
|
|
— |
|
Equity in (income) losses of investee companies, net
of cash distributions |
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
(23 |
) |
|
|
— |
|
|
|
(23 |
) |
Legal reserves related to securities
litigation |
|
|
3,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,000 |
|
Changes in operating assets and liabilities,
net of acquisitions |
|
|
4,514 |
|
|
|
705 |
|
|
|
2,983 |
|
|
|
2,345 |
|
|
|
1,039 |
|
|
|
(1,398 |
) |
|
|
(12,543 |
) |
|
|
(2,355 |
) |
Adjustments relating to discontinued
operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by operations |
|
|
3,481 |
|
|
|
1,211 |
|
|
|
1,750 |
|
|
|
993 |
|
|
|
963 |
|
|
|
5,632 |
|
|
|
(8,433 |
) |
|
|
5,597 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and acquisitions, net of cash
acquired |
|
|
— |
|
|
|
(70 |
) |
|
|
(20 |
) |
|
|
— |
|
|
|
(65 |
) |
|
|
(336 |
) |
|
|
— |
|
|
|
(491 |
) |
Advances to parents and consolidated
subsidiaries |
|
|
(65 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
|
|
69 |
|
|
|
— |
|
Capital expenditures and product development
costs |
|
|
(21 |
) |
|
|
(244 |
) |
|
|
— |
|
|
|
— |
|
|
|
(72 |
) |
|
|
(1,922 |
) |
|
|
— |
|
|
|
(2,259 |
) |
Investment proceeds from
available-for-sale-securities |
|
|
— |
|
|
|
965 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
|
— |
|
|
|
991 |
|
Other investment proceeds |
|
|
— |
|
|
|
41 |
|
|
|
138 |
|
|
|
— |
|
|
|
— |
|
|
|
235 |
|
|
|
— |
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities |
|
|
(86 |
) |
|
|
692 |
|
|
|
118 |
|
|
|
(4 |
) |
|
|
(137 |
) |
|
|
(1,997 |
) |
|
|
69 |
|
|
|
(1,345 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,142 |
|
|
|
— |
|
|
|
1,142 |
|
Debt repayments |
|
|
(1,000 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
(500 |
) |
|
|
— |
|
|
|
(1,542 |
) |
|
|
— |
|
|
|
(3,043 |
) |
Change due to/from parent |
|
|
(66 |
) |
|
|
(1,821 |
) |
|
|
(1,870 |
) |
|
|
(512 |
) |
|
|
(790 |
) |
|
|
(3,305 |
) |
|
|
8,364 |
|
|
|
— |
|
Proceeds from exercise of stock options |
|
|
275 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
275 |
|
Principal payments on capital leases |
|
|
— |
|
|
|
(89 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
— |
|
|
|
(94 |
) |
Repurchases of common stock |
|
|
(485 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(485 |
) |
Dividends paid |
|
|
(235 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(235 |
) |
Other |
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities |
|
|
(1,503 |
) |
|
|
(1,911 |
) |
|
|
(1,870 |
) |
|
|
(1,012 |
) |
|
|
(792 |
) |
|
|
(3,708 |
) |
|
|
8,364 |
|
|
|
(2,432 |
) |
INCREASE (DECREASE) IN CASH AND EQUIVALENTS |
|
|
1,892 |
|
|
|
(8 |
) |
|
|
(2 |
) |
|
|
(23 |
) |
|
|
34 |
|
|
|
(73 |
) |
|
|
— |
|
|
|
1,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
5,568 |
|
|
|
12 |
|
|
|
(1 |
) |
|
|
84 |
|
|
|
(15 |
) |
|
|
491 |
|
|
|
— |
|
|
|
6,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
7,460 |
|
|
$ |
4 |
|
|
$ |
(3 |
) |
|
$ |
61 |
|
|
$ |
19 |
|
|
$ |
418 |
|
|
$ |
— |
|
|
$ |
7,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Statement of Cash Flows
For The Nine Months Ended September 30, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
America |
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
Online |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,237 |
|
|
$ |
560 |
|
|
$ |
2,276 |
|
|
$ |
1,636 |
|
|
$ |
872 |
|
|
$ |
2,698 |
|
|
$ |
(8,042 |
) |
|
$ |
2,237 |
|
Adjustments for noncash and
nonoperating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting
change, net of tax |
|
|
(34 |
) |
|
|
(34 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(34 |
) |
|
|
68 |
|
|
|
(34 |
) |
Depreciation and amortization |
|
|
32 |
|
|
|
458 |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
1,877 |
|
|
|
— |
|
|
|
2,385 |
|
Amortization of film costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,209 |
|
|
|
— |
|
|
|
2,209 |
|
Asset impairments |
|
|
— |
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
Gain (loss) on investments and other
assets, net |
|
|
— |
|
|
|
(243 |
) |
|
|
— |
|
|
|
— |
|
|
|
(105 |
) |
|
|
(16 |
) |
|
|
— |
|
|
|
(364 |
) |
Excess (deficiency) of distributions
over equity in pretax income of
consolidated subsidiaries |
|
|
(4,582 |
) |
|
|
(50 |
) |
|
|
(3,772 |
) |
|
|
(3,092 |
) |
|
|
(1,048 |
) |
|
|
— |
|
|
|
12,544 |
|
|
|
— |
|
Equity in (income) losses of
investee companies, net of cash distributions |
|
|
— |
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
|
|
15 |
|
|
|
— |
|
|
|
3 |
|
Legal reserves related to government
investigations |
|
|
500 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
500 |
|
Changes in operating assets and
liabilities, net of acquisitions |
|
|
6,156 |
|
|
|
341 |
|
|
|
6,837 |
|
|
|
6,161 |
|
|
|
1,182 |
|
|
|
1,049 |
|
|
|
(23,299 |
) |
|
|
(1,573 |
) |
Adjustments relating to discontinued
operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
|
— |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by operations |
|
|
4,309 |
|
|
|
1,036 |
|
|
|
5,341 |
|
|
|
4,705 |
|
|
|
913 |
|
|
|
7,813 |
|
|
|
(18,729 |
) |
|
|
5,388 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and acquisitions, net of
cash acquired |
|
|
— |
|
|
|
(490 |
) |
|
|
— |
|
|
|
— |
|
|
|
(53 |
) |
|
|
(216 |
) |
|
|
— |
|
|
|
(759 |
) |
Advances to parents and consolidated
subsidiaries |
|
|
(50 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(42 |
) |
|
|
— |
|
|
|
96 |
|
|
|
— |
|
Capital expenditures and product
development costs |
|
|
(115 |
) |
|
|
(244 |
) |
|
|
— |
|
|
|
— |
|
|
|
(75 |
) |
|
|
(1,587 |
) |
|
|
— |
|
|
|
(2,021 |
) |
Investment proceeds from
available-for-sale-securities |
|
|
— |
|
|
|
239 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
239 |
|
Other investment proceeds |
|
|
— |
|
|
|
63 |
|
|
|
— |
|
|
|
— |
|
|
|
146 |
|
|
|
2,596 |
|
|
|
— |
|
|
|
2,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by investing
activities |
|
|
(165 |
) |
|
|
(432 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(24 |
) |
|
|
793 |
|
|
|
96 |
|
|
|
264 |
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,273 |
|
|
|
— |
|
|
|
1,273 |
|
Debt repayments |
|
|
— |
|
|
|
(138 |
) |
|
|
— |
|
|
|
(302 |
) |
|
|
(450 |
) |
|
|
(2,332 |
) |
|
|
— |
|
|
|
(3,222 |
) |
Change due to/from parent |
|
|
8 |
|
|
|
(271 |
) |
|
|
(5,339 |
) |
|
|
(4,433 |
) |
|
|
(496 |
) |
|
|
(8,102 |
) |
|
|
18,633 |
|
|
|
— |
|
Proceeds from exercise of stock options |
|
|
272 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
272 |
|
Principal payments on capital leases |
|
|
— |
|
|
|
(140 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
(148 |
) |
Other |
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing
activities |
|
|
295 |
|
|
|
(549 |
) |
|
|
(5,339 |
) |
|
|
(4,735 |
) |
|
|
(946 |
) |
|
|
(9,169 |
) |
|
|
18,633 |
|
|
|
(1,810 |
) |
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS |
|
|
4,439 |
|
|
|
55 |
|
|
|
(1 |
) |
|
|
(31 |
) |
|
|
(57 |
) |
|
|
(563 |
) |
|
|
— |
|
|
|
3,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD |
|
|
2,208 |
|
|
|
(39 |
) |
|
|
(1 |
) |
|
|
89 |
|
|
|
52 |
|
|
|
731 |
|
|
|
— |
|
|
|
3,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
6,647 |
|
|
$ |
16 |
|
|
$ |
(2 |
) |
|
$ |
58 |
|
|
$ |
(5 |
) |
|
$ |
168 |
|
|
$ |
— |
|
|
$ |
6,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
Part II. Other Information
Item 1. Legal Proceedings.
Securities Matters
Consolidated Securities Class Action
Reference is made to the shareholder class action lawsuits described on page 38 of the
Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 Form 10-K”)
and page 57 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (the
“June 2005 Form 10-Q”). During the third quarter of 2005, the Company reached an agreement with
the lead plaintiff, the Minnesota State Board of Investment (“MSBI”), for the settlement of the
consolidated securities actions. The settlement is reflected in a written agreement between the
lead plaintiff and the Company. On September 30, 2005, the court issued an order granting
preliminary approval of the settlement and certified the settlement class. The court has scheduled
the final approval hearing for February 22, 2006. At this time, there can be no assurance that the
settlement of the securities class action litigation will receive final court approval. In
connection with reaching the agreement in principle on the securities class action, the Company
established a reserve of $2.4 billion during the second quarter of 2005. Ernst & Young LLP also has
agreed to a settlement in this litigation matter and will pay $100 million. Pursuant to the
settlement, in October 2005 Time Warner paid $2.4 billion into a settlement fund (the “MSBI
Settlement Fund”) for the members of the class represented in the action. In addition, the $150
million previously paid by Time Warner into a fund in connection with the settlement of the
investigation by the DOJ was transferred to the MSBI Settlement Fund, and Time Warner is using its
best efforts to have the $300 million it previously paid in connection with the settlement of its
SEC investigation transferred to the MSBI Settlement Fund.
Other Related Securities Litigation Matters
Reference is made to the shareholder derivative, ERISA and individual securities matters
described on pages 39-42 of the 2004 Form 10-K, pages 56-60 of the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005 (the “March 2005 Form 10-Q”) and pages 58-61 of the
June 2005 Form 10-Q. In addition to the $2.4 billion reserve established in connection with the
agreement in principle regarding the settlement of the MSBI consolidated securities class action,
during the second quarter of 2005, the Company established an additional reserve totaling $600
million in connection with the remaining related litigation matters that are pending against the
Company. This $600 million amount continues to represent the Company’s current best estimate of its
potential financial exposure in the remaining related litigation matters, including the remaining
individual shareholder suits, the derivative actions and the actions alleging violations of ERISA.
During the third quarter of 2005, the Company reached an oral understanding with the carriers
on its directors and officers insurance policies in connection with the securities and derivative
action matters described in pages 38-42 of the 2004 Form 10-K (other than the actions alleging
violations of ERISA described on page 39 of the 2004 Form 10-K). At present, this agreement is
anticipated to provide an incremental recovery of approximately $200 million. Because the
understanding and related documentation have not been completed, and in light of the continuing
uncertainty as to what part, if any, of the incremental $200 million will ultimately be received by
the Company, the Company has not given any accounting recognition for this incremental recovery at
September 30, 2005. The understanding and related documentation are expected to be completed in the
fourth quarter of 2005.
Reference is made to the shareholder derivative lawsuits described on page 39 of the Company’s
2004 Form 10-K. On September 16, 2005, plaintiffs in the consolidated action filed in the Court of
Chancery for the State of Delaware for New Castle County filed a motion for leave to file a second
amended complaint.
Reference is made to the lawsuit filed by the Regents of the University of California et al.
described on page 40 of the 2004 Form 10-K and page 58 of the March 2005 Form 10-Q. The court
issued a series of rulings on threshold issues presented by the motions to dismiss on May 12, July
22 and August 2, 2005. These rulings granted in part and denied in part the relief sought by
defendants, subject to plaintiffs’ right to make a prima facie evidentiary showing to support
certain dismissed claims.
Reference is made to the lawsuit filed by the Alaska State Department of Revenue et al.
described on page 41 of the 2004 Form 10-K. On August 10, 2005, the court issued an order granting
in part and denying in part the Company’s motions to dismiss for
82
failure to state a claim. With respect to the jurisdictional motions, the court delayed its ruling
90 days to permit plaintiffs to conduct additional discovery and supplement the allegations in the
complaint. On September 9, 2005, plaintiffs moved for leave to amend their complaint. That motion
was granted by the court on October 10, 2005.
Reference is made to the lawsuits filed on behalf of purchasers of stock in PurchasePro.com,
Inc. (“PurchasePro”) described on page 42 of the 2004 Form 10-K, page 60 of the March 2005 Form
10-Q and page 61 of the June 2005 Form 10-Q. The parties reached a settlement following the
Company’s filing of a motion for reconsideration. On August 29, 2005, PurchasePro filed a motion to
approve the settlement agreement. The court held a hearing on that motion on October 5, 2005 and
entered a final order approving the settlement agreement on October 13, 2005.
Government Investigations
Reference is made to the investigations the SEC and the DOJ had been conducting into the
accounting and disclosure practices of the Company described on page 42 of the 2004 Form 10-K and
page 60 of the March 2005 Form 10-Q. As part of the settlement with the DOJ, in December 2004, the
Company paid a penalty of $60 million and established a $150 million fund, which the Company could
use to settle related securities litigation. The fund is reflected as restricted cash on the
Company’s accompanying consolidated balance sheet at December 31, 2004 and September 30, 2005.
During October 2005, the $150 million was transferred by the Company into the MSBI Settlement Fund
for the members of the class covered by the MSBI consolidated securities class action described
above. The independent examiner appointed in connection with the
settlement with the SEC has begun its review, which as a result of an extension, is
expected to be completed in the second quarter of 2006.
Other Matters
Reference is made to the putative consumer class action suits described on page 44 of the 2004
Form 10-K, page 61 of the March 2005 Form 10-Q and page 62 of the June 2005 Form 10-Q. The
Company’s petition for an appeal to the Washington Supreme Court in the Washington SOSA case is
pending. America Online has engaged in mediation with plaintiffs in both the consolidated
California action and the Illinois action, and the parties have agreed upon certain modifications
to the proposed nationwide settlement. The proposed settlement, in both its original and modified
form, is not material to the Company. On October 20, 2005, plaintiffs’ counsel in the California
action filed a motion to dissolve the previously-obtained injunction.
Reference is made to the lawsuit filed by Hallissey et al. described on page 44 of the 2004
Form 10-K and page 63 of the June 2005 Form 10-Q. The plaintiffs’ petition for review in the
California Supreme Court was denied. The trial court has set a January 22, 2006 scheduling
conference for the remaining individual claims.
Reference is made to the lawsuit filed by Kim Sevier and Eric M. Payne, a putative nationwide
consumer class action, described on page 45 of the 2004 Form 10-K and page 63 of the June 2005 Form
10-Q. This matter has been settled on terms that are not material to the Company. The district
court granted final approval of the settlement on September 17, 2005.
Reference is made to the lawsuit filed by Andrew Parker and Eric DeBrauwere et al., a
purported nationwide class action, described on page 45 of the 2004 Form 10-K and page 63 of the
March 2005 Form 10-Q. This lawsuit has been settled on terms that are not material to the Company.
The court granted preliminary approval of the class settlement on October 25, 2005.
Time Inc. has received a grand jury subpoena from the United States Attorney’s Office for the
Eastern District of New York in connection with an investigation of certain magazine
circulation-related practices. Time Inc. is responding to the subpoena and intends to cooperate
with the investigation. Time Inc. has also informed its advertisers that it is reviewing and
discussing with the Audit Bureau of Circulations (“ABC”) its reporting of sponsored sales
subscriptions under ABC rules.
On October 20, 2005, a group of syndicate participants, including BNZ Investments Limited,
filed three related actions in the High Court of New Zealand, Auckland Registry, against New Line
Productions Inc. and New Line Cinema Corporation (collectively “New Line”), wholly owned
subsidiaries of the Company. The complaints allege breach of contract, breach of duties of good
faith and fair dealing, and other common law and statutory claims under California and New Zealand
law. Plaintiffs contend, among other things, they have not received proceeds from certain
financing transactions they entered into with New Line relating to three motion pictures: The Lord
of the Rings: The Fellowship of the Ring; The Lord of the Rings: The Two Towers; and The Lord of
the Rings: The Return of the King. The Company intends to defend against these lawsuits
vigorously, but is unable to predict the outcome of these suits.
83
From time to time, the Company receives notices from third parties claiming that it infringes
their intellectual property rights. Claims of intellectual property infringement could require
Time Warner to enter into royalty or licensing agreements on unfavorable terms, incur substantial
monetary liability or be enjoined preliminarily or permanently from further use of the intellectual
property in question. In addition, certain agreements entered into by the Company may require the
Company to indemnify the other party for certain third-party intellectual property infringement
claims, which could increase the Company’s damages and its costs of defending against such claims.
Even if the claims are without merit, defending against the claims can be time-consuming and
costly.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Company Purchases of Equity Securities
The following table provides information about purchases by the Company during the
quarter ended September 30, 2005 of equity securities registered by the Company pursuant
to Section 12 of the Exchange Act.
Issuer Purchases of Equity Securities
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Total Number of |
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Approximate Dollar |
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|
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|
|
|
Shares Purchased as |
|
Value of Shares that |
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Part of Publicly |
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May Yet Be |
| |
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Total Number of |
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Average Price |
|
Announced Plans or |
|
Purchased Under the |
| Period |
|
Shares Purchased (1) |
|
Paid Per Share (2) |
|
Programs (3) |
|
Plans or Programs (4) |
July 1, 2005 - July 31, 2005 |
|
|
1,172 |
|
|
$ |
17.16 |
|
|
|
— |
|
|
$ |
— |
|
August 1, 2005 - August 31, 2005 |
|
|
13,909,306 |
|
|
$ |
18.01 |
|
|
|
13,907,000 |
|
|
$ |
4,749,513,698 |
|
September 1, 2005 - September 30, 2005 |
|
|
15,127,000 |
|
|
$ |
18.15 |
|
|
|
15,127,000 |
|
|
$ |
4,475,011,563 |
|
|
|
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|
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Total |
|
|
29,037,478 |
|
|
$ |
18.08 |
|
|
|
29,034,000 |
|
|
|
|
|
|
|
|
| (1) |
|
The total number of shares purchased includes (a) shares of Common Stock purchased by the
Company under the publicly announced stock repurchase program described in footnote (3) below,
and (b) shares of Common Stock that are tendered by employees to the Company to satisfy the
employees’ tax withholding obligations in connection with the vesting of awards of restricted
stock, which are repurchased by the Company based on their fair market value on the vesting
date. The number of shares of Common Stock purchased by the Company in connection with the
vesting of such awards totaled 1,172 shares, 2,306 shares and 0 shares, respectively, for the
months of July, August and September. |
| |
| (2) |
|
The calculation of the average price paid per share does not give effect to any fees,
commissions or other costs associated with the repurchase of such shares. |
| |
| (3) |
|
On August 3, 2005, the Company announced that its Board of Directors had authorized a Common
Stock repurchase program that allows the Company to repurchase, from time to time, up to $5
billion of Common Stock over a two-year period. On November 2, 2005, the Company announced
that its Board of Directors had authorized the increase of the amount that may be repurchased
under the Company’s publicly announced stock repurchase program
to an aggregate of up to $12.5
billion of Common Stock. 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. The
stock repurchase program expires on July 29, 2007. In the past, the Company has repurchased
shares of Common Stock pursuant to a trading program under Rule 10b5-1 promulgated under the
Securities Exchange Act, as amended, and it may repurchase shares of Common Stock under such a
trading program in the future. |
| |
| (4) |
|
The approximate dollar value of shares that may yet be purchased under the stock repurchase
program does not give effect to the increased amount that the Board of Directors authorized
the Company to repurchase under the publicly announced stock repurchase program described in
footnote (3) above. |
Item 5.
Other Information.
Resignation
of Director
Stephen
M. Case resigned from the Board of Directors of the Company effective
October 31, 2005, having notified the Board of his intention
the previous day.
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.
84
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.
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|
TIME WARNER INC.
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(Registrant) |
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Date:
November 2, 2005 |
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/s/ Wayne H. Pace |
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|
Wayne H. Pace |
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|
|
Executive Vice President and Chief Financial Officer |
|
|
85
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
| |
|
|
| Exhibit No. |
|
Description of Exhibit |
31.1
|
|
Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, with
respect to the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2005. |
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, with
respect to the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2005. |
|
|
|
32
|
|
Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, with respect to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005. † |
|
|
|
| † |
|
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. |
86