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 |
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for the quarterly period ended September 30, 2009 or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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for the transition period from
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Commission file number 001-15062
TIME WARNER INC.
(Exact name of Registrant as specified in its charter)
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Delaware
(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, NY 10019-8016
(Address of Principal Executive Offices) (Zip Code)
(212) 484-8000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
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Shares Outstanding |
| Description of Class |
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as of October 27, 2009 |
Common Stock — $.01 par value
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1,167,577,951 |
TIME WARNER INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
Management’s discussion and analysis of results of operations and financial condition (“MD&A”)
is a supplement to the accompanying consolidated financial statements and provides additional
information on Time Warner Inc.’s (“Time Warner” or the “Company”) businesses, current
developments, financial condition, cash flows and results of operations. MD&A is organized as
follows:
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Overview. This section provides a general description of Time Warner’s business
segments, as well as recent developments the Company believes are important in understanding
the results of operations and financial condition or in understanding anticipated future
trends. |
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Results of operations. This section provides an analysis of the Company’s
results of operations for the three and nine months ended September 30, 2009. This analysis
is presented on both a consolidated and a business segment basis. In addition, a brief
description is provided of significant transactions and events that affect 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, 2009 and cash flows for the nine months
ended September 30, 2009. |
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Caution concerning forward-looking statements. This section provides a
description of the use of forward-looking information appearing in this report, including in
MD&A and the consolidated financial statements. Such information is based on management’s
current expectations about future events, which are inherently susceptible to uncertainty
and changes in circumstances. Refer to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008 (the “2008 Form 10-K”), as well as Item 1A, “Risk Factors,” in Part
II of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (the
“June 2009 Form 10-Q”), for a discussion of the risk factors applicable to the Company. |
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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, TNT,
CNN, AOL, People, Sports Illustrated and Time. The Company produces and distributes films through
Warner Bros. and New Line Cinema, including Harry Potter and the Half-Blood Prince, The Hangover,
The Dark Knight and Gran Torino, as well as television series, including Two and a Half Men, The
Mentalist, The Big Bang Theory, Gossip Girl and The Closer. During the nine months ended September
30, 2009, the Company generated revenues of $20.889 billion (down 7% from $22.518 billion in 2008),
Operating Income of $3.769 billion (down 7% from $4.066 billion in 2008), Net Income of $1.841
billion (down 30% from $2.630 billion in 2008) and Cash Provided by Operations from Continuing
Operations of $3.482 billion (down 18% from $4.246 billion in 2008).
On March 12, 2009, the Company completed the legal and structural separation of Time Warner
Cable Inc. (“TWC”) from the Company. With the completion of the separation, the Company disposed of
the Cable segment in its entirety and ceased to consolidate the financial condition and results of
operations of TWC in its consolidated financial statements. Accordingly, the Company has presented
the financial condition and results of operations of the Cable segment as discontinued operations
in the accompanying consolidated financial statements for all periods presented.
On May 28, 2009, Time Warner announced that its Board of Directors has authorized management
to proceed with plans for the complete legal and structural separation of AOL LLC from Time Warner,
which is expected to occur in the fourth quarter of 2009. Refer to “Recent Developments” for more
information.
Impact of the Current Economic Environment
The current global economic recession has reduced the Company’s visibility into long-term
business trends and has adversely affected its businesses during the first nine months of 2009 and
is currently expected to continue to adversely affect them during the remainder of 2009. For
example, during the nine months ended September 30, 2009, the Company’s Advertising revenues
declined 14% compared to the similar period in the prior year. The Company currently expects
Advertising revenues to continue to decline during the remainder of 2009 as compared to the similar
period in 2008, although the rate of decline for the remainder of 2009 is expected to moderate in
comparison to that experienced during the first nine months of 2009. Additionally, the current
economic environment is adversely affecting the Company’s Content revenues due to, among other
things, reduced consumer spending on DVDs.
The significant losses in the market value of the Company’s pension plan assets in 2008 have
resulted in an increase in pension expense of approximately $42 million and $113 million,
respectively, for the three and nine months ended September 30, 2009 and are expected to result in
an approximately $150 million increase in pension expense for the full year of 2009. Additionally,
the strengthening of the U.S. dollar relative to significant foreign currencies to which the
Company is exposed has negatively affected the Company’s revenues and Operating Income by
approximately $130 million and $70 million, respectively, for the three months ended September 30,
2009 and approximately $570 million and $170 million, respectively, for the nine months ended
September 30, 2009. If exchange rates remain at levels similar to those at September 30, 2009, the
Company does not expect they will have a significant impact on revenues or Operating Income during
the remainder of 2009 compared to the similar period in 2008.
The Company continues to have strong liquidity to meet its needs for the foreseeable future.
At September 30, 2009, the Company had $14.029 billion of unused committed capacity, including cash
and equivalents and credit facilities containing commitments from a geographically diverse group of
major financial institutions. See “Financial Condition and Liquidity” for further details regarding
the Company’s total committed borrowing capacity.
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Time Warner Businesses
Time Warner classifies its operations into four reportable segments: Networks, Filmed
Entertainment, Publishing and AOL.
Time Warner evaluates the performance and operational strength of its business segments based
on several factors, of which the primary financial measure is operating income before depreciation
of tangible assets and amortization of intangible assets (“Operating Income before Depreciation and
Amortization”). Operating Income before Depreciation and Amortization eliminates the uneven effects
across all business segments of noncash depreciation of tangible assets and amortization of certain
intangible assets, primarily intangible assets recognized in business combinations. Operating
Income before Depreciation and Amortization should be considered in addition to Operating Income,
as well as other measures of financial performance. Accordingly, the discussion of the results of
operations for each of Time Warner’s business segments includes both Operating Income before
Depreciation and Amortization and Operating Income. For additional information regarding Time
Warner’s business segments, refer to Note 11, “Segment Information.”
Networks. Time Warner’s Networks segment is comprised of Turner Broadcasting System, Inc.
(“Turner”) and Home Box Office, Inc. (“HBO”). For the nine months ended September 30, 2009, the
Networks segment generated revenues of $8.645 billion (41% of the Company’s overall revenues),
$3.089 billion in Operating Income before Depreciation and Amortization and $2.773 billion in
Operating Income.
The Turner networks — including such recognized brands as TNT, TBS, CNN, Cartoon Network,
truTV and HLN (formerly CNN Headline News) — are among the leaders in advertising-supported cable
TV networks. For seven consecutive years, more primetime households have watched
advertising-supported cable TV networks than the national broadcast networks. The Turner networks
generate revenues principally from the receipt of monthly subscriber fees paid by cable system
operators, satellite distribution services, telephone companies and other distributors and from the
sale of advertising. Key contributors to Turner’s success are its continued investments in
high-quality programming focused on sports, original and syndicated series, news, network movie
premieres and animation leading to strong ratings and revenue growth, as well as strong brands and
operating efficiencies. For the remainder of 2009, the Company anticipates that the difficult
economic environment and the absence of advertising revenues associated with the 2008 election
coverage will adversely affect Advertising revenues at Turner compared to the similar period in
2008.
HBO operates the HBO and Cinemax multichannel premium pay television programming services,
with the HBO service ranking as the nation’s most widely distributed premium pay television
service. HBO generates revenues principally from monthly subscriber fees from cable system
operators, satellite distribution services, telephone companies and other distributors. An
additional source of revenues is the sale of its original programming, including Sex and the City,
True Blood, Entourage, The Sopranos and Rome.
The Company’s Networks segment has recently focused on international expansion, including
Turner’s fourth quarter 2007 acquisition of seven pay networks operating principally in Latin
America and HBO’s acquisitions of additional equity interests in HBO Asia and HBO South Asia during
the fourth quarter of 2007 and first quarter of 2008, as well as the acquisition of an additional
equity interest in the HBO Latin America Group, consisting of HBO Brasil, HBO Olé and HBO Latin
America Production Services (collectively, “HBO LAG”), during the fourth quarter of 2008. In
addition, during the three months ended September 30, 2009, Turner acquired Japan Image
Communications Co., Ltd. (“JIC”), a Japanese pay television
business. HBO LAG and JIC contributed
revenues and Operating Income before Depreciation and Amortization of
$265 million and $69 million,
respectively, for the nine months ended September 30, 2009. In addition, during 2008 and
the first nine months of 2009, Turner expanded its presence in Turkey, Germany and Korea. The
Company anticipates that international expansion will continue to be an area of focus at the
Networks segment for the foreseeable future.
Filmed Entertainment. Time Warner’s Filmed Entertainment segment is comprised of Warner Bros.
Entertainment Group (“Warner Bros.”), one of the world’s leading studios, and New Line Cinema
Corporation (“New Line”). For the nine months ended September 30, 2009, the Filmed Entertainment
segment generated revenues of $7.746 billion (35% of the
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Company’s overall revenues), $923 million in Operating Income before Depreciation and
Amortization and $648 million in Operating Income.
The Filmed Entertainment segment has diversified sources of revenues within its film and
television businesses, including an extensive film library and a global distribution
infrastructure, which have helped it to deliver consistent long-term operating performance. To
increase operational efficiencies and maximize performance within the Filmed Entertainment segment,
in 2008 the Company reorganized the New Line business to be operated as a unit of Warner Bros.
while maintaining separate development, production and other operations, and the Company incurred
restructuring charges primarily related to involuntary employee terminations in connection with the
reorganization. Beginning in the first quarter of 2009, Warner Bros. commenced a significant
restructuring, primarily consisting of headcount reductions and the outsourcing of certain
functions to an external service provider. As a result of these restructurings, the Filmed
Entertainment segment incurred restructuring charges of $17 million and $85 million for the three
and nine months ended September 30, 2009, respectively, and expects to incur additional
restructuring charges of approximately $10 million in the fourth quarter of 2009.
Warner Bros. continues to be an industry leader in the television business. During the
2009-2010 broadcast season, Warner Bros. expects to produce more than 25 primetime series, with at
least one series airing on each of the five broadcast networks (including Two and a Half Men, The
Mentalist, The Big Bang Theory, Gossip Girl and Smallville), as well as original series for several
cable networks (including The Closer and Nip/Tuck).
The sale of DVDs has been one of the largest drivers of the segment’s profit over the last
several years. The industry and the Company experienced a decline in DVD sales in 2008 and the
first nine months of 2009 as growing consumer interest in high definition Blu-ray DVDs and the
effect of increased electronic delivery only partially offset softening consumer demand for
standard definition DVDs. Also contributing to the overall decline in DVD sales are several
factors, including the general economic downturn in the U.S. and many regions around the world,
increasing competition for consumer discretionary time and spending, piracy and the maturation of
the standard definition DVD format.
Piracy, including physical piracy as well as illegal online file-sharing, continues to be a
significant issue for the filmed entertainment industry. Due to technological advances, piracy has
expanded from music to movies, television programming and interactive games. The Company has taken
a variety of actions to combat piracy over the last several years, including the launch of new
services for consumers at competitive price points, aggressive online and customs enforcement,
compressed release windows and educational campaigns, and will continue to do so, both individually
and together with cross-industry groups, trade associations and strategic partners.
Publishing. Time Warner’s Publishing segment consists principally of magazine publishing and
related websites as well as a number of direct-marketing businesses. For the nine months ended
September 30, 2009, the Publishing segment generated revenues of $2.635 billion (12% of the
Company’s overall revenues), $295 million in Operating Income before Depreciation and Amortization
and $167 million in Operating Income. In an ongoing effort to continue to streamline the Publishing
segment’s operations, the Company expects to incur up to $100 million of restructuring costs
primarily related to severance costs in the fourth quarter of 2009.
As of September 30, 2009, Time Inc. published 22 magazines in the U.S., including People,
Sports Illustrated, Time, InStyle, Real Simple, Southern Living and Fortune, and over 90 magazines
outside the U.S., primarily through IPC Media (“IPC”) in the U.K. and Grupo Editorial Expansión
(“GEE”) in Mexico. The Publishing segment generates revenues primarily from advertising (including
advertising on digital properties), magazine subscriptions and newsstand sales. Time Inc. also owns
the magazine subscription marketer, Synapse Group, Inc. (“Synapse”), and the school and youth group
fundraising company, QSP, Inc. and its Canadian affiliate, Quality Service Programs Inc.
(collectively, “QSP”). Advertising sales at the Publishing segment, particularly print advertising
sales, continue to be significantly adversely affected by the current economic environment as
evidenced by their continuing decline during the first nine months of 2009. Online advertising
sales at the Publishing segment have also been adversely affected by the current economic
environment, although, on a percentage basis, to a lesser degree than print advertising sales. Time
Inc. continues to develop digital content, including the relaunch of RealSimple.com and the
expansion of People.com and Time.com, as well as the expansion of digital properties owned by IPC
and GEE. Online Advertising revenues were 11% and 12%, respectively, of Time Inc.’s total
Advertising revenues for the three and nine months ended September 30, 2009 compared to 11% and
10%,
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
respectively, for the three and nine months ended September 30, 2008. On July 16, 2009, Time
Inc. completed the sale of its direct-selling division, Southern Living At Home, which sells home
decor products through independent consultants at parties hosted in people’s homes throughout the
U.S.
AOL. AOL LLC (together with its subsidiaries, “AOL”) is a leading global web services company
with an extensive suite of brands and offerings and a substantial worldwide audience. Its business
spans online content, products and services that it offers to consumers, publishers and
advertisers. AOL is focused on attracting and engaging consumers and providing valuable online
advertising services on both its owned and operated properties and third-party websites. As of
September 2009, AOL has the largest advertising network in terms of online consumer reach in the
U.S. For the nine months ended September 30, 2009, AOL generated revenues of $2.448 billion (12% of
the Company’s overall revenues), $760 million in Operating Income before Depreciation and
Amortization and $449 million in Operating Income.
Historically, AOL’s primary strategic focus was its dial-up Internet access services business,
which operated one of the largest Internet subscription access services in the U.S. As broadband
penetration in the U.S. increased, AOL experienced a decline, which it continues to experience, in
subscribers to its access service. At the same time, online advertising experienced significant
growth. In August 2006, AOL fundamentally shifted the primary strategic focus of its business from
generating Subscription revenues to attracting and engaging Internet consumers and generating
Advertising revenues. In connection with this shift, AOL began offering the vast majority of its
content, products and services to consumers for free in an effort to attract and engage a broader
group of consumers. While this strategic shift was announced in 2006, AOL is still in the process
of completing this transition. Consequently, AOL’s subscription access service remains an important
source of its total revenues and cash flows.
The Company has been evaluating potential transactions involving, and structural alternatives
for, AOL for some time, including the possibility of separating AOL’s global web services and
subscription access services businesses, which share infrastructure such as data centers and
network operations centers. Historically, the global web services business had three units: (i) the
first focused on content published on a variety of websites with related applications and services;
(ii) the second focused on social networking, community and instant communications products and
services; and (iii) the third focused on providing advertising services on both AOL’s owned and
operated properties and third-party websites. The subscription access services business included
the AOL-branded Internet access service as well as the CompuServe and Netscape Internet access
services.
In April 2009, Tim Armstrong was appointed AOL’s Chairman and Chief Executive Officer, and he
commenced a review of AOL’s strategy and operations while the Company continued its evaluation of
structural alternatives. The Company’s evaluation resulted in the announcement on May 28, 2009 that
it would move forward with plans for the complete legal and structural separation of AOL from Time
Warner. Refer to “Recent Developments” for further details regarding the separation of AOL from
Time Warner.
In connection with the strategic review conducted by Mr. Armstrong, which factored in the
Company’s decision to separate AOL from Time Warner, AOL has updated its organizational structure
and developed the next phase in the strategic shift begun in 2006. AOL’s strategy remains focused
primarily on attracting and engaging Internet consumers and generating Advertising revenues, with
the subscription access service managed as a valuable distribution channel for AOL’s content,
product and service offerings. As a result, AOL intends to continue to operate as a single
integrated business rather than as two separate businesses.
AOL’s strategy is to focus its resources on its core competitive strengths in web content
production, local and mapping, communications and advertising networks while expanding the presence
of its content, products and service offerings on multiple platforms and digital devices. AOL also
aims to reorient its culture and reinvigorate the AOL brand by prioritizing the consumer experience
and making greater use of data-driven insights. AOL aims to encourage innovation through the
entrepreneurial environment of AOL Ventures.
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
AOL’s business operations are focused on the following two areas:
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AOL Media. AOL seeks to be a global publisher of relevant and engaging online
content by utilizing open and highly scalable publishing platforms and content management
systems, as well as a leading online provider of consumer products and services. |
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AOL generates Advertising revenues from its owned and operated content, products and
services, which are referred to as “AOL Media,” through the sale of display and search
advertising. AOL seeks to provide effective and efficient advertising solutions utilizing
data-driven insights that help advertisers decide how best to engage consumers. |
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AOL also generates revenues through its subscription access service. AOL views its
subscription access service as a valuable distribution channel for AOL Media. AOL’s access
service subscribers are important users of AOL Media and engaging both present and former
access service subscribers is an important component of its strategy. In addition, AOL’s
subscription access service will remain an important source of revenue and cash flow for AOL
in the near term. |
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Third Party Network. AOL also generates Advertising revenues through the sale
of advertising on third-party websites and on digital devices, which are referred to as the
“Third Party Network,” and AOL markets these advertising offerings to publishers under the
brand “Advertising.com.” AOL’s mission is to provide an open and transparent advertising
system that is easy-to-use and offers its publishers and advertisers unique and valuable
insights. AOL seeks to significantly increase the number of publishers and advertisers
utilizing the network. |
AOL markets its advertising offerings to advertisers on both AOL Media and the Third Party
Network under the brand “AOL Advertising.”
During the first nine months of 2009, AOL’s Advertising revenues were negatively affected by
weak global economic conditions, which contributed to lower advertising demand, and which the
Company anticipates may continue to negatively affect AOL’s Advertising revenues in the fourth
quarter of 2009.
Google Inc. (“Google”) is, except in limited circumstances, the exclusive web search provider
for AOL Media. In connection with these search services, Google provides AOL with a share of the
revenues generated through paid text-based search advertising on AOL Media. For the nine months
ended September 30, 2009, Advertising revenues associated with the Google relationship
(substantially all of which were generated on AOL Media) were $422 million. In addition, AOL sells
search-based keyword advertising directly to advertisers on AOL Media through the use of a
white-labeled, modified version of Google’s advertising platform, for which AOL provides a share of
the revenues generated through such sales to Google. Domestically, AOL has agreed, except in
certain limited circumstances, to use Google’s search services on an exclusive basis through
December 19, 2010. Upon expiration of this agreement, AOL expects to continue to generate
Advertising revenues by providing paid-search advertising on AOL Media, either through the
continuation of its relationship with Google or an agreement with another search provider.
AOL views its subscription access service, which is offered to consumers in the U.S. for a
monthly fee, as a valuable distribution channel for AOL Media. In general, subscribers to the
subscription access service are among the most engaged consumers on AOL Media. However, the
domestic AOL-brand access subscriber base has been declining, which has had an adverse impact on
AOL’s Subscription revenues. AOL’s domestic AOL-brand access subscribers declined 1.5 million and
1.9 million for the nine months ended September 30, 2009 and 2008, respectively. The continued
decline in subscribers is the result of several factors, including the increased availability of
high-speed broadband Internet connections, the fact that a significant amount of online content,
products and services has been optimized for use with Internet broadband connections and the
effects of AOL’s strategic shift announced in 2006, which resulted in significantly reduced
marketing efforts for its subscription access service, and the free availability of the majority of
its content, products and services. AOL expects the net number of domestic AOL-brand access
subscribers to continue to decline. Accordingly, because Advertising revenues associated with AOL
Media in large part are generated from the activity (including search queries) of current and
former AOL subscribers, as AOL’s subscriber base declines, AOL needs to maintain the engagement of
former subscribers similar to historical levels and increase the number and engagement of other
consumers on AOL Media. AOL seeks to do
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
this by continuing to develop and offer engaging content, products and services and continuing
to transition those access service subscribers who are terminating their paid access subscriptions
to free AOL Media offerings.
During the first nine months of 2009, in an effort to better align its cost structure with its
revenues, AOL undertook various restructuring activities. As a result, for the three and nine
months ended September 30, 2009, AOL incurred restructuring charges of $10 million and $83 million,
respectively, primarily related to involuntary employee terminations and facility closures. AOL
currently expects to incur up to $20 million of additional restructuring charges through the
consummation of the AOL Separation (as defined below), which is anticipated to occur in the fourth
quarter of 2009. Shortly after the AOL Separation, AOL anticipates undertaking significant
additional restructuring activities to more effectively align its organizational structure and
costs with its strategy.
Recent Developments
HBO Central Europe Acquisition
On October 14, 2009, HBO entered into an agreement to purchase its partners’ interests in the
HBO Central Europe (“HBO CE”) joint venture for approximately $160 million in cash. HBO CE operates
the HBO and Cinemax premium pay television programming services serving 11 territories in Central
Europe. The closing of the transaction is subject to customary closing conditions, including the
receipt of regulatory approvals, and is expected to occur in the first quarter of 2010. HBO
currently owns a 33 1/3% interest in HBO CE, and upon closing, this transaction will result in HBO
owning 100% of the interests of HBO CE. See Note 2 to the accompanying consolidated financial
statements.
AOL Separation from Time Warner
As noted above, on May 28, 2009, Time Warner announced that its Board of Directors has
authorized management to proceed with plans for the complete legal and structural separation of AOL
from Time Warner (the “AOL Separation”). The AOL Separation is currently expected to be effected as
a spin-off of AOL Holdings LLC, a wholly-owned subsidiary that has
been converted to a corporation
and renamed AOL Inc. In the AOL Separation, Time Warner
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
will distribute all of its AOL Inc. common stock to Time Warner shareholders, and AOL will
become an independent, publicly traded company.
On July 8, 2009, the Company repurchased Google’s 5% interest in AOL for $283 million in cash,
which amount included a payment in respect of Google’s pro rata share of cash distributions to Time
Warner by AOL attributable to the period of Google’s investment in AOL. After repurchasing this
stake, Time Warner currently owns 100% of AOL.
The AOL Separation is contingent on the satisfaction or waiver of a number of conditions,
including the effectiveness of a registration statement on Form 10 that AOL filed with the
Securities and Exchange Commission (the “SEC”) on July 27, 2009 in connection with the transaction.
Time Warner expects to complete the AOL Separation in the fourth quarter of 2009. See Note 2 to the
accompanying consolidated financial statements.
Patch Acquisition
On June 10, 2009, AOL purchased Patch Media Corporation (“Patch”), a news, information and
community platform business dedicated to providing comprehensive local information and services for
individual towns and communities, for approximately $7 million in cash. Approximately $700,000 of
the consideration is being held in an indemnity escrow account until the first anniversary of the
closing.
At the time of closing, Tim Armstrong, AOL’s Chairman and Chief Executive Officer, held,
indirectly through Polar Capital Group, LLC (“Polar Capital”) (a private investment company which
he founded), economic interests in Patch that entitled him to receive approximately 75% of the
transaction consideration. Mr. Armstrong’s original investment in Patch, made in December 2007
through Polar Capital, was approximately $4.5 million. In connection with the transaction, Mr.
Armstrong, through Polar Capital, waived his right to receive any transaction consideration in
excess of his original $4.5 million investment, opting to accept only the return of his initial
investment. In addition, Mr. Armstrong elected to return the $4.5 million (approximately $450,000
of which is being held in the indemnity escrow account for a year) that he was entitled to receive
in connection with the transaction to AOL, to be held by AOL until after the AOL Separation. As
soon as legally permissible, following the AOL Separation, AOL will cause to be issued to Polar
Capital an amount of AOL Inc. common stock equivalent to $4.5 million (less any amounts held in the
indemnity escrow account) based on an average of the high and low market prices on the relevant
trading day. The issuance of shares of AOL Inc. common stock to Polar Capital will be exempt from
registration under Section 4(2) of the Securities Act of 1933, as a transaction by an issuer not
involving a public offering. The payment to Polar Capital of the $4.5 million of consideration is
not contingent on the continued employment of Mr. Armstrong with AOL.
An appraisal of the value of the business was performed by an independent financial advisory
firm to determine that the consideration paid by AOL was within a reasonable range of the fair
value of Patch. The Patch acquisition did not significantly affect the Company’s consolidated
financial results for the three and nine months ended September 30, 2009. See Note 2 to the
accompanying consolidated financial statements.
Common Stock Repurchase Program
On July 26, 2007, Time Warner’s Board of Directors authorized a common stock repurchase
program that allows the Company to purchase up to an aggregate of $5 billion of common stock.
Purchases under this stock repurchase program may be made from time to time on the open market and
in privately negotiated transactions. The size and timing of these purchases are based on a number
of factors, including price and business and market conditions. From the program’s inception
through November 2, 2009 the Company repurchased approximately 83 million shares of common stock
for approximately $3.7 billion, pursuant to trading programs under Rule 10b5-1 of the Exchange
Act. This number included approximately 32 million shares of common stock purchased for
approximately $878 million in 2009 (Note 6).
TWC Separation from Time Warner and Reverse Stock Split of Time Warner Common Stock
On March 12, 2009 (the “Distribution Record Date”), the Company disposed of all of its shares
of TWC common stock. With the completion of the legal and structural separation of TWC from Time
Warner (the “TWC Separation”), the Company disposed of the Cable segment in its entirety.
Accordingly, the Company has presented the financial condition
8
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
and results of operations of the Cable segment as discontinued operations in the accompanying
consolidated financial statements for all periods presented. See Note 1 to the accompanying
consolidated financial statements.
In connection with the TWC Separation, the Company implemented a 1-for-3 reverse stock split
on March 27, 2009.
CME Investment
On May 18, 2009, the Company completed an investment in Central European Media Enterprises
Ltd. (“CME”), in which the Company received a 31% economic interest and a 38% voting interest, for
$244 million in cash. CME is a broadcasting company operating leading networks in seven Central and
Eastern European countries. In connection with its investment, Time Warner has agreed to allow CME
founder and Non-Executive Chairman Ronald S. Lauder to vote Time Warner’s shares of CME for at
least four years, subject to certain exceptions. Also, Mr. Lauder has agreed to support Time
Warner’s appointment of two designees to CME’s board of directors. The Company’s investment in CME
is being accounted for under the cost method of accounting. See Note 2 to the accompanying
consolidated financial statements.
RESULTS OF OPERATIONS
Changes in Basis of Presentation
As discussed more fully in Note 1 to the accompanying consolidated financial statements, the
2008 financial information has been recast so that the basis of presentation is consistent with
that of the 2009 financial information. This recast reflects (i) the financial condition and
results of operations of TWC as discontinued operations for all periods presented, (ii) the
adoption of recent accounting guidance pertaining to noncontrolling interests, (iii) the adoption
of recent accounting guidance pertaining to participating securities and (iv) the 1-for-3 reverse
stock split of the Company’s common stock that became effective on March 27, 2009.
Recent Accounting Guidance
See Note 1 to the accompanying consolidated financial statements for a discussion of
accounting guidance adopted during the nine months ended September 30, 2009 and recent accounting
guidance not yet adopted.
9
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Significant Transactions and Other Items Affecting Comparability
As more fully described herein and in the related notes to the accompanying consolidated
financial statements, the comparability of Time Warner’s results from continuing operations has
been affected by significant transactions and certain other items in each period as follows
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Amounts
related to securities litigation and government investigations |
|
$ |
(7 |
) |
|
$ |
(5 |
) |
|
$ |
(21 |
) |
|
$ |
(13 |
) |
Asset impairments |
|
|
(57 |
) |
|
|
(39 |
) |
|
|
(57 |
) |
|
|
(57 |
) |
Loss on sale of assets |
|
|
- |
|
|
|
(3 |
) |
|
|
(33 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Operating Income |
|
|
(64 |
) |
|
|
(47 |
) |
|
|
(111 |
) |
|
|
(73 |
) |
Investment losses, net |
|
|
(25 |
) |
|
|
(6 |
) |
|
|
(1 |
) |
|
|
(22 |
) |
Amounts related to the separation of TWC |
|
|
4 |
|
|
|
(2 |
) |
|
|
6 |
|
|
|
(7 |
) |
Costs related to the separation of AOL |
|
|
(4 |
) |
|
|
- |
|
|
|
(24 |
) |
|
|
- |
|
Share of equity investment gain on disposal
of assets |
|
|
- |
|
|
|
30 |
|
|
|
- |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax impact |
|
|
(89 |
) |
|
|
(25 |
) |
|
|
(130 |
) |
|
|
(72 |
) |
Income tax impact of above items |
|
|
27 |
|
|
|
10 |
|
|
|
30 |
|
|
|
26 |
|
Tax items related to TWC |
|
|
- |
|
|
|
(8 |
) |
|
|
24 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax impact |
|
|
(62 |
) |
|
|
(23 |
) |
|
|
(76 |
) |
|
|
(54 |
) |
Noncontrolling interest impact |
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of items on income from continuing
operations attributable to Time Warner Inc.
shareholders |
|
$ |
(62 |
) |
|
$ |
(23 |
) |
|
$ |
(71 |
) |
|
$ |
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the items affecting comparability above, the Company incurred restructuring
costs of $39 million and $175 million for the three and nine months ended September 30, 2009,
respectively, and $20 million and $168 million for the three and nine months ended September 30,
2008, respectively. For further discussions of restructuring costs, refer to the “Consolidated
Results” and “Business Segment Results” discussions.
Amounts Related to Securities Litigation
The Company recognized legal and other professional fees related to the defense of various
shareholder lawsuits totaling $7 million and $21 million for the three and nine months ended
September 30, 2009, respectively, and $5 million and $13 million for the three and nine months
ended September 30, 2008, respectively.
Asset Impairments
During the three and nine months ended September 30, 2009, the Company recorded a $52 million
noncash impairment of intangible assets related to Turner’s interest in a general entertainment
network in India at the Networks segment and a $5 million noncash impairment of certain trade names
at the AOL segment. During the three and nine months ended September 30, 2008, the Company recorded
a $30 million noncash impairment at the Publishing segment related to a sub-lease with a tenant
that filed for bankruptcy in September 2008 and a $9 million noncash impairment of a building at
the AOL segment. In addition, during the nine months ended September 30, 2008, the Company recorded
an $18 million noncash impairment of GameTap at the Networks segment as a result of Turner’s
decision to sell its online video game business.
10
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Loss on Sale of Assets
For the nine months ended September 30, 2009, the Company recognized a $33 million loss on the
sale of Warner Bros.’ Italian cinema assets.
For the three and nine months ended September 30, 2008, the Company recorded a $3 million loss
on the completion of the sale of GameTap at the Networks segment.
Investment Losses, Net
For the three and nine months ended September 30, 2009, the Company recognized $2 million and
$23 million, respectively, of miscellaneous investment losses. In addition, for the three and nine
months ended September 30, 2009, the Company recognized a $23 million impairment of the Company’s
investment in Miditech Pvt. Limited, a programming production company in India, and, for the nine
months ended September 30, 2009, a $28 million gain on the sale of the Company’s investment in TiVo
Inc. and a $17 million gain on the sale of the Company’s investment in Eidos plc (formerly Sci
Entertainment Group plc) (“Eidos”).
For the three and nine months ended September 30, 2008, the Company recognized $6 million of
miscellaneous investment losses and $14 million of miscellaneous investment gains, respectively. In
addition, for the nine months ended September 30, 2008, the Company recognized a $26 million
impairment of the Company’s investment in Eidos and $10 million of losses resulting from market
fluctuations in equity derivative instruments.
Amounts Related to the Separation of TWC
The Company incurred pretax direct transaction costs (e.g., legal and professional fees)
related to the separation of TWC of $6 million for the nine months ended September 30, 2009 and $2
million and $7 million for the three and nine months ended September 30, 2008, respectively, which
have been reflected in other income (loss), net in the accompanying consolidated statement of
operations. In addition, for the three and nine months ended September 30, 2009, the Company
recognized $4 million and $12 million, respectively, of other income related to the increase in the
estimated fair value of Time Warner equity awards held by TWC employees.
Costs Related to the Separation of AOL
The Company incurred costs related to the separation of AOL of $4 million and $24 million,
respectively, for the three and nine months ended September 30, 2009, which have been reflected in
other income (loss), net in the accompanying consolidated statement of operations. These costs
included $4 million and $9 million, respectively, of pretax direct transaction costs (e.g., legal
and professional fees) for the three and nine months ended September 30, 2009 and $15 million of
financing costs related to the solicitation of consents from debt holders to amend the indentures
governing certain of the Company’s debt securities for the nine
months ended September 30, 2009. For additional information, refer
to “Financial Condition and
Liquidity — Outstanding Debt and Other Financing
Arrangements — Consent
Solicitation.”
Share of Equity Investment Gain on Disposal of Assets
For the three and nine months ended September 30, 2008, the Company recognized its $30 million
share of a pretax gain on the sale of a Central European documentary channel by an equity method
investee.
Income Tax Impact and Tax Items Related to TWC
The income tax impact reflects the estimated tax or tax benefit associated with each item
affecting comparability. Such estimated taxes or tax benefits vary based on certain factors,
including the taxability or deductibility of the items and foreign tax on certain transactions. For
the nine months ended September 30, 2009, the Company also recognized approximately $24 million of
tax benefits attributable to the impact of certain state tax law changes on TWC net deferred tax
liabilities.
11
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Noncontrolling Interest Impact
The noncontrolling interest impact for the nine months ended September 30, 2009 of $5 million
reflects the minority owner’s share of the tax provision related to changes in certain state tax
laws.
Three and Nine Months Ended September 30, 2009 Compared to Three and Nine Months Ended September 30, 2008
Consolidated Results
The following discussion provides an analysis of the Company’s results of operations and
should be read in conjunction with the accompanying consolidated statement of operations.
Revenues. The components of revenues are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
Subscription |
|
$ |
2,562 |
|
|
$ |
2,584 |
|
|
|
(1 |
%) |
|
$ |
7,669 |
|
|
$ |
7,800 |
|
|
|
(2 |
%) |
Advertising |
|
|
1,632 |
|
|
|
1,856 |
|
|
|
(12 |
%) |
|
|
4,943 |
|
|
|
5,763 |
|
|
|
(14 |
%) |
Content |
|
|
2,754 |
|
|
|
2,906 |
|
|
|
(5 |
%) |
|
|
7,680 |
|
|
|
8,278 |
|
|
|
(7 |
%) |
Other |
|
|
187 |
|
|
|
233 |
|
|
|
(20 |
%) |
|
|
597 |
|
|
|
677 |
|
|
|
(12 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
7,135 |
|
|
$ |
7,579 |
|
|
|
(6 |
%) |
|
$ |
20,889 |
|
|
$ |
22,518 |
|
|
|
(7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in Subscription revenues for the three and nine months ended September 30, 2009
was primarily related to declines at the AOL and Publishing segments, offset partially by an
increase at the Networks segment. The decline at the AOL segment reflects the continued decline in
the number of domestic AOL-brand access subscribers. The decrease at the Publishing segment was
primarily due to declines in domestic subscription renewals and softening domestic newsstand sales,
both of which were due to the effect of the current economic environment, as well as decreases at
IPC resulting primarily from the negative impact of foreign exchange rates. The increase in
Subscription revenues at the Networks segment was due primarily to higher subscription rates at
both Turner and HBO and the effect of the consolidation of HBO LAG, partially offset by the
negative impact of foreign exchange rates at Turner.
The decrease in Advertising revenues for the three and nine months ended September 30, 2009 was
primarily due to declines at the Publishing and AOL segments and, to a lesser extent, a decline at
the Networks segment. The decrease at the Publishing segment was primarily due to declines in
domestic print Advertising revenues and international print Advertising revenues, including the
effect of foreign exchange rates at IPC, and lower online revenues. The decrease at the AOL segment
was attributable to declines in Advertising revenues on the Third Party Network and display
advertising on AOL Media, primarily due to weak global economic conditions, which contributed to
lower advertising demand. Also contributing to the decrease at the AOL segment were declines in
revenues generated through AOL’s strategic relationship with Google primarily due to decreases in
search query volume (partially due to the decline in domestic AOL-brand access subscribers) and
lower revenues per search query on certain AOL Media properties. The decrease at the Networks
segment was driven mainly by the impact of weakened demand, primarily at Turner’s news networks,
and the negative impact of foreign exchange rates, partly offset by increases at Turner’s domestic
entertainment networks for the three months ended September 30, 2009.
The decrease in Content revenues for the three and nine months ended September 30, 2009 was
due primarily to declines at the Filmed Entertainment and Networks segments. The decline at the
Filmed Entertainment segment was mainly due to a decrease in theatrical product revenues, partially
offset for the nine months ended September 30, 2009 by an
increase in television product revenues. The negative impact of foreign exchange rates also
contributed to the decline in Content revenues at the Filmed Entertainment segment. The decline at
the Networks segment was due primarily to lower ancillary sales of HBO’s original programming.
12
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Each of the revenue categories is discussed in greater detail by segment in “Business Segment
Results.”
Costs of Revenues. For the three months ended September 30, 2009 and 2008, costs of revenues
totaled $3.924 billion and $4.103 billion, respectively, and, as a percentage of revenues, were 55%
and 54%, respectively. For the nine months ended September 30, 2009 and 2008, costs of revenues
totaled $11.645 billion and $12.612 billion, respectively, and, as a percentage of revenues, were
both 56%. The segment variations are discussed in detail in “Business Segment Results.”
Selling, General and Administrative Expenses. For the three months ended September 30, 2009
and 2008, selling, general and administrative expenses decreased 7% to $1.612 billion in 2009 from
$1.726 billion in 2008, reflecting decreases at each of the Company’s segments. For the nine months
ended September 30, 2009 and 2008, selling, general and administrative expenses decreased 7% to
$4.862 billion in 2009 from $5.225 billion in 2008, primarily related to decreases at the Filmed
Entertainment, AOL, Publishing and Corporate segments. The segment variations are discussed in
detail in “Business Segment Results.”
Included in costs of revenues and selling, general and administrative expenses is depreciation
expense, which decreased to $237 million and $712 million for the three and nine months ended
September 30, 2009, respectively, from $244 million and $738 million for the three and nine months
ended September 30, 2008, respectively, primarily reflecting a decline at the AOL segment due in
part to a reduction in network assets due to subscriber declines.
Amortization Expense. Amortization expense decreased to $115 million and $348 million for the
three and nine months ended September 30, 2009, respectively, from $140 million and $387 million
for the three and nine months ended September 30, 2008, respectively. The decrease in amortization
expense for the three and nine months ended September 30, 2009 primarily related to declines at the
Filmed Entertainment and AOL segments, partially offset by an increase at the Networks segment. The
segment variations are discussed in detail in “Business Segment Results.”
Restructuring Costs. For the three and nine months ended September 30, 2009, the Company
incurred restructuring costs of $39 million and $175 million, respectively, primarily related to
various employee terminations and other exit activities, including $17 million and $85 million,
respectively, at the Filmed Entertainment segment for the three and nine months ended September 30,
2009, $12 million and $7 million, respectively, at the Publishing segment for the three and nine
months ended September 30, 2009 and $10 million and $83 million, respectively, at the AOL segment
for the three and nine months ended September 30, 2009.
The Company incurred restructuring costs for the three and nine months ended September 30,
2008 of $20 million and $168 million, respectively, primarily related to various employee
terminations and other exit activities, $17 million and $130 million, respectively, at the Filmed
Entertainment segment for the three and nine months ended September 30, 2008, $1 million and $16
million, respectively, at the Publishing segment for the three and nine months ended September 30,
2008, $2 million and $15 million, respectively, at the AOL segment for the three and nine months
ended September 30, 2008 and $7 million at the Corporate segment for the nine months ended
September 30, 2008.
Operating Income. Operating Income decreased to $1.388 billion for the three months ended
September 30, 2009 from $1.548 billion for the three months ended September 30, 2008. Excluding the
items previously noted under “Significant Transactions and Other Items Affecting Comparability”
totaling $64 million and $47 million of expense for the three months ended September 30, 2009 and
2008, respectively, Operating Income decreased $143 million, primarily reflecting declines at the
AOL and Publishing segments, partially offset by increases at the Networks and Filmed Entertainment
segments.
Operating Income decreased to $3.769 billion for the nine months ended September 30, 2009 from
$4.066 billion for the nine months ended September 30, 2008. Excluding the items previously noted
under “Significant Transactions and Other Items Affecting Comparability” totaling $111 million and
$73 million of expense for the nine months ended September 30, 2009 and 2008, respectively,
Operating Income decreased $259 million, primarily reflecting declines at the AOL and Publishing
segments, partially offset by increases at the Networks and Filmed Entertainment segments.
The segment variations are discussed under “Business Segment Results.”
13
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Interest Expense, Net. Interest expense, net, decreased to $297 million and $904 million for
the three and nine months ended September 30, 2009, respectively, from $321 million and $999
million for the three and nine months ended September 30, 2008, respectively. The decrease in
interest expense, net for the three and nine months ended September 30, 2009 is due primarily to
lower average net debt.
Other Income (Loss), Net. Other income (loss), net detail is shown in the table below
(millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Investment losses, net |
|
$ |
(25 |
) |
|
$ |
(6 |
) |
|
$ |
(1 |
) |
|
$ |
(22 |
) |
Income (loss) from equity method investees |
|
|
(19 |
) |
|
|
31 |
|
|
|
(49 |
) |
|
|
13 |
|
Other |
|
|
(7 |
) |
|
|
4 |
|
|
|
(21 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss), net |
|
$ |
(51 |
) |
|
$ |
29 |
|
|
$ |
(71 |
) |
|
$ |
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in investment losses, net are discussed under “Significant Transactions and Other
Items Affecting Comparability.” Excluding the impact of investment losses, net, the change in other
income (loss), net for the three and nine months ended September 30, 2009 was primarily due to the
Company’s recognition in the third quarter of 2008 of its $30 million share of a pretax gain on
the sale of a Central European documentary channel by an equity method investee, higher losses from
equity method investees and costs related to the separation of AOL, partly offset by lower
securitization expenses.
Income Tax Provision. Income tax expense from continuing operations was $377 million for the
three months ended September 30, 2009 compared to $487 million for the three months ended September
30, 2008 and was $1.042 billion for the nine months ended September 30, 2009 compared to $1.147
billion for the nine months ended September 30, 2008. The Company’s effective tax rate for
continuing operations was 36% and 37% for the three and nine months ended September 30, 2009,
respectively, compared to 39% and 38% for the three and nine months ended September 30, 2008,
respectively. The decrease for the three and nine months ended September 30, 2009, was principally
due to the recognition of certain state and local tax benefits.
Income from Continuing Operations. Income from continuing operations was $663 million for the
three months ended September 30, 2009 compared to $769 million for the three months ended September
30, 2008. Excluding the items previously noted under “Significant Transactions and Other Items
Affecting Comparability” totaling $62 million and $23 million of expense, net for the three months
ended September 30, 2009 and 2008, respectively, income from continuing operations decreased by $67
million, primarily reflecting lower Operating Income, partially offset by lower tax expense and
interest expense, all as noted above. Basic and diluted income per common share from continuing
operations attributable to Time Warner Inc. common shareholders were
$0.56 and $0.55, respectively,
in 2009 compared to $0.64 and $0.63, respectively, in 2008.
Income from continuing operations was $1.752 billion for the nine months ended September 30,
2009 compared to $1.899 billion for the nine months ended September 30, 2008. Excluding the items
previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling
$71 million and $54 million of expense, net for the nine months ended September 30, 2009 and 2008,
respectively, income from continuing operations decreased by $130 million, primarily reflecting
lower Operating Income, partially offset by lower interest expense, all as noted above. Basic and
diluted income per common share from continuing operations attributable to Time Warner Inc. common
shareholders were both $1.45 in 2009 compared to $1.57 and $1.56, respectively, in 2008.
Discontinued Operations, Net of Tax. The financial results for the nine months ended
September 30, 2009 and the three and nine months ended September 30, 2008 included the impact of
treating the results of operations and financial condition of TWC as discontinued operations.
Discontinued operations, net of tax was a loss of $1 million and income of $130 million for the
three and nine months ended September 30, 2009, respectively, and was $355 million and $890 million
for the three and nine months ended September 30, 2008, respectively. The current year results
included TWC’s results for the period from January 1, 2009 through March 12, 2009, as compared to
the full three- and nine-month periods in 2008. In
14
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
addition, discontinued operations, net of tax
for the nine months ended September 30, 2009 included direct transaction costs (e.g., legal and
professional fees) related to the separation of TWC of $75 million compared to $53 million and $102
million for the three and nine months ended September 30, 2008, respectively. For additional
information, see Note 2 to the accompanying consolidated financial statements.
Net Income Attributable to Noncontrolling Interests. Net income attributable to
noncontrolling interests was $1 million and $41 million, respectively, for the three and nine
months ended September 30, 2009 compared to $57 million and $159 million, respectively, for the
three and nine months ended September 30, 2008. The decrease in net income attributable to
noncontrolling interests for the three and nine months ended September 30, 2009 is primarily
attributable to the TWC Separation and the repurchase of Google’s 5% interest in AOL on July 8,
2009.
Net Income Attributable to Time Warner Inc. shareholders and Net Income Per Common Share
Attributable to Time Warner Inc. common shareholders. Net income attributable to Time Warner Inc.
shareholders was $661 million for the three months ended September 30, 2009 compared to $1.067
billion for the three months ended September 30, 2008. Basic and diluted net income per common
share attributable to Time Warner Inc. common shareholders were $0.56 and $0.55, respectively, in
2009 compared to $0.89 for both in 2008. Net income attributable to Time Warner Inc. common
shareholders was $1.841 billion for the nine months ended September 30, 2009 compared to $2.630
billion for the nine months ended September 30, 2008. Basic and diluted net income per common share
attributable to Time Warner Inc. common shareholders were $1.54 and $1.53, respectively, in 2009
compared to $2.20 and $2.19, respectively, in 2008.
Business Segment Results
Networks. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Networks segment for the three and nine months ended September 30, 2009 and 2008 are
as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
1,885 |
|
|
$ |
1,722 |
|
|
|
9 |
% |
|
$ |
5,598 |
|
|
$ |
5,136 |
|
|
|
9 |
% |
Advertising |
|
|
768 |
|
|
|
772 |
|
|
|
(1 |
%) |
|
|
2,367 |
|
|
|
2,417 |
|
|
|
(2 |
%) |
Content |
|
|
197 |
|
|
|
224 |
|
|
|
(12 |
%) |
|
|
598 |
|
|
|
626 |
|
|
|
(4 |
%) |
Other |
|
|
24 |
|
|
|
13 |
|
|
|
85 |
% |
|
|
82 |
|
|
|
37 |
|
|
|
122 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,874 |
|
|
|
2,731 |
|
|
|
5 |
% |
|
|
8,645 |
|
|
|
8,216 |
|
|
|
5 |
% |
Costs of revenues(a) |
|
|
(1,282 |
) |
|
|
(1,199 |
) |
|
|
7 |
% |
|
|
(4,029 |
) |
|
|
(3,915 |
) |
|
|
3 |
% |
Selling, general and
administrative(a) |
|
|
(496 |
) |
|
|
(524 |
) |
|
|
(5 |
%) |
|
|
(1,475 |
) |
|
|
(1,475 |
) |
|
|
- |
|
Loss on disposal of
consolidated
business |
|
|
- |
|
|
|
(3 |
) |
|
|
(100 |
%) |
|
|
- |
|
|
|
(3 |
) |
|
|
(100 |
%) |
Asset impairments |
|
|
(52 |
) |
|
|
- |
|
|
NM |
|
|
(52 |
) |
|
|
(18 |
) |
|
|
189 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before
Depreciation and Amortization |
|
|
1,044 |
|
|
|
1,005 |
|
|
|
4 |
% |
|
|
3,089 |
|
|
|
2,805 |
|
|
|
10 |
% |
Depreciation |
|
|
(87 |
) |
|
|
(82 |
) |
|
|
6 |
% |
|
|
(259 |
) |
|
|
(241 |
) |
|
|
7 |
% |
Amortization |
|
|
(19 |
) |
|
|
(14 |
) |
|
|
36 |
% |
|
|
(57 |
) |
|
|
(32 |
) |
|
|
78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
938 |
|
|
$ |
909 |
|
|
|
3 |
% |
|
$ |
2,773 |
|
|
$ |
2,532 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (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,
2009 was due primarily to higher subscription rates at both Turner and HBO and the effect of the
consolidation of HBO LAG, partially offset by the negative impact of foreign exchange rates at
Turner.
The decrease in Advertising revenues for the three and nine months ended September 30, 2009
was driven mainly by
15
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
the impact of weakened demand, primarily at Turner’s news networks, and the negative impact of
foreign exchange rates, partly offset by increases at Turner’s domestic entertainment networks for
the three months ended September 30, 2009. The Company anticipates that the difficult economic
environment and the absence of Advertising revenues associated with the 2008 election coverage will
adversely affect Advertising revenues at Turner in the fourth quarter of 2009 compared to the
similar period in 2008.
The decrease in Content revenues for the three months ended September 30, 2009 was due
primarily to lower ancillary sales of HBO’s original programming, which is expected to continue for
the remainder of the year, partly offset by the effect of lower than anticipated home video returns
of approximately $25 million for the third quarter of 2009.
For the three and nine months ended September 30, 2009, costs of revenues increased due to
higher programming costs, partially offset by lower newsgathering costs, primarily reflecting the
absence of the prior year’s election-related costs. For the three months ended September 30, 2009,
programming costs increased 10% to $939 million from $854 million for the three months ended
September 30, 2008, and for the nine months ended September 30, 2009, programming costs increased
5% to $3.013 billion from $2.870 billion for the nine months ended September 30, 2008. The increase
in programming costs for the three and nine months ended September 30, 2009 was due primarily to
the impact of the consolidation of HBO LAG as well as higher expenses related to original
programming at Turner, and for the nine months ended September 30, 2009, was partially offset by
lower expenses related to sports programming at Turner, primarily NBA programming. Costs of
revenues as a percentage of revenues were 45% and 47% for the three and nine months ended September
30, 2009, respectively, compared to 44% and 48% for the three and nine months ended September 30,
2008, respectively.
The decrease in selling, general and administrative expenses for the three months ended
September 30, 2009 was due primarily to lower marketing expenses, partly offset by increased costs
related to the consolidation of HBO LAG. Selling, general and administrative expenses for the nine
months ended September 30, 2009 were flat primarily due to increased costs associated with the
consolidation of HBO LAG, which were offset by lower marketing expenses.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the three and nine months ended September 30, 2009 included a $52 million noncash
impairment of intangible assets related to Turner’s interest in a general entertainment network in
India. The results for the three months ended September 30, 2008 included a $3 million loss on the
completion of the sale of GameTap, an online video game business, and the results for the nine months ended
September 30, 2008 included an $18 million noncash impairment of GameTap.
Operating Income before Depreciation and Amortization for the three and nine months ended
September 30, 2009 increased primarily due to an increase in revenues. Operating Income for the
three and nine months ended September 30, 2009 increased primarily due to the increase in Operating
Income before Depreciation and Amortization, partly offset by higher amortization expense primarily
related to the consolidation of HBO LAG.
16
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, 2009 and 2008 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
|
9/30/09 |
|
|
9/30/08 |
|
|
%
Change |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
12 |
|
|
$ |
10 |
|
|
|
20 |
% |
|
$ |
31 |
|
|
$ |
30 |
|
|
|
3 |
% |
Advertising |
|
|
18 |
|
|
|
20 |
|
|
|
(10 |
%) |
|
|
52 |
|
|
|
57 |
|
|
|
(9 |
%) |
Content |
|
|
2,716 |
|
|
|
2,797 |
|
|
|
(3 |
%) |
|
|
7,526 |
|
|
|
8,034 |
|
|
|
(6 |
%) |
Other |
|
|
34 |
|
|
|
54 |
|
|
|
(37 |
%) |
|
|
137 |
|
|
|
164 |
|
|
|
(16 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,780 |
|
|
|
2,881 |
|
|
|
(4 |
%) |
|
|
7,746 |
|
|
|
8,285 |
|
|
|
(7 |
%) |
Costs of revenues(a) |
|
|
(1,963 |
) |
|
|
(2,015 |
) |
|
|
(3 |
%) |
|
|
(5,480 |
) |
|
|
(5,891 |
) |
|
|
(7 |
%) |
Selling, general and
administrative(a) |
|
|
(415 |
) |
|
|
(468 |
) |
|
|
(11 |
%) |
|
|
(1,225 |
) |
|
|
(1,407 |
) |
|
|
(13 |
%) |
Loss on sale of assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(33 |
) |
|
|
- |
|
|
NM |
Restructuring costs |
|
|
(17 |
) |
|
|
(17 |
) |
|
|
- |
|
|
|
(85 |
) |
|
|
(130 |
) |
|
|
(35 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before
Depreciation and Amortization |
|
|
385 |
|
|
|
381 |
|
|
|
1 |
% |
|
|
923 |
|
|
|
857 |
|
|
|
8 |
% |
Depreciation |
|
|
(43 |
) |
|
|
(42 |
) |
|
|
2 |
% |
|
|
(124 |
) |
|
|
(126 |
) |
|
|
(2 |
%) |
Amortization |
|
|
(51 |
) |
|
|
(64 |
) |
|
|
(20 |
%) |
|
|
(151 |
) |
|
|
(179 |
) |
|
|
(16 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
291 |
|
|
$ |
275 |
|
|
|
6 |
% |
|
$ |
648 |
|
|
$ |
552 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude depreciation. |
Content revenues primarily include theatrical product (which is content made available
for initial exhibition in theaters) and television product (which is content made available for
initial airing on television). The components of Content revenues for the three and nine months
ended September 30, 2009 and 2008 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
%
Change |
|
9/30/09 |
|
|
9/30/08 |
|
|
%
Change |
Theatrical product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical film |
|
$ |
774 |
|
|
$ |
785 |
|
|
|
(1 |
%) |
|
$ |
1,645 |
|
|
$ |
1,580 |
|
|
|
4 |
% |
Home video and electronic
delivery |
|
|
549 |
|
|
|
592 |
|
|
|
(7 |
%) |
|
|
1,607 |
|
|
|
2,168 |
|
|
|
(26 |
%) |
Television licensing |
|
|
353 |
|
|
|
358 |
|
|
|
(1 |
%) |
|
|
1,084 |
|
|
|
1,179 |
|
|
|
(8 |
%) |
Consumer products and other |
|
|
32 |
|
|
|
42 |
|
|
|
(24 |
%) |
|
|
79 |
|
|
|
124 |
|
|
|
(36 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total theatrical product |
|
|
1,708 |
|
|
|
1,777 |
|
|
|
(4 |
%) |
|
|
4,415 |
|
|
|
5,051 |
|
|
|
(13 |
%) |
Television product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television licensing |
|
|
543 |
|
|
|
531 |
|
|
|
2 |
% |
|
|
1,954 |
|
|
|
1,742 |
|
|
|
12 |
% |
Home video and electronic
delivery |
|
|
196 |
|
|
|
207 |
|
|
|
(5 |
%) |
|
|
514 |
|
|
|
557 |
|
|
|
(8 |
%) |
Consumer products and other |
|
|
40 |
|
|
|
38 |
|
|
|
5 |
% |
|
|
151 |
|
|
|
144 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total television product |
|
|
779 |
|
|
|
776 |
|
|
|
- |
|
|
|
2,619 |
|
|
|
2,443 |
|
|
|
7 |
% |
Other |
|
|
229 |
|
|
|
244 |
|
|
|
(6 |
%) |
|
|
492 |
|
|
|
540 |
|
|
|
(9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Content revenues |
|
$ |
2,716 |
|
|
$ |
2,797 |
|
|
|
(3 |
%) |
|
$ |
7,526 |
|
|
$ |
8,034 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline in Content revenues for the three and nine months ended September 30, 2009
included the negative impact of foreign exchange rates on many of the segment’s international
operations.
17
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Theatrical film revenues for the three months ended September 30, 2009, which included the
releases of Harry Potter and the Half-Blood Prince and The Final Destination as well as carryover
revenues from The Hangover declined slightly compared to revenues for the three months ended
September 30, 2008, which included the releases of The Dark Knight and Journey to the Center of the
Earth. The increase in theatrical film revenues for the nine months ended September 30, 2009 was
due primarily to the success of key films released in the first half of 2009, which included
revenues from the releases of The Hangover and Terminator 4: Salvation as well as carryover from
Gran Torino and The Curious Case of Benjamin Button, compared to the similar period in 2008, which
included revenues from the releases of Sex and the City, 10,000 B.C. and Get Smart as well as
carryover from I Am Legend and The Bucket List. Theatrical product revenues from home video and
electronic delivery decreased for the three and nine months ended September 30, 2009 primarily due
to the reduced quantity and performance of new releases and lower
catalog sales, driven in part by the negative impact of the current
economic environment, partially
offset by the effect of lower than anticipated catalog returns for the nine months ended September
30, 2009. Significant titles in 2009 included Gran Torino, Watchmen, Body of Lies and Yes Man,
compared to significant titles in 2008, which included I Am Legend, 10,000 B.C., The Bucket List,
Sex and the City and Fool’s Gold. Theatrical product revenues from television licensing decreased
for the three and nine months ended September 30, 2009 due primarily to the timing and quantity of
availabilities. Theatrical product revenues from consumer products and other decreased for the
three and nine months ended September 30, 2009 due to difficult comparisons to consumer product
revenues in the three and nine months ended September 30, 2008, which included revenues from
arrangements related to the release of The Dark Knight in the third quarter of 2008 and the release
of Speed Racer in the second quarter of 2008.
The increase in television product licensing fees for the nine months ended September 30, 2009
was primarily due to the effect of fewer network deliveries in the first quarter of 2008 as a
result of the Writers Guild of America (East and West) strike, which was settled in February 2008.
The decrease in television product revenues from home video and electronic delivery for the three
and nine months ended September 30, 2009 primarily resulted from the reduced quantity and
performance of new releases and lower catalog sales, driven in part by the negative impact of the
current economic environment.
The decrease in Other content revenues for the three and nine months ended September 30, 2009
was due primarily to difficult comparisons to the prior year, which included revenues from the
second-quarter 2008 interactive video game release of LEGO: Indiana Jones and the third-quarter
2008 interactive video game release of LEGO: Batman, partially offset by benefits from the
expansion of third party interactive video games distribution in 2009 as well as the first-quarter
2009 interactive video game release of F.E.A.R. 2: Project Origin.
The decrease in costs of revenues for the three and nine months ended September 30, 2009
resulted primarily from lower theatrical advertising and print costs due primarily to the timing,
quantity and mix of films released and lower manufacturing and related costs associated with a
decline in Home video and electronic delivery revenues. Film costs increased to $1.192 billion and
$3.473 billion for the three and nine months ended September 30, 2009, respectively, from $1.184
billion and $3.410 billion for the three and nine months ended September 30, 2008, respectively.
Included in film costs are net pre-release theatrical film valuation adjustments, which for the
three months ended September 30, 2009 included a reversal of $12 million compared to an expense of
$10 million for the three months ended September 30, 2008 and for the nine months ended September
30, 2009 increased to $39 million from $28 million for the nine months ended September 30, 2008. In
addition, for the three and nine months ended September 30, 2009, the Company recognized a benefit
of approximately $25 million related to an adjustment to correct prior period participation
accruals, and, during the nine months ended September 30, 2008, the Company recognized
approximately $40 million in participation expense related to claims on films released in prior
periods. Costs of revenues as a percentage of revenues was 71% for both the three and nine months
ended September 30, 2009 compared to 70% and 71% for the three and nine months ended September 30,
2008, respectively.
The decrease in selling, general and administrative expenses for the three and nine months
ended September 30, 2009 was primarily the result of lower employee costs resulting from the
operational reorganization of the New Line business in 2008 and Warner Bros.’ restructuring
activities in 2009, discussed below, as well as lower distribution expenses primarily associated
with the declines in Home video and electronic delivery and Other content revenues.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the nine
18
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
months ended September 30, 2009 included a $33 million loss on the sale of Warner Bros.’
Italian cinema assets. In addition, beginning in the first quarter of 2009, Warner Bros. commenced
a significant restructuring, primarily consisting of headcount reductions and the outsourcing of
certain functions to an external service provider. The Filmed Entertainment segment incurred
restructuring charges of $17 million and $85 million for the three and nine months ended September
30, 2009, respectively, and expects to incur additional restructuring charges of approximately $10
million in the fourth quarter of 2009. The results for the three and nine months ended September
30, 2008 included restructuring charges of $17 million and $130 million, respectively, related to
involuntary employee terminations in connection with the operational reorganization of the New Line
business.
Operating Income before Depreciation and Amortization increased for the three and nine months
ended September 30, 2009 primarily due to lower costs of revenues and selling, general and
administrative expenses, partly offset by a decrease in revenues and the negative impact of foreign
exchange rates. Operating Income before Depreciation and Amortization for the nine months ended
September 30, 2009 also included the effect of lower than anticipated home video catalog returns of
approximately $40 million, and the $33 million loss on the sale of the Italian cinema assets.
The increase in Operating Income for the three and nine months ended September 30, 2009 was
primarily due to the increase in Operating Income before Depreciation and Amortization, as well as
a decrease in amortization expense primarily relating to film library assets.
Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Publishing segment for the three and nine months ended September 30, 2009 and 2008
are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
333 |
|
|
$ |
382 |
|
|
|
(13 |
%) |
|
$ |
959 |
|
|
$ |
1,134 |
|
|
|
(15 |
%) |
Advertising |
|
|
456 |
|
|
|
585 |
|
|
|
(22 |
%) |
|
|
1,321 |
|
|
|
1,783 |
|
|
|
(26 |
%) |
Content |
|
|
22 |
|
|
|
16 |
|
|
|
38 |
% |
|
|
53 |
|
|
|
40 |
|
|
|
33 |
% |
Other |
|
|
103 |
|
|
|
135 |
|
|
|
(24 |
%) |
|
|
302 |
|
|
|
382 |
|
|
|
(21 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
914 |
|
|
|
1,118 |
|
|
|
(18 |
%) |
|
|
2,635 |
|
|
|
3,339 |
|
|
|
(21 |
%) |
Costs of revenues(a) |
|
|
(363 |
) |
|
|
(449 |
) |
|
|
(19 |
%) |
|
|
(1,045 |
) |
|
|
(1,330 |
) |
|
|
(21 |
%) |
Selling, general and
administrative(a) |
|
|
(400 |
) |
|
|
(427 |
) |
|
|
(6 |
%) |
|
|
(1,288 |
) |
|
|
(1,338 |
) |
|
|
(4 |
%) |
Asset impairments |
|
|
- |
|
|
|
(30 |
) |
|
|
(100 |
%) |
|
|
- |
|
|
|
(30 |
) |
|
|
(100 |
%) |
Restructuring costs |
|
|
(12 |
) |
|
|
(1 |
) |
|
NM |
|
|
(7 |
) |
|
|
(16 |
) |
|
|
(56 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before
Depreciation and Amortization |
|
|
139 |
|
|
|
211 |
|
|
|
(34 |
%) |
|
|
295 |
|
|
|
625 |
|
|
|
(53 |
%) |
Depreciation |
|
|
(31 |
) |
|
|
(32 |
) |
|
|
(3 |
%) |
|
|
(93 |
) |
|
|
(100 |
) |
|
|
(7 |
%) |
Amortization |
|
|
(11 |
) |
|
|
(17 |
) |
|
|
(35 |
%) |
|
|
(35 |
) |
|
|
(52 |
) |
|
|
(33 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
97 |
|
|
$ |
162 |
|
|
|
(40 |
%) |
|
$ |
167 |
|
|
$ |
473 |
|
|
|
(65 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude depreciation. |
For the three and nine months ended September 30, 2009, Subscription revenues declined
primarily due to declines in domestic subscription renewals and softening domestic newsstand sales,
both due to the effect of the current economic environment, as well as decreases at IPC resulting
primarily from the negative impact of foreign exchange rates. The Company anticipates that the
economic environment will continue to adversely affect the Publishing segment’s Subscription
revenues in the fourth quarter of 2009.
For the three and nine months ended September 30, 2009, Advertising revenues decreased
primarily due to declines in domestic print Advertising revenues and international print
Advertising revenues, including the effect of foreign exchange rates at IPC, and lower online
revenues. These declines primarily reflect the current weak economic conditions and
19
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
increased competition for advertising dollars. The Company currently anticipates that
Advertising revenues at the Publishing segment in the fourth quarter of 2009 will decline compared
to the similar period in 2008, reflecting primarily the effect of the current economic environment,
although the rate of decline in the fourth quarter of 2009 is expected to moderate in comparison to
that experienced during the first nine months of 2009.
For the three and nine months ended September 30, 2009, Other revenues decreased due primarily
to decreases at the non-magazine businesses, including Southern Living At Home, which was sold
during the three months ended September 30, 2009.
Costs of revenues decreased 19% and 21% for the three and nine months ended September 30,
2009, respectively, and, as a percentage of revenues, were 40% for both the three and nine months
ended September 30, 2009 and both the three and nine months ended September 30, 2008. Costs of
revenues for the magazine and online businesses include manufacturing costs (paper, printing and
distribution) and editorial-related costs, which together decreased 20% to $322 million for the
three months ended September 30, 2009 from $405 million for the three months ended September
30, 2008 and decreased 22% to $956 million for the nine months ended September 30, 2009 from $1.219
billion for the nine months ended September 30, 2009, primarily due to cost savings initiatives,
lower printing and paper costs related to a decline in volume and lower costs at IPC due primarily
to the effect of foreign exchange rates. In addition, costs of revenues at the non-magazine
businesses declined as a result of lower revenues.
Selling, general and administrative expenses for the three and nine months ended September 30,
2009 decreased due to cost savings initiatives, a decrease at IPC due primarily to the effect of
foreign exchange rates and lower marketing expenses, and, for the three months ended September 30,
2009, the effect of the sale of Southern Living At Home, partly offset by costs associated with the
acquisition of QSP and higher pension expense, and, for the nine months ended September 30, 2009,
an $18 million increase in bad debt reserves related to a newsstand wholesaler.
As
previously noted under “Significant Transactions and Other Items
Affecting Comparability,” the results for the three and nine months
ended September 30, 2008 included a $30 million noncash
impairment related to the sub-lease with a tenant that filed for bankruptcy in September 2008. In addition, the results for the three and nine months ended September 30, 2009 included restructuring
costs of $12 million and $7 million, respectively, including a $6 million increase related to the
sub-lease with the tenant that filed for bankruptcy in September 2008. In an ongoing effort to
continue to streamline the Publishing segment’s operations, the Company expects to incur up to $100
million of restructuring costs primarily related to severance costs in the fourth quarter of 2009.
The results for the three and nine months ended September 30, 2008 included restructuring costs of
$1 million and $16 million, respectively, primarily related to severance costs associated with
continuing efforts to streamline operations.
For the three and nine months ended September 30, 2009, Operating Income before Depreciation
and Amortization and Operating Income decreased due primarily to lower revenues, partially offset
by decreases in costs of revenues and selling, general and administrative expenses and the absence
of the $30 million noncash asset impairment.
The Company anticipates that, excluding the Publishing segment’s asset impairments and
restructuring costs, Operating Income before Depreciation and Amortization and Operating Income at
the Publishing segment generated in the fourth quarter of 2009 will be less than that achieved
during the comparable period in 2008, primarily resulting from the expected continued declines in
Advertising and Subscription revenues.
As discussed in more detail in Note 1 to the Company’s consolidated financial statements in
the 2008 Form 10-K, goodwill and indefinite-lived intangible assets are tested annually for
impairment during the fourth quarter or earlier upon the occurrence of certain events. As a result
of the test in the fourth quarter of 2008, the Company recognized impairments of goodwill and
indefinite-lived intangible assets at the Publishing reporting unit of $6.007 billion and $518
million, respectively and the carrying values of the impaired assets were written down to their
estimated fair values as of December 31, 2008. As of September 30, 2009, the carrying values of
goodwill and indefinite-lived intangible assets at the Publishing reporting unit were $3.163
billion and $814 million, respectively. If the current economic environment deteriorates in the
fourth quarter of 2009 and negatively affects the Company’s long-term view of Advertising revenues
beyond the Company’s current expectations, it is possible that the carrying value of the Company’s
Publishing reporting unit and certain indefinite-lived intangible assets of the Publishing
reporting unit will exceed their respective fair values, which may result in the Company
recognizing a noncash impairment of goodwill and/or indefinite-lived intangible assets at the
Publishing reporting unit. Determining fair value requires the exercise of significant judgment,
including judgments about appropriate discount rates, perpetual growth rates, the amount and timing
of expected future cash flows, as well as relevant comparable company earnings multiples (when
estimating fair value using a market-based approach).
To illustrate the magnitude of potential impairment charges relative to changes in estimated
fair value, had the fair value of the Publishing reporting unit been hypothetically lower by 10% as
of December 31, 2008, the reporting unit book value would have exceeded fair value by approximately
$365 million. Had the fair value of the Publishing reporting unit been hypothetically lower by 20%
as of December 31, 2008, the reporting unit book value would have exceeded fair value by
approximately $856 million. In addition, a hypothetical 10% decrease to the fair value of
indefinite-lived intangible assets would result in book value exceeding fair value by approximately
$85 million at the Publishing reporting unit, while a hypothetical 20% decrease to the fair value
of those indefinite-lived intangible assets would result in book value exceeding fair value by
approximately $175 million.
20
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of
the AOL segment for the three and nine months ended September 30, 2009 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
332 |
|
|
$ |
470 |
|
|
(29%) |
|
$ |
1,081 |
|
|
$ |
1,500 |
|
|
(28%) |
Advertising |
|
|
415 |
|
|
|
507 |
|
|
(18%) |
|
|
1,277 |
|
|
|
1,589 |
|
|
(20%) |
Other |
|
|
30 |
|
|
|
35 |
|
|
(14%) |
|
|
90 |
|
|
|
108 |
|
|
(17%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
777 |
|
|
|
1,012 |
|
|
(23%) |
|
|
2,448 |
|
|
|
3,197 |
|
|
(23%) |
Costs of revenues(a) |
|
|
(392 |
) |
|
|
(466 |
) |
|
(16%) |
|
|
(1,221 |
) |
|
|
(1,540 |
) |
|
(21%) |
Selling, general and
administrative(a) |
|
|
(136 |
) |
|
|
(146 |
) |
|
(7%) |
|
|
(379 |
) |
|
|
(489 |
) |
|
(22%) |
Asset impairments |
|
|
(5 |
) |
|
|
(9 |
) |
|
(44%) |
|
|
(5 |
) |
|
|
(9 |
) |
|
(44%) |
Restructuring costs |
|
|
(10 |
) |
|
|
(2 |
) |
|
NM |
|
|
(83 |
) |
|
|
(15 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
234 |
|
|
|
389 |
|
|
(40%) |
|
|
760 |
|
|
|
1,144 |
|
|
(34%) |
Depreciation |
|
|
(66 |
) |
|
|
(76 |
) |
|
(13%) |
|
|
(206 |
) |
|
|
(238 |
) |
|
(13%) |
Amortization |
|
|
(34 |
) |
|
|
(45 |
) |
|
(24%) |
|
|
(105 |
) |
|
|
(124 |
) |
|
(15%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
134 |
|
|
$ |
268 |
|
|
(50%) |
|
$ |
449 |
|
|
$ |
782 |
|
|
(43%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude depreciation. |
The decline in Subscription revenues for the three and nine months ended September 30,
2009 reflects the continued decline in the number of domestic AOL-brand access subscribers.
The number of domestic AOL-brand access subscribers was 5.4 million, 5.8 million and 7.5
million as of September 30, 2009, June 30, 2009 and September 30, 2008, respectively. The average
monthly revenue per domestic AOL-brand access subscriber (“ARPU”) was $18.54 and $18.60 for the
three months ended September 30, 2009 and 2008, respectively, and $18.43 and $18.29 for the nine
months ended September 30, 2009 and 2008, respectively. AOL includes in its subscriber numbers
individuals, households and entities that have provided billing information and completed the
registration process sufficiently to allow for an initial log-on to the AOL service. Individuals
who have registered for the free AOL service, including subscribers who have migrated from paid
subscription plans, are not included in the AOL-brand access subscriber numbers presented above.
The continued decline in domestic AOL-brand access subscribers is the result of several
factors, including the increased availability of high-speed Internet broadband connections, the
fact that a significant amount of online content, products and services has been optimized for use
with broadband Internet connections and the effects of AOL’s strategic shift announced in 2006,
which resulted in significantly reduced marketing efforts for its subscription access service and
the free availability of the majority of its content, products and services. ARPU for the three and
nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008
was negatively affected by the shift in the subscriber mix to lower-priced plans and was positively
affected by price increases for lower-priced plans.
21
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Advertising services include display advertising (which includes impression-based, time-based
and performance-based advertising), both domestically and internationally, which is provided on
both AOL Media and the Third Party Network and paid-search advertising, both domestically and
internationally, which is provided mainly on AOL Media. The components of Advertising revenues for
the three and nine months ended September 30, 2009 and 2008 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
|
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
|
AOL Media |
|
|
288 |
|
|
|
363 |
|
|
(21%) |
|
|
893 |
|
|
|
1,090 |
|
|
(18%) |
Third Party Network |
|
|
127 |
|
|
|
144 |
|
|
(12%) |
|
|
384 |
|
|
|
499 |
|
|
(23%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Advertising revenues |
|
$ |
415 |
|
|
$ |
507 |
|
|
(18%) |
|
$ |
1,277 |
|
|
$ |
1,589 |
|
|
(20%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline in Advertising revenues for the three and nine months ended September 30, 2009
included the negative impact of foreign exchange rates on international operations relating to both
AOL Media and the Third Party Network.
The decrease in Advertising revenues generated on AOL Media for the three and nine months
ended September 30, 2009, as compared to the three and nine months ended September 30, 2008, was
due primarily to declines in revenues generated through AOL’s strategic relationship with Google,
which was primarily the result of decreases in search query volume (partially due to the decline in
domestic AOL-brand access subscribers) and lower revenues per search query on certain AOL Media
properties and weak global economic conditions that resulted in lower advertising demand. For the
three months ended September 30, 2009, the revenues associated with the arrangement with Google
(substantially all of which were paid-search revenues generated on AOL Media) declined $42 million
to $135 million from $177 million in 2008, respectively, and for the nine months ended September
30, 2009 declined $91 million to $422 million from $513 million in 2008.
The decrease in Advertising revenues on the Third Party Network for the three and nine months
ended September 30, 2009 compared to the three and nine months ended September 30, 2008 was
primarily due to weak global economic conditions, which contributed to lower advertising demand. In
addition, the decline in Advertising revenues on the Third Party Network included a decrease of $3
million and $23 million for the three and nine months ended September 30, 2009, respectively, due
to a change in the relationship with a major customer of AOL. Revenues associated with this
relationship were $0 and $2 million for the three and nine months ended September 30, 2009,
respectively, compared to $3 million and $25 million for the three and nine months ended September
30, 2008, respectively. Total revenues from this customer for the year ended December 31, 2008 were
$26 million.
Total Advertising revenues for the three months ended September 30, 2009 decreased $4 million
from the three months ended June 30, 2009, reflecting decreases in revenues associated with the
arrangement with Google, primarily due to decreases in search query volume on certain AOL Media
properties.
AOL has made and is exploring making additional changes to its content, products and services
designed to enhance the consumer experience (e.g., fewer advertisements on certain AOL Media
properties). These changes have involved and may continue to involve the elimination or
modification of advertising practices that historically have been a source of revenues. These
enhancements to the consumer experience are intended to ultimately increase AOL’s Advertising
revenues by enhancing the attractiveness of AOL’s content, product and service offerings to
consumers and therefore their value to advertisers. These changes did not have a significant impact
on AOL’s Advertising revenues in the third quarter of 2009, but these enhancements may have a
negative impact on its Advertising revenues in the near-term.
The Company expects Advertising revenues at the AOL segment for the fourth quarter of 2009 to
be less than those generated during the comparable period in 2008, primarily reflecting weak
economic conditions and the impact of the continued decline in AOL-brand access subscribers.
For the three and nine months ended September 30, 2009, costs of revenues decreased 16% and
21%, respectively, and, as a percentage of revenues, were 50% for both periods compared to 46% and
48% for the three and nine months ended September 30, 2008, respectively. Costs of revenues
decreased for the three and nine months ended September 30, 2009
22
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
primarily due to declines in TAC and, to a lesser extent, declines in network-related costs
associated with a decline in AOL-brand access subscribers and lower personnel-related costs
primarily associated with reduced headcount, partly offset by higher compensation expense resulting
from AOL’s decision not to pay most annual bonuses in 2008. TAC consists of the costs of acquiring
third-party online advertising inventory and costs incurred in connection with distributing AOL’s
free products or services or otherwise directing traffic to AOL Media. TAC decreased 18% to $135
million for the three months ended September 30, 2009 from $165 million for the three months ended
September 30, 2008 and decreased 26% to $398 million for the nine months ended September 30, 2009
from $535 million for the nine months ended September 30, 2008, due primarily to the decrease in
Advertising revenues on the Third Party Network and, to a lesser extent, declines in new product
distribution costs.
Selling, general and administrative expenses decreased 7% to $136 million and 22% to $379
million for the three and nine months ended September 30, 2009, respectively, reflecting reduced
payments to marketing partners due to the decline in domestic AOL-brand access subscribers, lower
consulting costs and reduced spending due to cost savings initiatives, partly offset by an
incremental $15 million accrual in connection with the resolution of a French value-added tax
matter associated with AOL’s former European access service businesses and higher compensation
expense resulting from the decision not to pay most annual bonuses in 2008. In addition, selling,
general and administrative expenses for the three and nine months ended September 30, 2008 included
$6 million and $22 million, respectively, of external costs incurred in connection with the
Company’s evaluation of various strategic alternatives related to AOL, including the previously
contemplated separation of AOL into separate businesses.
As previously noted under “Significant Transactions and Other Items Affecting Comparability,”
the results for the three and nine months ended September 30, 2009 included a $5 million noncash
impairment of certain trade names, and the results for the three and nine months ended September
30, 2008 included a $9 million noncash impairment of a building. In addition, during the
first nine months of 2009, in an effort to better align its cost structure with its revenues, AOL
undertook various restructuring activities. As a result, for the three and nine months ended
September 30, 2009, AOL incurred restructuring charges of $10 million and $83 million,
respectively, primarily related to involuntary employee terminations and facility closures. AOL
currently expects to incur up to $20 million of additional restructuring charges through the
consummation of the AOL Separation, which is anticipated to occur in the fourth quarter of 2009.
Shortly after the AOL Separation, AOL anticipates undertaking significant additional restructuring
activities to more effectively align its organizational structure and costs to its strategy.
For the three and nine months ended September 30, 2009, Operating Income before Depreciation
and Amortization decreased due primarily to a decline in revenues and higher restructuring costs,
partially offset by lower costs of revenues and selling, general and administrative expenses. For
the three and nine months ended September 30, 2009, Operating Income decreased due primarily to the
decrease in Operating Income before Depreciation and Amortization, as discussed above, partially
offset by a decrease in depreciation expense due in part to a reduction in network assets due to
subscriber declines and lower amortization expense primarily due to certain intangible assets
becoming fully amortized.
Excluding the AOL segment’s asset impairments, the Company anticipates that Operating Income
before Depreciation and Amortization and Operating Income at the AOL segment during the fourth
quarter of 2009 will be less than that generated during the comparable period of 2008, primarily
resulting from continuing declines in Subscription and Advertising revenues.
23
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, 2009 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
|
9/30/09 |
|
|
9/30/08 |
|
|
% Change |
Selling, general and
administrative(a) |
|
$ |
(76 |
) |
|
$ |
(73 |
) |
|
4% |
|
$ |
(238 |
) |
|
$ |
(250 |
) |
|
(5%) |
Restructuring costs |
|
|
- |
|
|
|
- |
|
|
- |
|
|
- |
|
|
|
(7 |
) |
|
(100%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss before
Depreciation and
Amortization |
|
|
(76 |
) |
|
|
(73 |
) |
|
4% |
|
|
(238 |
) |
|
|
(257 |
) |
|
(7%) |
Depreciation |
|
|
(10 |
) |
|
|
(12 |
) |
|
(17%) |
|
|
(30 |
) |
|
|
(33 |
) |
|
(9%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
$ |
(86 |
) |
|
$ |
(85 |
) |
|
1% |
|
$ |
(268 |
) |
|
$ |
(290 |
) |
|
(8%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Selling, general and administrative expenses exclude depreciation. |
The results for the nine months ended September 30, 2008 included $7 million of
restructuring costs, due primarily to involuntary employee terminations as a result of the
Company’s cost savings initiatives at the Corporate segment.
For the three months ended September 30, 2009, Operating Loss before Depreciation and
Amortization increased primarily due to higher pension expenses and an increase in legal and other
professional fees related to the defense of former employees in various lawsuits, partially offset
by corporate cost savings initiatives. Excluding the restructuring costs noted above, Operating
Loss before Depreciation and Amortization and Operating Loss for the nine months ended September
30, 2009 decreased primarily due to corporate cost savings initiatives, partially offset by higher
pension expenses and an increase in legal and other professional fees related to the defense of
former employees in various lawsuits.
FINANCIAL CONDITION AND LIQUIDITY
Management believes that cash generated by or available to the Company should be sufficient to
fund its capital and liquidity needs for the foreseeable future, including quarterly dividend
payments and the remainder of its $5 billion common stock repurchase program. Time Warner’s sources
of cash include cash provided by operations, cash and equivalents on hand, available borrowing
capacity under its committed credit facilities and commercial paper program and access to capital
markets. Time Warner’s unused committed capacity at September 30, 2009 was $14.029 billion,
including $7.126 billion of cash and equivalents.
As part of the TWC Separation, the Company received $9.253 billion on March 12, 2009 as its
portion of the payment by TWC of the special cash dividend of $10.27 per share to all holders of
TWC Class A Common Stock and TWC Class B Common Stock as of the close of business on March 11, 2009
(aggregating $10.856 billion) (the “Special Dividend”).
In late January 2009, Google exercised its right to request that AOL register Google’s 5%
equity interest for sale in an initial public offering. Time Warner exercised its right to purchase
Google’s equity interest for cash based on the appraised fair market value of the equity interest
in lieu of conducting an initial public offering. As noted in “Recent Developments,” on July 8,
2009, the Company repurchased Google’s 5% interest in AOL for $283 million in cash, which amount
included a payment in respect of Google’s pro rata share of cash distributions to Time Warner by
AOL attributable to the period of Google’s investment in AOL.
Current Financial Condition
At September 30, 2009, Time Warner had $17.500 billion of debt, $7.126 billion of cash and
equivalents (net debt of $10.374 billion, defined as total debt less cash and equivalents) and
$36.142 billion of shareholders’ equity, compared to $21.955 billion of debt, $1.233 billion of
cash and equivalents (net debt of $20.722 billion, defined as total debt less cash and equivalents)
and $42.288 billion of shareholders’ equity at December 31, 2008.
24
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 consolidated
net debt from December 31, 2008 to September 30, 2009 (millions):
| |
|
|
|
|
Balance at December 31, 2008 |
|
$ |
20,722 |
|
Cash provided by operations from continuing operations |
|
|
(3,482 |
) |
Capital expenditures and product development costs |
|
|
464 |
|
Dividends paid to common stockholders |
|
|
676 |
|
Investments and acquisitions, net(a) |
|
|
720 |
|
Proceeds from the sale of investments(a) |
|
|
(292 |
) |
Repurchases of common stock(b) |
|
|
676 |
|
Proceeds from the Special Dividend(b) |
|
|
(9,253 |
) |
All other, net |
|
|
143 |
|
|
|
|
Balance at September 30, 2009(c) |
|
$ |
10,374 |
|
|
|
|
|
|
|
| (a) |
|
Refer to “Investing Activities” below for further detail. |
| |
| (b) |
|
Refer to “Financing Activities” below for further detail. |
| |
| (c) |
|
Included in the net debt balance is $23 million that represents the unamortized fair value
adjustment recognized as a result of the merger of AOL and Historic TW Inc. |
Time Warner had a shelf registration statement (the “Registration Statement”) on file
with the SEC since November 8, 2006 that allowed it to offer and sell from time to time debt
securities, preferred stock, common stock and/or warrants to purchase debt and equity securities.
As a result of the Company’s $13.955 billion of unused committed capacity at March 31, 2009 and the
anticipated expiration in early November 2009 of the Registration Statement, the Company determined
it no longer needed the Registration Statement. Accordingly, on April 24, 2009, the Company and the
subsidiary guarantors under the Registration Statement submitted filings to the SEC that suspended
the reporting obligations with respect to the debt securities (and related guarantees) that were
offered and sold pursuant to the Registration Statement and deregistered the securities covered
under the Registration Statement that were available for offer and sale.
The Company has historically invested a portion of its cash on hand in money market funds,
including The Reserve Fund’s Primary Fund (“The Reserve Fund”). On the morning of September 15,
2008, the Company requested a full redemption of its approximately $330 million investment in The
Reserve Fund, but the redemption request was not honored. On September 22, 2008, The Reserve Fund
announced that redemptions of shares were suspended pursuant to an SEC order requested by The
Reserve Fund so that an orderly liquidation could be effected. Through November 3, 2009, the
Company has received $303 million from The Reserve Fund representing its pro rata share of partial
distributions made by The Reserve Fund. The Company has not been informed as to when the remaining
amount will be returned. In February 2009, The Reserve Fund announced that it would set aside an
initial amount of $3.5 billion to defend against certain legal actions. The Company has filed a
claim against The Reserve Fund demanding repayment of the remaining amount of its full investment.
As a result of the status of The Reserve Fund, the Company has classified its receivable from The
Reserve Fund at September 30, 2009 as other current assets on the Company’s consolidated balance
sheet.
As noted in “Recent Developments,” on July 26, 2007, Time Warner’s Board of Directors
authorized a common stock repurchase program that allows the Company to purchase up to an aggregate
of $5 billion of common stock. Purchases under this stock repurchase program may be made from time
to time on the open market and in privately negotiated transactions. The size and timing of these
purchases are based on a number of factors, including price and business and market conditions.
From the program’s inception through November 2, 2009, the
Company repurchased approximately 83 million shares of common stock for approximately $3.7 billion pursuant to trading programs under
Rule 10b5-1 of the Exchange Act. This number included approximately 32 million shares of common
stock purchased for approximately $878 million in 2009 (Note 6).
Time Warner’s $2.000 billion aggregate principal (plus accrued interest) amount of floating
rate public debt will mature on November 13, 2009. The Company intends to pay such aggregate
principal amount and accrued interest in cash on the maturity date. The Company does not have any
other public debt maturing until April 2011.
25
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
In connection with an arrangement entered into with a film co-financing partner in the second
quarter of 2009, the Company agreed to advance the co-financing partner, in 2013, a percentage of
the net present value of estimated future profit participations owed to the partner on all films
co-financed with this partner through 2010.
In connection with the AOL Separation, Time Warner is assisting AOL in arranging a $250
million 364-day senior secured revolving credit facility (the “AOL Revolving Facility”). Time
Warner will guarantee AOL’s obligations under the AOL Revolving Facility. In addition, Time Warner
will agree to continue to provide credit support for certain existing AOL lease and certain other
obligations of approximately $100 million until the earlier of 24 months following the distribution
and 30 days after AOL obtains the right to borrow funds under a long-term post-distribution credit
facility. AOL will pay Time Warner a fee for its guarantee of AOL’s obligations under the AOL
Revolving Facility and its credit support for AOL’s lease and certain other obligations.
Cash Flows
Cash and equivalents increased by $5.893 billion, including $52 million of cash used by
discontinued operations, and decreased by $20 million, including $11 million of cash used by
discontinued operations, for the nine months ended September 30, 2009 and 2008, respectively.
Components of these changes are discussed below in more detail.
Operating Activities from Continuing Operations
Details of cash provided by operations from continuing operations are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Operating Income |
|
$ |
3,769 |
|
|
$ |
4,066 |
|
Depreciation and amortization |
|
|
1,060 |
|
|
|
1,125 |
|
Loss on sale of assets |
|
|
33 |
|
|
|
3 |
|
Noncash asset impairments |
|
|
57 |
|
|
|
57 |
|
Net interest payments(a) |
|
|
(673 |
) |
|
|
(823 |
) |
Net income taxes paid(b) |
|
|
(820 |
) |
|
|
(444 |
) |
Noncash equity-based compensation |
|
|
151 |
|
|
|
167 |
|
Domestic pension plan contributions |
|
|
(35 |
) |
|
|
(115 |
) |
Merger-related and restructuring payments, net of accruals(c) |
|
|
(49 |
) |
|
|
(1 |
) |
All other, net, including working capital changes |
|
|
(11 |
) |
|
|
211 |
|
|
|
|
|
|
Cash provided by operations from continuing operations |
|
$ |
3,482 |
|
|
$ |
4,246 |
|
|
|
|
|
|
|
|
|
| (a) |
|
Includes interest income received of
$31 million and $74 million in 2009 and 2008,
respectively. |
| |
| (b) |
|
Includes income tax refunds received of $67 million and $108 million in 2009 and 2008, respectively, and income tax sharing payments made to TWC of $44 million and received
from TWC of $9 million in 2009 and 2008, respectively. |
| |
| (c) |
|
Includes payments for merger-related and
restructuring costs and payments for certain other merger-related
liabilities, net of accruals. |
Cash provided by operations from continuing operations decreased to $3.482 billion in
2009 from $4.246 billion in 2008. The decrease in cash provided by operations from continuing
operations was related primarily to an increase in net income taxes paid, a decrease in operating
income, an increase in merger-related and restructuring payments, net of accruals and a decrease
in cash provided by working capital, partially offset by a decline in net interest payments and
domestic pension plan contributions. The components of working capital are subject to wide
fluctuations based on the timing of cash transactions related to production schedules, the
acquisition of programming, collection of accounts receivable and similar items.
As of September 30, 2009, certain of the Company’s domestic defined benefit pension plans were
funded by assets in a pension trust with a fair market value of $2.030 billion compared to $1.702
billion as of December 31, 2008. Between January 1, 2009 and September 30, 2009, the Company’s plan
assets have experienced market gains of approximately 26%.
26
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
The Company did not make any discretionary cash contributions to its defined benefit plans
during the nine months ended September 30, 2009. Subject to market conditions and other
considerations, the Company may make discretionary cash contributions during the remainder of the
year.
Investing Activities from Continuing Operations
Details of cash provided (used) by investing activities from continuing operations are as
follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Investments in available-for-sale securities |
|
$ |
(4 |
) |
|
$ |
(17 |
) |
Investments and acquisitions, net of cash acquired: |
|
|
|
|
|
|
|
|
Repurchase of Google’s 5% interest in AOL |
|
|
(283 |
) |
|
|
- |
|
CME |
|
|
(244 |
) |
|
|
- |
|
Bebo |
|
|
(8 |
) |
|
|
(851 |
) |
The Reserve Fund |
|
|
- |
|
|
|
(330 |
) |
buy.at |
|
|
- |
|
|
|
(125 |
) |
All other |
|
|
(181 |
) |
|
|
(396 |
) |
Capital expenditures and product development costs |
|
|
(464 |
) |
|
|
(556 |
) |
Proceeds from the Special Dividend |
|
|
9,253 |
|
|
|
- |
|
Proceeds from the sale of available-for-sale securities |
|
|
50 |
|
|
|
15 |
|
All other investment and sale proceeds |
|
|
242 |
|
|
|
242 |
|
|
|
|
|
|
Cash provided (used) by investing activities from continuing operations |
|
$ |
8,361 |
|
|
$ |
(2,018 |
) |
|
|
|
|
|
Cash provided by investing activities from continuing operations was $8.361 billion for the
nine months ended September 30, 2009 compared to cash used by investing activities from continuing
operations of $2.018 billion for the nine months ended September 30, 2008. The change in cash
provided (used) by investing activities from continuing operations was primarily due to the receipt
of the Company’s portion of the Special Dividend, a decline in investments and acquisitions and
lower capital expenditures and product development costs.
Financing Activities from Continuing Operations
Details of cash used by financing activities from continuing operations are as follows
(millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Borrowings(a) |
|
$ |
3,542 |
|
|
$ |
25,719 |
|
Debt repayments(a) |
|
|
(8,014 |
) |
|
|
(27,026 |
) |
Proceeds from the exercise of stock options |
|
|
23 |
|
|
|
125 |
|
Excess tax benefit on stock options |
|
|
- |
|
|
|
3 |
|
Principal payments on capital leases |
|
|
(38 |
) |
|
|
(31 |
) |
Repurchases of common stock |
|
|
(676 |
) |
|
|
(332 |
) |
Dividends paid |
|
|
(676 |
) |
|
|
(675 |
) |
Other financing activities |
|
|
(59 |
) |
|
|
(20 |
) |
|
|
|
|
|
Cash used by financing activities from continuing operations |
|
$ |
(5,898 |
) |
|
$ |
(2,237 |
) |
|
|
|
|
|
|
|
|
| (a) |
|
The Company reflects borrowings under its bank credit agreements on a gross basis and short-term commercial paper on a
net basis in the consolidated statement of cash flows. |
27
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Cash used by financing activities from continuing operations increased to $5.898 billion
for the nine months ended September 30, 2009 from $2.237 billion for the nine months ended
September 30, 2008. The change in cash used by financing activities from continuing operations was
primarily due to an increase in net debt repayments. The Company used a portion of the $9.253
billion it received from the payment of the Special Dividend to repay in full its $2.0 billion
three-year unsecured term loan facility (plus accrued interest) and repay all amounts outstanding
under the Revolving Facility (defined below).
Cash Flows from Discontinued Operations
Details of cash used by discontinued operations are as follows (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
Cash provided by operations from discontinued operations |
|
$ |
532 |
|
|
$ |
3,849 |
|
Cash used by investing activities from discontinued operations |
|
|
(622 |
) |
|
|
(3,094 |
) |
Cash provided (used) by financing activities from discontinued operations |
|
|
(5,224 |
) |
|
|
2,092 |
|
Effect of change in cash and equivalents of discontinued operations |
|
|
5,262 |
|
|
|
(2,858 |
) |
|
|
|
|
|
Cash used by discontinued operations |
|
$ |
(52 |
) |
|
$ |
(11 |
) |
|
|
|
|
|
For the nine months ended September 30, 2009, cash used by discontinued operations primarily
reflected cash activity of TWC through its separation from the Company on March 12, 2009, and, for
the nine months ended September 30, 2008, it primarily reflects cash activity of TWC for the entire
nine-month period. The cash used by financing activities from discontinued operations of $5.224
billion for the nine months ended September 30, 2009 reflects the payment of the Special Dividend,
partially offset by an increase in borrowings.
28
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Outstanding Debt and Other Financing Arrangements
Outstanding Debt and Committed Financial Capacity
At September 30, 2009, Time Warner had total committed capacity, defined as maximum available
borrowings under various existing debt arrangements and cash and short-term investments, of $31.624
billion. Of this committed capacity, $14.029 billion was unused and $17.500 billion was outstanding
as debt. At September 30, 2009, total committed capacity, outstanding letters of credit,
outstanding debt and total unused committed capacity were as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused |
|
| |
|
Committed |
|
|
Letters of |
|
|
Outstanding |
|
|
committed |
|
| |
|
Capacity(a) |
|
|
Credit(b) |
|
|
Debt(c) |
|
|
capacity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
7,126 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7,126 |
|
Revolving bank credit agreement and
commercial paper program |
|
|
6,900 |
|
|
|
88 |
|
|
|
- |
|
|
|
6,812 |
|
Floating-rate public debt(d) |
|
|
2,000 |
|
|
|
- |
|
|
|
2,000 |
|
|
|
- |
|
Fixed-rate public debt |
|
|
15,227 |
|
|
|
- |
|
|
|
15,227 |
|
|
|
- |
|
Other obligations(e)(f) |
|
|
371 |
|
|
|
7 |
|
|
|
273 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31,624 |
|
|
$ |
95 |
|
|
$ |
17,500 |
|
|
$ |
14,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The bank credit agreements, commercial paper program and public debt of the Company rank pari passu with the senior debt of the respective obligors thereon. The Company’s maturity profile of its outstanding debt and other financing
arrangements is relatively long-term, with a weighted average maturity of 11.0 years as of September 30, 2009. |
| (b) |
|
Represents the portion of committed capacity reserved for outstanding and undrawn letters of credit. |
| (c) |
|
Represents principal amounts adjusted for premiums and discounts. |
| (d) |
|
The Company has classified $2.000 billion in debt of Time Warner due within the next twelve months as short-term in the accompanying consolidated balance sheet. |
| (e) |
|
Includes committed financings by subsidiaries under local bank credit agreements. |
| (f) |
|
Includes debt due within the next twelve months of $90 million that relates to capital lease and other obligations. |
Repayment and Termination of $2.0 Billion Term Facility
On March 17, 2009, the Company used a portion of the proceeds it received from the payment of
the Special Dividend to repay in full the $2.0 billion outstanding (plus accrued interest) under
its unsecured term loan facility with a maturity date of January 8, 2011 (the “Term Facility”) and
terminated the Term Facility. Time Warner did not incur any early termination or prepayment
penalties in connection with the termination of the Term Facility.
Termination of Supplemental Credit Agreement
On March 12, 2009, TWC borrowed the full committed amount of $1.932 billion under its
unsecured term loan credit facility entered into on June 30, 2008 (the “TWC Bridge Facility”), all
of which was used by TWC to pay a portion of the Special Dividend. On March 26, 2009, TWC completed
an offering of $3.0 billion in aggregate principal amount of debt securities and used a portion of
the net proceeds from the offering to prepay in full the outstanding loans and all other amounts
due under the TWC Bridge Facility, and the TWC Bridge Facility was terminated in accordance with
its terms. Concurrently with the termination of the TWC Bridge Facility and pursuant to the terms
of the $1.535 billion credit agreement (the “Supplemental Credit Agreement”) between the Company
(as lender) and TWC (as borrower) for a two-year senior unsecured supplemental term loan facility
(the “Supplemental Credit Facility”), on March 26, 2009, TWC terminated the commitments of Time
Warner under the Supplemental Credit Facility, and the Supplemental Credit Agreement was terminated
in accordance with its terms.
Amendments to Revolving Facility
On March 11, 2009, the Company entered into the first and second amendments to the amended and
restated credit agreement (the “Revolving Credit Agreement”) for its senior unsecured five-year
revolving credit facility (the “Revolving
29
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Facility”). The first amendment terminated the $100 million commitment of Lehman Commercial
Paper Inc. (“LCPI”), a subsidiary of Lehman Brothers Holdings Inc., which filed a petition for
bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in September 2008, reducing the committed
amount of the Revolving Facility from $7.0 billion to $6.9 billion. The second amendment, among
other things, amended the Revolving Credit Agreement to (i) expand the circumstances under which
any other lender under the Revolving Facility would become a Defaulting Lender (as defined in the
Revolving Credit Agreement, as amended) and (ii) permit Time Warner to terminate the commitment of
any such lender on terms substantially similar to those applicable to LCPI under the first
amendment to the Revolving Credit Agreement.
Consent Solicitation
On April 15, 2009, the Company completed a solicitation of consents (the “Consent
Solicitation”) from the holders of the debt securities (the “Securities”) issued by Time Warner
Inc. and its subsidiaries under all of the indentures governing the publicly traded debt securities
of the Company and its subsidiaries other than the indenture entered into in November 2006
(collectively, the “Indentures”). Completion of the Consent Solicitation resulted in the adoption
on April 16, 2009 of certain amendments to each Indenture that provide that certain restrictive
covenants will not apply (subject to the concurrent or prior issuance of the guarantee by HBO
discussed below) to a conveyance or transfer by AOL LLC of its properties and assets substantially
as an entirety, unless such conveyance or transfer constitutes a conveyance or transfer of the
properties and assets of the issuer and the guarantors under the relevant Indenture and their
respective subsidiaries, taken as a whole, substantially as an entirety. As a result of the Consent
Solicitation, prior to or concurrently with a conveyance or transfer of AOL LLC’s properties and
assets substantially as an entirety, HBO will issue a guarantee of the obligations of Historic TW
Inc. (“Historic TW”) (including in its capacity as successor to Time Warner Companies, Inc.),
whether as issuer or guarantor, under the Indentures and the Securities. Such guarantee will be
issued by HBO only in connection with such a transaction.
Contractual Commitments
Six Flags
In connection with the Company’s former investment in the Six Flags theme parks located in
Georgia and Texas (“Six Flags Georgia” and “Six Flags Texas,” respectively, and, collectively, the
“Parks”), in 1997, certain subsidiaries of the Company (including Historic TW) agreed to guarantee
(the “Six Flags Guarantee”) certain obligations of the partnerships that hold the Parks (the
“Partnerships”) for the benefit of the limited partners in such Partnerships, including the
following (the “Guaranteed Obligations”): (a) making a minimum annual distribution to the limited
partners of the Partnerships (the minimum was approximately $61 million in 2008 and is subject to
annual cost of living adjustments); (b) making a minimum amount of capital expenditures each year
(an amount approximating 6% of the Parks’ annual revenues); (c) offering each year to purchase 5%
of the limited partnership units of the Partnerships (plus any such units not purchased pursuant to
such offer in any prior year) based on an aggregate price for all limited partnership units at the
higher of (i) $250 million in the case of Six Flags Georgia and $374.8 million in the case of Six
Flags Texas (the “Base Valuations”) and (ii) a weighted average multiple of EBITDA for the
respective Park over the previous four-year period (the “Cumulative LP Unit Purchase Obligation”);
(d) making annual ground lease payments; and (e) either (i) purchasing all of the outstanding
limited partnership units through the exercise of a call option upon the earlier of the occurrence
of certain specified events and the end of the term of each of the Partnerships in 2027 (Six Flags
Georgia) and 2028 (Six Flags Texas) (the “End of Term Purchase”) or (ii) causing each of the
Partnerships to have no indebtedness and to meet certain other financial tests as of the end of the
term of the Partnership. The aggregate amount payable in connection with an End of Term Purchase
option on either Park will be the Base Valuation applicable to such Park, adjusted for changes in
the consumer price index from December 1996, in the case of Six Flags Georgia, and December 1997,
in the case of Six Flags Texas, through December of the year immediately preceding the year in
which the End of Term Purchase occurs, in each case, reduced ratably to reflect limited partnership
units previously purchased.
In connection with the Company’s 1998 sale of Six Flags Entertainment Corporation (which held
the controlling interests in the Parks) to Six Flags, Inc. (formerly Premier Parks Inc.) (“Six
Flags”), Six Flags and Historic TW entered into a Subordinated Indemnity Agreement pursuant to
which Six Flags agreed to guarantee the performance of the Guaranteed Obligations when due and to
indemnify Historic TW, among others, in the event that the Guaranteed Obligations are not performed
and the Six Flags Guarantee is called upon. In the event of a default of Six Flags’ obligations
under the
30
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Subordinated Indemnity Agreement, the Subordinated Indemnity Agreement and related agreements
provide, among other things, that Historic TW has the right to acquire control of the managing
partner of the Parks. Six Flags’ obligations to Historic TW are further secured by its interest in
all limited partnership units that are held by Six Flags. To date, no payments have been made by
the Company pursuant to the Six Flags Guarantee.
In connection with the TWC Separation, guarantees previously made by Time Warner Entertainment
Company, L.P. (“TWE”), a subsidiary of TWC, were terminated and, pursuant to and as required under
the original terms of the Six Flags Guarantee, Warner Bros. Entertainment Inc. (“WBEI”) became a
guarantor. In addition, TWE’s rights and obligations under the Subordinated Indemnity Agreement
have been assigned to WBEI. The Company continues to indemnify TWE in connection with any residual
exposure of TWE under the Guaranteed Obligations.
In April 2009, Six Flags received notices from limited partners of the Partnerships to sell
limited partnership units with an aggregate price of approximately $66 million. The general partner
of the Georgia limited partnership exercised its right to purchase Six Flags Georgia units having a
total purchase price of $7 million. The remaining purchase price for limited partnership units in
the Parks that were put was funded through $6 million of cash that had been held in escrow to
support the Six Flags Guarantee and a loan from a wholly-owned Time Warner subsidiary (TW-SF LLC)
of approximately $53 million (the “TW Loan”). The TW Loan was made to SFOG Acquisition A, Inc., a
Delaware corporation, and SFOT Acquisition I, Inc., a Delaware corporation (collectively, the
“Acquisition Corporations”). The TW Loan accrues interest at 14% per annum with a final maturity
date of March 15, 2011. Up to $10 million of the TW Loan has been guaranteed by Six Flags. Taking
into account the limited partnership units purchased in 2009, the estimated maximum Cumulative LP
Unit Purchase Obligation for 2010 is approximately $300 million. In addition, the aggregate
undiscounted estimated future cash flow requirements covered by the Six Flags Guarantee over the
remaining term (through 2028) of the agreements are approximately $1.15 billion (for a net present
value of approximately $415 million). In July 2009, the Company received a payment on the TW Loan
of $13 million (which included both principal and accrued interest) from the Acquisition
Corporations.
On June 12, 2009, Six Flags and certain of its subsidiaries filed petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court in Delaware. The
reorganization plan that ultimately becomes effective is expected to result in a significant
reduction in debt for Six Flags. It is too early to determine the impact, if any, of the
reorganization proceedings on the guarantee by Six Flags of the TW Loan. The Partnerships holding
the Parks and the Acquisition Corporations were not included in the debtors filing the bankruptcy
proceeding.
In connection with the proposed plan of reorganization of Six Flags, in October 2009, TW-SF
LLC agreed to provide the Acquisition Corporations a new 5-year multiple draw credit facility of up
to $150 million, which the Acquisition Corporations would be able to use only to fund their
obligations to purchase certain limited partnership units of the Partnerships. The new credit
facility, which is subject to a number of conditions precedent, including a final order confirming
the plan of reorganization, would be in addition to the existing TW Loan. New loans drawn under
the facility would mature 5 years from their respective funding date. Interest will accrue at a
rate at least equal to a LIBOR floor of 250 basis points plus a spread of 100 basis points over the
applicable margin for a new Six Flags’ senior term credit facility, which will close simultaneously
with the closing of this facility.
Because the Six Flags Guarantee existed prior to December 31, 2002 and no modifications to the
arrangements have been made since the date the guarantee came into existence, the Company is
required to continue to account for the Guaranteed Obligations as a contingent liability. Based on
its evaluation of the current facts and circumstances surrounding the Guaranteed Obligations and
the Subordinated Indemnity Agreement, the Company is unable to predict the loss, if any, that may
be incurred under these Guaranteed Obligations and no liability for the arrangements has been
recognized at September 30, 2009. Because of the specific circumstances surrounding the
arrangements and the fact that no active or observable market exists for this type of financial
guarantee, the Company is unable to determine a current fair value for the Guaranteed Obligations
and related Subordinated Indemnity Agreement.
31
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
Programming Licensing Backlog
Programming licensing backlog represents the amount of future revenues not yet recorded from
cash contracts for the licensing of theatrical and television product for pay cable, basic cable,
network and syndicated television exhibition. Backlog was approximately $4.7 billion and $4.1
billion at September 30, 2009 and December 31, 2008, respectively. Included in these amounts is
licensing of film product from the Filmed Entertainment segment to the Networks segment in the
amount of $1.1 billion and $967 million at September 30, 2009 and December 31, 2008, respectively.
Customer Credit Risk
Credit risk in the Company’s businesses originates from sales of various products and services
and is dispersed among many different counterparties. At September 30, 2009, no single customer of
the Company had a receivable balance that was greater than 5% of the Company’s total net
receivables. As a result of the current economic environment, a number of customers that purchase
products and services from the Company are experiencing financial challenges (including bankruptcy
in some cases). It is possible that some of these customers may not pay amounts owed or expected.
It is also possible that these customers or others may not have the financial means to purchase the
Company’s products or services in the future. If these events occur, they could have an adverse
impact on the Company’s operating results and cash flows.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, particularly statements anticipating future trends in
revenues, Operating Income before Depreciation and Amortization, Operating Income and cash from
operations. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,”
“believes” and words and terms of similar substance used in connection with any discussion of
future operating or financial performance identify forward-looking statements. These
forward-looking statements are based on management’s current expectations and beliefs about future
events. As with any projection or forecast, they are inherently susceptible to uncertainty and
changes in circumstances, and the Company is under no obligation to, and expressly disclaims any
obligation to, update or alter its forward-looking statements whether as a result of such changes,
new information, subsequent events or otherwise.
Various factors could adversely affect the operations, business or financial results of Time
Warner or its business segments in the future and cause Time Warner’s actual results to differ
materially from those contained in the forward-looking statements, including those factors
discussed in detail in Item 1A, “Risk Factors,” in the 2008 Form 10-K and in Item 1A, “Risk
Factors,” in the June 2009 Form 10-Q, which should be read in conjunction with this report, and in
Time Warner’s other filings made from time to time with the SEC after the date of this report. In
addition, Time Warner operates in highly competitive, consumer and technology-driven and rapidly
changing media, entertainment and interactive services. These businesses are affected by government
regulation, economic, strategic, political and social conditions, consumer response to new and
existing products and services, technological developments and, particularly in view of new
technologies, the continued ability to protect intellectual property rights. Time Warner’s actual
results could differ materially from management’s expectations because of changes in such factors.
Further, for Time Warner generally, lower than expected valuations associated with the cash
flows and revenues at Time Warner’s segments may result in Time Warner’s inability to realize the
value of recorded intangibles and goodwill at those segments. In addition, achieving the Company’s
financial objectives, including growth in operations, maintaining financial ratios and a strong
balance sheet, could be adversely affected by the factors discussed in detail in Item 1A, “Risk
Factors,” in the 2008 Form 10-K and in Item 1A, “Risk Factors,” in the June 2009 Form 10-Q, as well
as:
| |
• |
|
a longer than anticipated continuation of the current economic slowdown or
further deterioration in the economy; |
| |
• |
|
decreased liquidity in the capital markets, including any reduction in the
ability to access the capital markets for debt securities or bank financings; |
| |
• |
|
the impact of terrorist acts and hostilities; |
| |
• |
|
changes in the Company’s plans, strategies and intentions; |
| |
• |
|
the impacts of significant acquisitions, dispositions and other similar
transactions, including the planned separation of AOL from Time Warner; and |
| |
• |
|
the failure to meet earnings expectations. |
32
TIME WARNER INC.
Item 4. CONTROLS AND PROCEDURES
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including the
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rule
13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the
Company’s disclosure controls and procedures are effective to ensure that information required to
be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms
and that information required to be disclosed by the Company is accumulated and communicated to the
Company’s management to allow timely decisions regarding the required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2009, the Company’s Filmed Entertainment segment
outsourced certain information technology processes and controls to two third party service
providers and expects to continue to outsource additional information technology processes and
controls through the end of 2009. The outsourced processes and controls primarily included the
programming and management of applications, databases, servers, and the segment’s information
technology network. The Filmed Entertainment segment has implemented controls and monitoring
procedures over the third party service providers’ processes and controls. Except for the
described outsourcing at the Filmed Entertainment segment, there have not been any changes in the
Company’s internal control over financial reporting during the quarter ended September 30, 2009
that have materially affected, or are reasonably likely to materially affect, its internal control
over financial reporting.
33
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
7,126 |
|
|
$ |
1,233 |
|
Receivables, less allowances of $1,799 and $2,269 |
|
|
4,833 |
|
|
|
5,664 |
|
Inventories |
|
|
1,892 |
|
|
|
1,842 |
|
Deferred income taxes |
|
|
704 |
|
|
|
624 |
|
Prepaid expenses and other current assets |
|
|
697 |
|
|
|
772 |
|
Current assets of discontinued operations |
|
|
- |
|
|
|
6,480 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
15,252 |
|
|
|
16,615 |
|
|
|
|
|
|
|
|
|
|
Noncurrent inventories and film costs |
|
|
5,658 |
|
|
|
5,339 |
|
Investments, including available-for-sale securities |
|
|
1,174 |
|
|
|
1,036 |
|
Property, plant and equipment, net |
|
|
4,691 |
|
|
|
4,896 |
|
Intangible assets subject to amortization, net |
|
|
3,470 |
|
|
|
3,564 |
|
Intangible assets not subject to amortization |
|
|
7,831 |
|
|
|
7,728 |
|
Goodwill |
|
|
31,978 |
|
|
|
32,428 |
|
Other assets |
|
|
1,212 |
|
|
|
1,220 |
|
Noncurrent assets of discontinued operations |
|
|
- |
|
|
|
41,231 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
71,266 |
|
|
$ |
114,057 |
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
8,084 |
|
|
$ |
8,194 |
|
Deferred revenue |
|
|
970 |
|
|
|
1,012 |
|
Debt due within one year |
|
|
2,090 |
|
|
|
2,066 |
|
Current liabilities of discontinued operations |
|
|
2 |
|
|
|
2,865 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
11,146 |
|
|
|
14,137 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
15,410 |
|
|
|
19,889 |
|
Deferred income taxes |
|
|
1,447 |
|
|
|
974 |
|
Deferred revenue |
|
|
269 |
|
|
|
266 |
|
Other noncurrent liabilities |
|
|
6,506 |
|
|
|
6,801 |
|
Noncurrent liabilities of discontinued operations |
|
|
- |
|
|
|
26,320 |
|
Commitments and Contingencies (Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
Time Warner common stock, $0.01 par value, 1.632 billion and 1.630 billion
shares
issued and 1.171 billion and 1.196 billion shares outstanding |
|
|
16 |
|
|
|
16 |
|
Paid-in-capital |
|
|
161,483 |
|
|
|
169,564 |
|
Treasury stock, at cost (461 million and 434 million shares) |
|
|
(26,535 |
) |
|
|
(25,836 |
) |
Accumulated other comprehensive loss, net |
|
|
(1,047 |
) |
|
|
(1,676 |
) |
Accumulated deficit |
|
|
(97,775 |
) |
|
|
(99,780 |
) |
|
|
|
|
|
|
|
Total Time Warner Inc. shareholders’ equity |
|
|
36,142 |
|
|
|
42,288 |
|
Noncontrolling interests (including $0 and $2,751 attributable to discontinued
operations) |
|
|
346 |
|
|
|
3,382 |
|
|
|
|
|
|
|
|
Total equity |
|
|
36,488 |
|
|
|
45,670 |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
71,266 |
|
|
$ |
114,057 |
|
|
|
|
|
|
|
|
See accompanying notes.
34
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
2,562 |
|
|
$ |
2,584 |
|
|
$ |
7,669 |
|
|
$ |
7,800 |
|
Advertising |
|
|
1,632 |
|
|
|
1,856 |
|
|
|
4,943 |
|
|
|
5,763 |
|
Content |
|
|
2,754 |
|
|
|
2,906 |
|
|
|
7,680 |
|
|
|
8,278 |
|
Other |
|
|
187 |
|
|
|
233 |
|
|
|
597 |
|
|
|
677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
7,135 |
|
|
|
7,579 |
|
|
|
20,889 |
|
|
|
22,518 |
|
Costs of revenues |
|
|
(3,924 |
) |
|
|
(4,103 |
) |
|
|
(11,645 |
) |
|
|
(12,612 |
) |
Selling, general and administrative |
|
|
(1,612 |
) |
|
|
(1,726 |
) |
|
|
(4,862 |
) |
|
|
(5,225 |
) |
Amortization of intangible assets |
|
|
(115 |
) |
|
|
(140 |
) |
|
|
(348 |
) |
|
|
(387 |
) |
Restructuring costs |
|
|
(39 |
) |
|
|
(20 |
) |
|
|
(175 |
) |
|
|
(168 |
) |
Asset impairments |
|
|
(57 |
) |
|
|
(39 |
) |
|
|
(57 |
) |
|
|
(57 |
) |
Loss on sale of assets |
|
|
- |
|
|
|
(3 |
) |
|
|
(33 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,388 |
|
|
|
1,548 |
|
|
|
3,769 |
|
|
|
4,066 |
|
Interest expense, net |
|
|
(297 |
) |
|
|
(321 |
) |
|
|
(904 |
) |
|
|
(999 |
) |
Other income (loss), net |
|
|
(51 |
) |
|
|
29 |
|
|
|
(71 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income
taxes |
|
|
1,040 |
|
|
|
1,256 |
|
|
|
2,794 |
|
|
|
3,046 |
|
Income tax provision |
|
|
(377 |
) |
|
|
(487 |
) |
|
|
(1,042 |
) |
|
|
(1,147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
663 |
|
|
|
769 |
|
|
|
1,752 |
|
|
|
1,899 |
|
Discontinued operations, net of tax |
|
|
(1 |
) |
|
|
355 |
|
|
|
130 |
|
|
|
890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
662 |
|
|
|
1,124 |
|
|
|
1,882 |
|
|
|
2,789 |
|
Less Net income attributable to
noncontrolling
interests |
|
|
(1 |
) |
|
|
(57 |
) |
|
|
(41 |
) |
|
|
(159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Time Warner Inc.
shareholders |
|
$ |
661 |
|
|
$ |
1,067 |
|
|
$ |
1,841 |
|
|
$ |
2,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Time Warner Inc.
shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
662 |
|
|
$ |
761 |
|
|
$ |
1,736 |
|
|
$ |
1,873 |
|
Discontinued operations, net of tax |
|
|
(1 |
) |
|
|
306 |
|
|
|
105 |
|
|
|
757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
661 |
|
|
$ |
1,067 |
|
|
$ |
1,841 |
|
|
$ |
2,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information attributable to
Time Warner Inc. common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share from
continuing
operations |
|
$ |
0.56 |
|
|
$ |
0.64 |
|
|
$ |
1.45 |
|
|
$ |
1.57 |
|
Discontinued operations |
|
|
- |
|
|
|
0.25 |
|
|
|
0.09 |
|
|
|
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.56 |
|
|
$ |
0.89 |
|
|
$ |
1.54 |
|
|
$ |
2.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic common shares outstanding |
|
|
1,179.9 |
|
|
|
1,194.8 |
|
|
|
1,190.4 |
|
|
|
1,193.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share from
continuing operations |
|
$ |
0.55 |
|
|
$ |
0.63 |
|
|
$ |
1.45 |
|
|
$ |
1.56 |
|
Discontinued operations |
|
|
- |
|
|
|
0.26 |
|
|
|
0.08 |
|
|
|
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.55 |
|
|
$ |
0.89 |
|
|
$ |
1.53 |
|
|
$ |
2.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted common shares outstanding |
|
|
1,193.3 |
|
|
|
1,202.1 |
|
|
|
1,199.7 |
|
|
|
1,200.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share of common
stock |
|
$ |
0.1875 |
|
|
$ |
0.1875 |
|
|
$ |
0.5625 |
|
|
$ |
0.5625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
35
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited; millions)
| |
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(recast) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,882 |
|
|
$ |
2,789 |
|
Less Discontinued operations, net of tax |
|
|
130 |
|
|
|
890 |
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
1,752 |
|
|
|
1,899 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,060 |
|
|
|
1,125 |
|
Amortization of film and television costs |
|
|
4,817 |
|
|
|
4,331 |
|
Asset impairments |
|
|
57 |
|
|
|
57 |
|
Gain (loss) on investments and other assets, net |
|
|
24 |
|
|
|
12 |
|
Equity in losses of investee companies, net of cash distributions |
|
|
53 |
|
|
|
28 |
|
Equity-based compensation |
|
|
151 |
|
|
|
167 |
|
Deferred income taxes |
|
|
138 |
|
|
|
154 |
|
Changes in operating assets and liabilities, net of acquisitions |
|
|
(4,570 |
) |
|
|
(3,527 |
) |
|
|
|
|
|
|
|
Cash provided by operations from continuing operations |
|
|
3,482 |
|
|
|
4,246 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investments in available-for-sale securities |
|
|
(4 |
) |
|
|
(17 |
) |
Investments and acquisitions, net of cash acquired |
|
|
(716 |
) |
|
|
(1,702 |
) |
Capital expenditures and product development costs |
|
|
(464 |
) |
|
|
(556 |
) |
Investment proceeds from available-for-sale securities |
|
|
50 |
|
|
|
15 |
|
Proceeds from the Special Dividend paid by Time Warner Cable Inc. |
|
|
9,253 |
|
|
|
- |
|
Other investment proceeds |
|
|
242 |
|
|
|
242 |
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities from continuing operations |
|
|
8,361 |
|
|
|
(2,018 |
) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Borrowings |
|
|
3,542 |
|
|
|
25,719 |
|
Debt repayments |
|
|
(8,014 |
) |
|
|
(27,026 |
) |
Proceeds from exercise of stock options |
|
|
23 |
|
|
|
125 |
|
Excess tax benefit on stock options |
|
|
- |
|
|
|
3 |
|
Principal payments on capital leases |
|
|
(38 |
) |
|
|
(31 |
) |
Repurchases of common stock |
|
|
(676 |
) |
|
|
(332 |
) |
Dividends paid |
|
|
(676 |
) |
|
|
(675 |
) |
Other financing activities |
|
|
(59 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
Cash used by financing activities from continuing operations |
|
|
(5,898 |
) |
|
|
(2,237 |
) |
|
|
|
|
|
|
|
Cash provided (used) by continuing operations |
|
|
5,945 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operations from discontinued operations |
|
|
532 |
|
|
|
3,849 |
|
Cash used by investing activities from discontinued operations |
|
|
(622 |
) |
|
|
(3,094 |
) |
Cash provided (used) by financing activities from discontinued operations |
|
|
(5,224 |
) |
|
|
2,092 |
|
Effect of change in cash and equivalents of discontinued operations |
|
|
5,262 |
|
|
|
(2,858 |
) |
|
|
|
|
|
|
|
Cash used by discontinued operations |
|
|
(52 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND EQUIVALENTS |
|
|
5,893 |
|
|
|
(20 |
) |
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
1,233 |
|
|
|
1,285 |
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
7,126 |
|
|
$ |
1,265 |
|
|
|
|
|
|
|
|
See accompanying notes.
36
TIME WARNER INC.
CONSOLIDATED STATEMENT OF EQUITY
Nine Months Ended September 30,
(Unaudited; millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| |
|
Time Warner |
|
|
Noncontrolling |
|
|
|
|
|
|
Time Warner |
|
|
Noncontrolling |
|
|
|
|
| |
|
Shareholders |
|
|
Interests |
|
|
Total Equity |
|
|
Shareholders |
|
|
Interests |
|
|
Total Equity |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
BALANCE AT BEGINNING OF PERIOD |
|
$ |
42,288 |
|
|
$ |
3,382 |
|
|
$ |
45,670 |
|
|
$ |
58,536 |
|
|
$ |
4,322 |
|
|
$ |
62,858 |
|
Net income |
|
|
1,841 |
|
|
|
41 |
|
|
|
1,882 |
|
|
|
2,630 |
|
|
|
159 |
|
|
|
2,789 |
|
Other comprehensive income |
|
|
239 |
|
|
|
- |
|
|
|
239 |
|
|
|
(398 |
) |
|
|
(3 |
) |
|
|
(401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
2,080 |
|
|
|
41 |
|
|
|
2,121 |
|
|
|
2,232 |
|
|
|
156 |
|
|
|
2,388 |
|
Cash dividends ($0.5625 per common
share) |
|
|
(676 |
) |
|
|
- |
|
|
|
(676 |
) |
|
|
(675 |
) |
|
|
- |
|
|
|
(675 |
) |
Common stock repurchases |
|
|
(699 |
) |
|
|
- |
|
|
|
(699 |
) |
|
|
(299 |
) |
|
|
- |
|
|
|
(299 |
) |
Impact of adopting new accounting
pronouncements(a) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13 |
) |
|
|
- |
|
|
|
(13 |
) |
Time Warner Cable Inc. Special
Dividend |
|
|
- |
|
|
|
(1,603 |
) |
|
|
(1,603 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Time Warner Cable Inc. Spin-off |
|
|
(6,822 |
) |
|
|
(1,167 |
) |
|
|
(7,989 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Repurchase of Google’s interest in
AOL |
|
|
9 |
|
|
|
(292 |
) |
|
|
(283 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other |
|
|
(38 |
) |
|
|
(15 |
) |
|
|
(53 |
) |
|
|
155 |
|
|
|
11 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD |
|
$ |
36,142 |
|
|
$ |
346 |
|
|
$ |
36,488 |
|
|
$ |
59,936 |
|
|
$ |
4,489 |
|
|
$ |
64,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the nine months ended September 30, 2008, amount reflects the impact of adopting recent accounting guidance related to the accounting for collateral assignment and endorsement split-dollar life insurance arrangements. |
See accompanying notes.
37
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Time Warner Inc. (“Time Warner” or the “Company”) is a leading media and entertainment
company, whose businesses include television networks, filmed entertainment, publishing and
interactive services. Time Warner classifies its operations into four reportable segments:
Networks: consisting principally of cable television networks that provide programming; Filmed
Entertainment: consisting principally of feature film, television and home video production and
distribution; Publishing: consisting principally of magazine publishing; and AOL: consisting
principally of interactive consumer and advertising services. Financial information for Time
Warner’s various reportable segments is presented in Note 11.
Changes in Basis of Presentation
The 2008 financial information has been recast so that the basis of presentation is consistent
with that of the 2009 financial information. This recast reflects (i) the financial condition and
results of operations of Time Warner Cable Inc. (“TWC”) as discontinued operations for all periods
presented, (ii) the adoption of recent accounting guidance pertaining to noncontrolling interests,
(iii) the adoption of recent accounting guidance pertaining to participating securities and (iv)
the 1-for-3 reverse stock split of the Company’s common stock that became effective on March 27,
2009.
TWC Separation from Time Warner
On March 12, 2009 (the “Distribution Record Date”), the Company disposed of all of its shares
of TWC common stock. The disposition was made pursuant to a separation agreement entered into on
May 20, 2008, among Time Warner, TWC and certain of their subsidiaries (the “Separation Agreement”)
for the purpose of achieving the legal and structural separation of TWC from Time Warner (the “TWC
Separation”). The TWC Separation was effected as a pro rata dividend of all shares of TWC common
stock held by Time Warner in a spin-off (the “Distribution”) to Time Warner stockholders.
Prior to the Distribution Record Date, on March 12, 2009, TWC, in accordance with the terms of
the Separation Agreement, paid a special cash dividend of $10.27 per share to all holders of TWC
Class A Common Stock and TWC Class B Common Stock as of the close of business on March 11, 2009
(aggregating $10.856 billion) (the “Special Dividend”) that resulted in the receipt by Time Warner
of $9.253 billion.
With the completion of the TWC Separation, the Company disposed of the Cable segment in its
entirety. Accordingly, the Company has presented the financial condition and results of operations
of the Cable segment as discontinued operations in the consolidated financial statements for all
periods presented. For a summary of discontinued operations see Note 2.
Noncontrolling Interests
On January 1, 2009, the Company adopted recent accounting guidance for noncontrolling interest
in a consolidated subsidiary, including the accounting treatment applicable upon the
deconsolidation of a subsidiary. This guidance is being applied prospectively, except for the
provisions related to the presentation of noncontrolling interests, which are being applied
retrospectively. As of September 30, 2009 and December 31, 2008, noncontrolling interests of $346
million and $3.382 billion, respectively, have been classified as a component of equity in the
consolidated balance sheet. For the three and nine months ended September 30, 2009, net income
attributable to noncontrolling interests of $1 million and $41 million, respectively, and for the
three and nine months ended September 30, 2008, net income attributable to
noncontrolling interests of $57 million and $159 million, respectively, are included in net
income. The Company’s adoption of this guidance did not affect earnings per share amounts in prior
periods.
38
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating
Securities
On January 1, 2009, the Company adopted recent accounting guidance which requires that all
outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends or
dividend equivalents (such as restricted stock units granted by the Company) be considered
participating securities. Because the awards are participating securities, the Company is required
to apply the two-class method of computing basic and diluted earnings per share (the “Two-Class
Method”). The Company’s adoption of this guidance did not affect earnings per share amounts in
prior periods.
Basis of Presentation
Basis of Consolidation
The consolidated financial statements include 100% of the assets, liabilities, revenues,
expenses and cash flows of Time Warner and all voting interest entities (“VIE”) in which Time
Warner has a controlling voting interest (“subsidiaries”). In addition, an entity in which equity
investors do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties is referred to as a VIE. The primary beneficiary of a VIE is
the party that absorbs the majority of the entity’s expected losses, receives the majority of its
expected residual returns, or both, as a result of holding variable interests. As such, the Company
consolidates those VIEs of which it is the primary beneficiary. Intercompany accounts and
transactions between consolidated companies have been eliminated in consolidation.
The Company’s investments in entities determined to be VIEs principally consisted of certain
investments in its Networks segment, primarily HBO Asia and HBO South Asia (collectively “HBO
Asia”) and HBO Latin America Group (“HBO LAG”). For the three and nine months ended September 30,
2009, HBO Asia and HBO LAG collectively had revenues of $127 million and $351 million,
respectively, and operating income of $15 million and $56 million, respectively. As of September
30, 2009, total assets, liabilities and noncontrolling interest attributable to HBO Asia and HBO
LAG were $889 million (including goodwill and intangible assets of $659 million), $158 million and
$386 million, respectively. Such amounts are included in the consolidated statement of operations
and consolidated balance sheet. See “Recent Accounting Standards Not Yet Adopted” for a description
of amendments to the guidance on the accounting for VIEs.
The financial position and operating results of substantially all foreign operations are
consolidated using the local currency as the functional currency. Local currency assets and
liabilities are translated at the rates of exchange on the balance sheet date, and local currency
revenues and expenses are translated at average rates of exchange during the period. Translation
gains or losses of assets and liabilities are included in the consolidated statement of
shareholders’ equity as a component of Accumulated other comprehensive income, net.
Reclassifications
Certain reclassifications have been made to the prior year information to conform to the
September 30, 2009 presentation of the components of inventory.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (“GAAP”) requires management to make estimates, judgments and assumptions that affect
the amounts reported in the consolidated financial statements and footnotes thereto. Actual results
could differ from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements
include reserves established for accounting for asset impairments, allowances for doubtful
accounts, depreciation and amortization, film ultimate revenues, home video and magazine returns,
business combinations, pension and other postretirement benefits, equity-based compensation, income
taxes, contingencies, litigation matters and certain programming arrangements.
39
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Interim Financial Statements
The consolidated financial statements are unaudited; however, in the opinion of management,
they contain all the adjustments (consisting of those of a normal recurring nature) considered
necessary to present fairly the financial position, results of operations and cash flows for the
periods presented in conformity with GAAP applicable to interim periods. The consolidated financial
statements should be read in conjunction with the audited consolidated financial statements of Time
Warner included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008
(the “2008 Form 10-K”).
Recent Accounting Guidance Adopted in 2009
In addition to the adoption of accounting guidance related to (i) the accounting for
noncontrolling interests and (ii) the accounting for share-based payment awards that are considered
participating securities and their impact on earnings per share as discussed in “Changes in Basis
of Presentation,” the Company has also adopted the following accounting guidance in 2009:
Subsequent Events
On April 1, 2009, the Company adopted on a prospective basis guidance related to the
accounting for and disclosures of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. This guidance requires the Company
to disclose the date through which subsequent events have been evaluated, as well as whether that
date is the date the financial statements were issued or the date the financial statements were
available to be issued. For the three and nine months ended September 30, 2009, the Company
evaluated, for potential recognition and disclosure, events that occurred prior to the filing of
the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 on November 4,
2009. The adoption of this guidance did not affect the Company’s historical consolidated financial
statements.
Interim Disclosures about Fair Value of Financial Instruments
On April 1, 2009, the Company adopted on a prospective basis guidance that requires
disclosures regarding the fair value of financial instruments in interim financial statements, as
well as in annual financial statements. The adoption of this guidance did not affect the Company’s
historical consolidated financial statements.
Recognition and Presentation of Other-Than-Temporary-Impairments
On April 1, 2009, the Company adopted on a prospective basis guidance that clarifies the
interaction of the factors that should be considered when determining whether a debt security is
other than temporarily impaired. The adoption of this guidance did not affect the Company’s
historical consolidated financial statements.
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly
On April 1, 2009, the Company adopted on a prospective basis guidance that provides additional
guidance for estimating fair value of a financial instrument when the volume and level of activity
for the asset or liability have significantly decreased. Also, this guidance includes information
on identifying circumstances that indicate if a transaction is not orderly (i.e., a forced
liquidation or distressed sale). The adoption of this guidance did not affect the Company’s
historical consolidated financial statements.
Fair Value Measurements
On January 1, 2009, the Company adopted guidance on a prospective basis related to fair value
measurements pertaining to nonfinancial assets and liabilities. This guidance establishes the
authoritative definition of fair value, sets out a framework for measuring fair value and expands
the required disclosures about fair value measurement. On January 1, 2008, the Company adopted this
guidance as it pertains to the accounting for financial assets and liabilities as well as other
40
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
assets and liabilities carried at fair value on a recurring basis. The adoption of this
guidance did not affect the Company’s historical consolidated financial statements. For more
information, see Note 4.
Business Combinations
On January 1, 2009, the Company adopted guidance related to the accounting for business
combinations and is applying such guidance prospectively to business combinations that have an
acquisition date on or after January 1, 2009. This guidance establishes principles and requirements
for how an acquirer in a business combination (i) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree, (ii) recognizes and measures goodwill acquired in a business combination
or a gain from a bargain purchase, and (iii) determines what information to disclose to enable
users of financial statements to evaluate the nature and financial effects of the business
combination. In addition, changes in accounting for deferred tax asset valuation allowances and
acquired income tax uncertainties after purchase accounting is completed will be recognized in
earnings rather than as an adjustment to the cost of an acquisition. This accounting treatment for
deferred tax asset valuation allowances and acquired income tax uncertainties is applicable to
acquisitions that occur both prior and subsequent to the Company’s adoption of this guidance. The
adoption of this guidance did not affect the Company’s historical consolidated financial
statements.
Disclosures about Derivative Instruments and Hedging Activities
On January 1, 2009, the Company adopted on a prospective basis guidance that expands the
disclosure requirements for derivative instruments and hedging activities by requiring enhanced
disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for and (iii) how derivative instruments and
related hedged items affect an entity’s financial position, financial performance, and cash flows.
The adoption of this guidance did not affect the Company’s historical consolidated financial
statements. For more information, see Note 10.
Accounting for Collaborative Arrangements
On January 1, 2009, the Company adopted guidance that defines collaborative arrangements and
establishes accounting and reporting requirements for transactions between participants in the
arrangement and third parties. The Company’s collaborative arrangements primarily relate to
arrangements entered into with third parties to jointly finance and distribute theatrical
productions. These arrangements, which are referred to as co-financing arrangements, take various
forms. In most cases, the form of the arrangement is the sale of an economic interest in a film to
an investor. The Filmed Entertainment segment generally records the amounts received for the sale
of an economic interest as a reduction of the cost
of the film, as the investor assumes full risk for that portion of the film asset acquired in
these transactions. The substance of these arrangements is that the third-party investors own an
interest in the film and, therefore, in each period the Company reflects in the statement of
operations either a charge or benefit to costs of revenues to reflect the estimate of the
third-party investor’s interest in the profits or losses incurred on the film. The estimate of the
third-party investor’s interest in profits or losses incurred on the film is determined by
reference to the ratio of actual revenue earned to date in relation to total estimated ultimate
revenues. For the three months ended September 30, 2009 and 2008, participation costs of $43
million and $191 million, respectively, were recorded in costs of revenues and net amounts received
from collaborators for which capitalized film costs were reduced was $2 million and $98 million,
respectively. For the nine months ended September 30, 2009 and 2008, participation costs of $220
million and $415 million, respectively, were recorded in costs of revenues and net amounts received
from collaborators for which capitalized film costs were reduced was $144 million and $206 million,
respectively. As of September 30, 2009 and December 31, 2008, the net amount due to collaborators
for their share of participations was $239 million and $276 million, respectively, and was recorded
in participations payable in the consolidated balance sheet. This guidance did not affect the
Company’s historical consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
Multiple-Deliverable Revenue Arrangements
In October 2009, new guidance was issued related to the accounting for multiple-deliverable
revenue arrangements. This new guidance amends the existing guidance for separating consideration
in multiple-deliverable arrangements and establishes a selling price hierarchy for determining the
selling price of a deliverable. This guidance will become effective
41
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
on a prospective basis for Time Warner on January 1, 2011. The adoption of these new rules is
not expected to have a material impact on the Company’s consolidated financial statements.
Accounting for Transfers of Financial Assets
In June 2009, new guidance was issued related to the accounting for transfers of financial
assets. These new provisions eliminate the concept of a qualifying special-purpose entity and
eliminate the exception from applying existing accounting guidance related to VIEs that were
previously considered qualifying special-purpose entities. This new guidance will become effective
for Time Warner on January 1, 2010. The Company is currently evaluating the impact that the
adoption of this new guidance is expected to have on the way the Company accounts for its
securitization programs in its consolidated financial statements.
Amendments to VIE Guidance
In June 2009, new guidance was issued that amends the definition of the primary beneficiary of
a VIE and will require the Company to assess each reporting period if any of the Company’s variable
interests give it a controlling financial interest in the applicable VIE. This new guidance will
become effective for Time Warner on January 1, 2010. The Company is currently evaluating the impact
this new guidance is expected to have on the way the Company accounts for its VIEs and
securitization programs in its consolidated financial statements.
Income Per Common Share
Basic income per common share is determined using the Two-Class Method and is computed by
dividing net income attributable to Time Warner Inc. common shareholders by the weighted-average
common shares outstanding during the period. The Two-Class Method is an earnings allocation formula
that determines income per share for each class of common stock and participating security
according to dividends declared and participation rights in undistributed earnings. Diluted income
per common share reflects the more dilutive earnings per share amount calculated using the treasury
stock method or the Two-Class Method.
42
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Set forth below is a reconciliation of basic and diluted income per common share from
continuing operations (millions, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/2009 |
|
|
9/30/2008 |
|
|
9/30/2009 |
|
|
9/30/2008 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Income from continuing operations attributable
to
Time Warner Inc. shareholders |
|
$ |
662 |
|
|
$ |
761 |
|
|
$ |
1,736 |
|
|
$ |
1,873 |
|
Income allocated to participating securities
(restricted stock and restricted stock units) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(7 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable
to
Time Warner Inc. common shareholders
— basic |
|
$ |
660 |
|
|
$ |
760 |
|
|
$ |
1,729 |
|
|
$ |
1,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding
— basic |
|
|
1,179.9 |
|
|
|
1,194.8 |
|
|
|
1,190.4 |
|
|
|
1,193.7 |
|
Dilutive effect of equity awards |
|
|
13.4 |
|
|
|
7.3 |
|
|
|
9.3 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding
— diluted |
|
|
1,193.3 |
|
|
|
1,202.1 |
|
|
|
1,199.7 |
|
|
|
1,200.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share from continuing
operations attributable to Time Warner Inc.
common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.56 |
|
|
$ |
0.64 |
|
|
$ |
1.45 |
|
|
$ |
1.57 |
|
Diluted |
|
$ |
0.55 |
|
|
$ |
0.63 |
|
|
$ |
1.45 |
|
|
$ |
1.56 |
|
Diluted income per common share for the three and nine months ended September 30, 2009 and the
three and nine months ended September 30, 2008 excludes approximately 148 million and 162 million,
respectively, and 128 million and 130 million, respectively, common shares that may be issued under
the Company’s stock compensation plans because they do not have a dilutive effect.
Interim Impairment Testing of Goodwill at AOL
During the first quarter of 2009, the Company determined that, because the spin-off of AOL was
more likely than not, the Company was required to test goodwill at AOL as of March 31, 2009 (the
“interim testing date”).
In determining the fair value of AOL for the interim impairment analysis, the Company used a
market based approach. The market based approach to determine fair value involves the exercise of
judgment in identifying the relevant comparable company market multiples. The market multiples
identified by the Company were multiplied by AOL’s 2009 earnings forecast in determining the
estimated fair value of AOL. Such fair value exceeded AOL’s net book value and therefore did not
result in an impairment charge.
If the fair value of the AOL reporting unit had been hypothetically lower by 20% at March 31,
2009, the fair value of the AOL reporting unit would have exceeded its book value. In addition, if
the fair value of the AOL reporting unit had been hypothetically lower by 30% at March 31, 2009,
the book value of the AOL reporting unit would have exceeded its fair value by approximately $100
million. If the book value of the AOL reporting unit had been greater than its fair value, the
second step of the goodwill impairment test would have been required to be performed to determine
the ultimate amount of impairment loss to recognize.
43
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2. BUSINESS ACQUISITIONS, DISPOSITIONS AND RELATED TRANSACTIONS
HBO Central Europe Acquisition
On October 14, 2009, HBO entered into an agreement to purchase its partners’ interests in the
HBO Central Europe (“HBO CE”) joint venture for approximately $160 million in cash. HBO CE operates
the HBO and Cinemax premium pay television programming services serving 11 territories in Central
Europe. The closing of the transaction is subject to customary closing conditions, including the
receipt of regulatory approvals, and is expected to occur in the first quarter of 2010. HBO
currently owns a 33 1/3% interest in HBO CE, and upon closing, this transaction will result in HBO
owning 100% of the interests of HBO CE.
AOL Separation from Time Warner
As noted above, on May 28, 2009, Time Warner announced that its Board of Directors has
authorized management to proceed with plans for the complete legal and structural separation of AOL
from Time Warner (the “AOL Separation”). The AOL Separation is currently expected to be effected as
a spin-off of AOL Holdings LLC, a wholly-owned subsidiary that has
been converted to a corporation
and renamed AOL Inc. In the AOL Separation, Time Warner will distribute all
of its AOL Inc. common stock to Time Warner shareholders, and AOL will become an independent,
publicly traded company.
On July 8, 2009, the Company repurchased Google’s 5% interest in AOL for $283 million in cash,
which amount included a payment in respect of Google’s pro rata share of cash distributions to Time
Warner by AOL attributable to the period of Google’s investment in AOL. After repurchasing this
stake, Time Warner currently owns 100% of AOL.
The AOL Separation is contingent on the satisfaction or waiver of a number of conditions,
including the effectiveness of a registration statement on Form 10 that AOL filed with the
Securities and Exchange Commission (the “SEC”) on July 27, 2009 in connection with the transaction.
Time Warner expects to complete the AOL Separation in the fourth quarter of 2009.
Patch Acquisition
On June 10, 2009, AOL purchased Patch Media Corporation (“Patch”), a news, information and
community platform business dedicated to providing comprehensive local information and services for
individual towns and communities, for approximately $7 million in cash. Approximately $700,000 of
the consideration is being held in an indemnity escrow account until the first anniversary of the
closing.
At the time of closing, Tim Armstrong, AOL’s Chairman and Chief Executive Officer, held,
indirectly through Polar Capital Group, LLC (“Polar Capital”) (a private investment company which
he founded), economic interests in Patch that entitled him to receive approximately 75% of the
transaction consideration. Mr. Armstrong’s original investment in Patch, made in December 2007
through Polar Capital, was approximately $4.5 million. In connection with the transaction, Mr.
Armstrong, through Polar Capital, waived his right to receive any transaction consideration in
excess of his original $4.5 million investment, opting to accept only the return of his initial
investment. In addition, Mr. Armstrong elected to return the $4.5 million (approximately $450,000
of which is being held in the indemnity escrow account for a year) that he was entitled to receive
in connection with the transaction to AOL, to be held by AOL until after the AOL Separation. As
soon as legally permissible, following the AOL Separation, AOL will cause to be issued to Polar
Capital an amount of AOL Inc. common stock equivalent to $4.5 million (less any amounts held in the
indemnity escrow account) based on an average of the high and low market prices on the relevant
trading day. The issuance of shares of AOL Inc. common stock to Polar Capital will be exempt from
registration under Section 4(2) of the Securities Act of 1933, as a transaction by an issuer not
involving a public offering. The payment to Polar Capital of the $4.5 million of consideration is
not contingent on the continued employment of Mr. Armstrong with AOL.
44
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
An appraisal of the value of the business was performed by an independent financial advisory
firm to determine that the consideration paid by AOL was within a reasonable range of the fair
value of Patch. The Patch acquisition did not significantly affect the Company’s consolidated
financial results for the three and nine months ended September 30, 2009.
CME Investment
On May 18, 2009, the Company completed an investment in Central European Media Enterprises
Ltd. (“CME”), in which the Company received a 31% economic interest and a 38% voting interest, for
$244 million in cash. CME is a broadcasting company operating leading networks in seven Central and
Eastern European countries. In connection with its investment, Time Warner has agreed to allow CME
founder and Non-Executive Chairman Ronald S. Lauder to vote Time Warner’s shares of CME for at
least four years, subject to certain exceptions. Also, Mr. Lauder has agreed to support Time
Warner’s appointment of two designees to CME’s board of directors. The Company’s investment in CME
is being accounted for under the cost method of accounting.
Summary of Discontinued Operations
Discontinued operations for the three months ended September 30, 2009, reflect a loss of $1
million related to Warner Music Group tax indemnifications. Discontinued operations for the nine
months ended September 30, 2009 and the three and nine months September 30, 2008 primarily reflect
the financial condition and results of operations of TWC. Financial data for discontinued
operations for the nine months ended September 30, 2009 and the three and nine months ended
September 30, 2008 is as follows (millions, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
|
|
|
| |
|
Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
(recast) |
|
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
4,340 |
|
|
$ |
3,443 |
|
|
$ |
12,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income |
|
|
562 |
|
|
|
291 |
|
|
|
1,513 |
|
Income tax provision |
|
|
(207 |
) |
|
|
(161 |
) |
|
|
(623 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
355 |
|
|
$ |
130 |
|
|
$ |
890 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Time Warner Inc. shareholders |
|
$ |
306 |
|
|
$ |
105 |
|
|
$ |
757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information attributable to Time Warner Inc.
common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.25 |
|
|
$ |
0.09 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding - basic |
|
|
1,194.8 |
|
|
|
1,190.4 |
|
|
|
1,193.7 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.26 |
|
|
$ |
0.08 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding - diluted |
|
|
1,202.1 |
|
|
|
1,199.7 |
|
|
|
1,200.9 |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations for the nine months ended September 30, 2009 included direct
transaction costs (e.g., legal and professional fees) related to the separation of TWC of $75
million, and for the three and nine months ended September 30, 2008, included such direct
transaction and financing costs of $53 million and $102 million, respectively. The Networks segment
of Time Warner recognized approximately $170 million of Subscription revenues from TWC in 2009
through the Distribution Record Date and $210 million and $630 million, respectively, for the three
and nine months ended September 30, 2008.
45
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
3. INVENTORIES AND FILM COSTS
Inventories and film costs consist of (millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
December 31, |
| |
|
2009 |
|
2008 |
Inventories: |
|
|
|
|
|
|
|
|
Programming costs, less amortization |
|
$ |
3,372 |
|
|
$ |
3,206 |
|
DVDs, books, paper and other merchandise |
|
|
365 |
|
|
|
408 |
|
| |
|
|
|
|
Total inventories(a) |
|
|
3,737 |
|
|
|
3,614 |
|
Less: current portion of inventory |
|
|
(1,892 |
) |
|
|
(1,842 |
) |
| |
|
|
|
|
Total noncurrent inventories |
|
|
1,845 |
|
|
|
1,772 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Film costs — Theatrical: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
744 |
|
|
|
767 |
|
Completed and not released |
|
|
331 |
|
|
|
364 |
|
In production |
|
|
983 |
|
|
|
713 |
|
Development and pre-production |
|
|
144 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
Film costs — Television: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
850 |
|
|
|
922 |
|
Completed and not released |
|
|
207 |
|
|
|
224 |
|
In production |
|
|
547 |
|
|
|
499 |
|
Development and pre-production |
|
|
7 |
|
|
|
2 |
|
| |
|
|
|
|
Total film costs |
|
|
3,813 |
|
|
|
3,567 |
|
| |
|
|
|
|
Total noncurrent inventories and film costs |
|
$ |
5,658 |
|
|
$ |
5,339 |
|
| |
|
|
|
|
|
|
|
| (a) |
|
Does not include $1.857 billion and $2.160 billion of net film library costs as
of September 30, 2009 and December 31, 2008, respectively, which are included
in intangible assets subject to amortization in the consolidated balance sheet.
The decrease in 2009 includes an adjustment of $174 million representing a
change in cumulative participations payable with respect to film library titles
at Warner Bros., which was recognized as a reduction to the related film cost. |
46
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
4. FAIR VALUE MEASUREMENTS
A fair value measurement is determined based on the assumptions that a market participant
would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between
market participant assumptions based on (i) observable inputs such as quoted prices in active
markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable
either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to
use present value and other valuation techniques in the determination of fair value (Level 3). The
following table presents information about assets and liabilities required to be carried at fair
value on a recurring basis as of September 30, 2009 (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurements as of September 30, 2009 Using |
| |
|
|
|
|
|
Quoted Market |
|
|
|
|
|
|
| |
|
|
|
|
|
Prices in Active |
|
|
|
|
|
Significant |
| |
|
Fair Value |
|
Markets for |
|
Significant Other |
|
Unobservable |
| |
|
as of |
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
| |
|
September 30, |
|
|
|
|
|
|
| Description |
|
2009 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
$ |
250 |
|
|
$ |
246 |
|
|
$ |
4 |
|
|
$ |
- |
|
Available-for-sale securities |
|
|
41 |
|
|
|
10 |
|
|
|
31 |
|
|
|
- |
|
Derivatives |
|
|
34 |
|
|
|
5 |
|
|
|
- |
|
|
|
29 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
(91 |
) |
|
|
- |
|
|
|
(91 |
) |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
Total |
|
$ |
234 |
|
|
$ |
261 |
|
|
$ |
(56 |
) |
|
$ |
29 |
|
| |
|
|
|
|
|
|
|
|
The Company primarily applies the market approach for valuing recurring fair value
measurements.
The following table reconciles the beginning and ending balances of assets classified as Level
3 measurements and identifies the net income (losses) the Company recognized during the nine months
ended September 30, 2009 on such assets and liabilities that were included in the balance as of
September 30, 2009 (millions):
| |
|
|
|
|
| |
|
Derivatives |
|
|
|
|
|
Balance as of January 1, 2009 |
|
$ |
1 |
|
Total gains (losses): |
|
|
|
|
Included in net income |
|
|
12 |
|
Included in other comprehensive income |
|
|
- |
|
Purchases, issuances and settlements |
|
|
16 |
|
Transfers in and/or out of Level 3 |
|
|
- |
|
| |
|
|
Balance as of September 30, 2009 |
|
$ |
29 |
|
| |
|
|
|
|
|
|
|
Total gain
for the nine months ended September 30, 2009 included in
net income related to assets still held as of September 30, 2009 |
|
$ |
12 |
|
| |
|
|
Gains and losses recognized for assets and liabilities valued using significant unobservable
inputs are reported in investment losses, net, in other income (loss), net (Note 13).
Other Financial Instruments
Based on the interest rates prevailing at September 30, 2009, the fair value of Time Warner’s
debt exceeds its carrying value by approximately $1.5 billion. The carrying value for the majority
of the Company’s other financial instruments
approximates fair value due to the short-term nature of such instruments. However, differences
exist between the carrying value and fair value of the Company’s other financial instruments, but
these differences are not significant at September 30,
47
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2009. The fair value of financial instruments is generally determined by reference to the market
value of the instrument as quoted on a national securities exchange or in an over-the-counter
market. In cases where quoted market value is not available, fair value is based on an estimate
using present value or other valuation techniques.
Non-Financial Instruments
The majority of the Company’s non-financial instruments, which include goodwill, intangible
assets, inventories and property, plant and equipment, are not required to be carried at fair value
on a recurring basis. However, if certain triggering events occur (or at least annually for
goodwill and indefinite-lived intangible assets) such that a non-financial instrument is required
to be evaluated for impairment, a resulting asset impairment would require that the non-financial
instrument be recorded at the lower of historical cost or its fair value.
As it relates to film production costs, upon the occurrence of an event or change in
circumstance that may indicate that the fair value of a film is less than its unamortized costs,
the Company determines the fair value of the film and writes off to the consolidated statement of
operations the amount by which the unamortized capitalized costs exceed the film’s fair value. Some
of these events or changes in circumstance include: (i) an adverse change in the expected
performance of a film prior to its release, (ii) actual costs substantially in excess of budgeted
costs, (iii) substantial delays in completion or release schedules, (iv) changes in release plans,
(v) insufficient funding or resources to complete the film and to market it effectively and (vi)
the failure of actual performance subsequent to release to meet that which had been expected prior
to release. When required to determine the fair value of its films, the Company employs a
discounted cash flow methodology with assumptions for cash flows for periods not exceeding 10
years. The discount rate utilized in the discounted cash flow analysis is based on the weighted
average cost of capital of the respective business (e.g., Warner Bros.) plus a risk premium
representing the risk associated with producing a particular film. The fair value of any film costs
associated with a film that management plans to abandon is zero. As the primary determination of
fair value is determined using a discounted cash flow model, the resulting fair value is considered
a Level 3 input. During the three and nine months ended September 30, 2009, certain film production
costs, which were recorded as inventory in the consolidated balance sheet, were written down to
zero and $43 million, respectively, from their carrying values of $3 million and $120 million,
respectively.
48
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
5. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Committed financing capacity and long-term debt consists of (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
| |
|
Rate at |
|
|
|
|
|
2009 |
|
|
|
|
|
Unused |
|
Outstanding Debt (c) |
| |
|
September |
|
|
|
|
|
Committed |
|
Letters of |
|
Committed |
|
September |
|
December 31, |
| |
|
30, 2009 |
|
Maturities |
|
Capacity (a) |
|
Credit (b) |
|
Capacity |
|
30, 2009 |
|
2008 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(recast) |
Cash and equivalents |
|
|
|
|
|
|
|
|
|
$ |
7,126 |
|
|
$ |
- |
|
|
$ |
7,126 |
|
|
|
|
|
|
|
|
|
Revolving
bank credit agreement
and commercial paper program |
|
|
|
- |
|
|
2011 |
|
|
|
6,900 |
|
|
|
88 |
|
|
|
6,812 |
|
|
$ |
- |
|
|
$ |
4,490 |
|
Floating-rate public debt |
|
|
0.68 |
% |
|
|
2009 |
|
|
|
2,000 |
|
|
|
- |
|
|
|
- |
|
|
|
2,000 |
|
|
|
2,000 |
|
Fixed-rate public debt |
|
|
7.14 |
% |
|
|
2011-2036 |
|
|
|
15,227 |
|
|
|
- |
|
|
|
- |
|
|
|
15,227 |
|
|
|
15,227 |
|
Other obligations(d) |
|
|
7.21 |
% |
|
|
|
|
|
|
371 |
|
|
|
7 |
|
|
|
91 |
|
|
|
273 |
|
|
|
238 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
31,624 |
|
|
|
95 |
|
|
|
14,029 |
|
|
|
17,500 |
|
|
|
21,955 |
|
Debt due within one year |
|
|
|
|
|
|
|
|
|
|
(2,090 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,090 |
) |
|
|
(2,066 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
29,534 |
|
|
$ |
95 |
|
|
$ |
14,029 |
|
|
$ |
15,410 |
|
|
$ |
19,889 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The bank credit agreements, commercial paper program and public debt of the Company rank pari passu with the senior debt of the respective obligors thereon. The Company’s maturity profile of its outstanding debt and
other financing arrangements is relatively long-term, with a weighted average maturity of 11.0 years as of September 30, 2009. |
| |
| (b) |
|
Represents the portion of committed capacity reserved for outstanding and undrawn letters of credit. |
| |
| (c) |
|
Represents principal amounts adjusted for premiums and discounts. The weighted-average interest rate on Time Warner’s total debt was 6.41% at September 30, 2009 and 5.51% at December 31, 2008. The Company’s public debt
matures as follows: $2.000 billion in 2009, $0 in 2010, $2.000 billion in 2011, $2.000 billion in 2012, $1.300 billion in 2013 and $10.031 billion thereafter. |
| |
| (d) |
|
Amount consists of capital lease and other obligations, including committed financings by subsidiaries under local bank credit agreements. |
Repayment and Termination of $2.0 Billion Term Facility
On March 17, 2009, the Company used a portion of the proceeds it received from the Special
Dividend to repay in full the $2.0 billion outstanding (plus accrued interest) under its unsecured
term loan facility with a maturity date of January 8, 2011 (the “Term Facility”) and terminated the
Term Facility. Time Warner did not incur any early termination or prepayment penalties in
connection with the termination of the Term Facility.
Termination of Supplemental Credit Agreement
On March 12, 2009, TWC borrowed the full committed amount of $1.932 billion under its
unsecured term loan credit facility entered into on June 30, 2008 (the “TWC Bridge Facility”), all
of which was used by TWC to pay a portion of the Special Dividend. On March 26, 2009, TWC completed
an offering of $3.0 billion in aggregate principal amount of debt securities and used a portion of
the net proceeds from the offering to prepay in full the outstanding loans and all other amounts
due under the TWC Bridge Facility, and the TWC Bridge Facility was terminated in accordance with
its terms. Concurrently with the termination of the TWC Bridge Facility and pursuant to the terms
of the $1.535 billion credit agreement (the “Supplemental Credit Agreement”) between the Company
(as lender) and TWC (as borrower) for a two-year senior unsecured supplemental term loan facility
(the “Supplemental Credit Facility”), on March 26, 2009, TWC terminated the commitments of Time
Warner under the Supplemental Credit Facility, and the Supplemental Credit Agreement was terminated
in accordance with its terms.
Amendments to Revolving Facility
On March 11, 2009, the Company entered into the first and second amendments to the amended and
restated credit agreement (the “Revolving Credit Agreement”) for its senior unsecured five-year
revolving credit facility (the “Revolving Facility”). The first amendment terminated the $100
million commitment of Lehman Commercial Paper Inc. (“LCPI”), a
49
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
subsidiary of Lehman Brothers Holdings Inc., which filed a petition for bankruptcy under Chapter 11
of the U.S. Bankruptcy Code in September 2008, reducing the committed amount of the Revolving
Facility from $7.0 billion to $6.9 billion. The second amendment, among other things, amended the
Revolving Credit Agreement to (i) expand the circumstances under which any other lender under the
Revolving Facility would become a Defaulting Lender (as defined in the Revolving Credit Agreement,
as amended) and (ii) permit Time Warner to terminate the commitment of any such lender on terms
substantially similar to those applicable to LCPI under the first amendment to the Revolving Credit
Agreement.
Consent Solicitation
On April 15, 2009, the Company completed a solicitation of consents (the “Consent
Solicitation”) from the holders of the debt securities (the “Securities”) issued by Time Warner
Inc. and its subsidiaries under all of the indentures governing the publicly traded debt securities
of the Company and its subsidiaries other than the indenture entered into in November 2006
(collectively, the “Indentures”). Completion of the Consent Solicitation resulted in the adoption
on April 16, 2009 of certain amendments to each Indenture that provide that certain restrictive
covenants will not apply (subject to the concurrent or prior issuance of the guarantee by HBO
discussed below) to a conveyance or transfer by AOL LLC of its properties and assets substantially
as an entirety, unless such conveyance or transfer constitutes a conveyance or transfer of the
properties and assets of the issuer and the guarantors under the relevant Indenture and their
respective subsidiaries, taken as a whole, substantially as an entirety. As a result of the Consent
Solicitation, prior to or concurrent with a conveyance or transfer of AOL LLC’s properties and
assets substantially as an entirety, HBO will issue a guarantee of the obligations of Historic TW
Inc. (“Historic TW”) (including in its capacity as successor to Time Warner Companies, Inc.),
whether as issuer or guarantor, under the Indentures and the Securities. Such guarantee will be
issued by HBO only in connection with such a transaction.
Shelf Registration Statement
Time Warner had a shelf registration statement (the “Registration Statement”) on file with the
SEC since November 8, 2006 that allowed it to offer and sell from time to time debt securities,
preferred stock, common stock and/or warrants to purchase debt and equity securities. As a result
of the Company’s $13.955 billion of unused committed capacity at March 31, 2009 and the anticipated
expiration in early November 2009 of the Registration Statement, the Company determined it no
longer needed the Registration Statement. Accordingly, on April 24, 2009, the Company and the
subsidiary guarantors under the Registration Statement submitted filings to the SEC that suspended
the reporting obligations with respect to the debt securities (and related guarantees) that were
offered and sold pursuant to the Registration Statement and deregistered the securities covered
under the Registration Statement that were available for offer and sale.
6. SHAREHOLDERS’ EQUITY
Spin-Off of TWC
In connection with the Distribution, the Company recognized a reduction of $7.989 billion to
shareholders’ equity, including $1.167 billion attributable to noncontrolling interests.
Common Stock Repurchase Program
On July 26, 2007, Time Warner’s Board of Directors authorized a common stock repurchase
program that allows the Company to purchase up to an aggregate of $5 billion of common stock.
Purchases under this stock repurchase program
may be made from time to time on the open market and in privately negotiated transactions. The
size and timing of these purchases are based on a number of factors, including price and business
and market conditions. From the program’s inception through September 30, 2009, the Company
repurchased approximately 77 million shares of common stock for approximately $3.5 billion pursuant
to trading programs under Rule 10b5-1 of the Exchange Act. This number included approximately 26
million shares of common stock purchased for approximately $699 million during the nine months
ended September 30, 2009.
50
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
7. EQUITY-BASED COMPENSATION
The Company has one active equity plan under which it is authorized to grant equity awards to
employees and non-employee directors, covering an aggregate of 67 million shares of Time Warner
common stock. Options have been granted to employees and non-employee directors of Time Warner with
exercise prices equal to, or in excess of, the fair market value at the date of grant. Generally,
the stock options vest ratably over a four-year vesting period and expire ten years from the date
of grant. Certain stock option awards provide for accelerated vesting upon an election to retire
pursuant to the Company’s defined benefit retirement plans or after reaching a specified age and
years of service, as well as certain additional circumstances for non-employee directors. For the
nine months ended September 30, 2009, the Company granted approximately 10 million stock options at
a weighted-average grant date fair value per option of $5.05 ($3.13 net of tax). For the nine
months ended September 30, 2008, the Company granted approximately 10 million stock options at a
weighted-average grant date fair value per option of $12.36 ($7.66 net of tax). The table below
presents the weighted-average values of the assumptions used to value stock options at their grant
date.
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
| |
|
|
9/30/09 |
|
|
|
9/30/08 |
|
Expected volatility |
|
|
35.2% |
|
|
|
28.7% |
|
Expected term to exercise from grant date |
|
|
6.11 years |
|
|
|
5.96 years |
|
Risk-free rate |
|
|
2.5% |
|
|
|
3.2% |
|
Expected dividend yield |
|
|
4.4% |
|
|
|
1.7% |
|
Pursuant to this equity plan, Time Warner may also grant shares of common stock or restricted
stock units (“RSUs”), which generally vest between three to five years from the date of grant, to
its employees and non-employee directors. Certain RSU awards provide for accelerated vesting upon
an election to retire pursuant to the Company’s defined benefit retirement plans or after reaching
a specified age and years of service, as well as certain additional circumstances for non-employee
directors. Holders of restricted stock and RSU awards are generally entitled to receive cash
dividends or dividend equivalents, respectively, paid by the Company during the period of time that
the restricted stock or RSU awards are unvested. For the nine months ended September 30, 2009, the
Company granted approximately 5 million RSUs at a weighted-average grant date fair value per RSU of
$22.14 ($13.73 net of tax). For the nine months ended September 30, 2008, the Company granted
approximately 4 million RSUs at a weighted-average grant date fair value per RSU of $44.76 ($27.75
net of tax).
Time Warner also has a performance stock unit program for senior level executives. Under this
program, recipients of performance stock units (“PSUs”) are awarded a target number of PSUs that
represent the contingent (unfunded and unsecured) right to receive shares of Company stock at the
end of a performance period (generally three years) based on the actual performance level achieved
by the Company. For PSUs granted prior to 2009, the recipient of a PSU may receive, depending on
the Company’s total shareholder return (“TSR”) relative to the other companies in the S&P 500
Index, 0% to 200% of the target PSUs granted based on a sliding scale where a relative ranking of
less than the 25th percentile will pay 0% and a ranking at the 100th
percentile will pay 200% of the target number of shares.
PSUs granted in 2009 will be paid out in a number of shares of Common Stock based on (i) the
Company’s TSR relative to the other companies in the S&P 500 Index and (ii) the Company’s growth in
adjusted earnings per share (“EPS”) relative to the growth in adjusted EPS of the other companies
in the S&P 500 Index, in each case over a three-year performance period. Depending on the Company’s
TSR ranking and adjusted EPS growth ranking relative to the other companies in the S&P 500 Index, a
recipient of a PSU will receive between 0% and 200% of his or her target award following the
three-year performance period. If (i) the Company’s TSR ranking and adjusted EPS growth ranking are
both below the 50th percentile or (ii) the Company’s TSR ranking is at or above the
50th percentile, then the percentage of a participant’s target PSUs that will vest will
be based on the Company’s TSR ranking for the performance period. If the Company’s TSR ranking is
below the 50th percentile and its adjusted EPS growth ranking is at or above the
50th percentile, the percentage of a participant’s target PSUs that will vest will be
the average of (i) the percentage of target PSUs that would vest based on the Company’s TSR ranking
during the performance period and (ii) 100%. Based on market data as of September 30, 2009, the PSUs granted in 2009, 2008 and 2007 are tracking at a level that, if
maintained, would result in the award of 129%, 116% and 67%, respectively, of target PSUs granted.
51
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For accounting purposes, PSUs granted prior to 2009 are considered to have a market condition
and PSUs granted in 2009 are considered to have a market condition and a performance condition. The
effect of a market condition is reflected in the grant date fair value of the award, which is
estimated using a Monte Carlo analysis to estimate the total return ranking of Time Warner among
the S&P 500 Index companies over the performance period. In the case of PSUs granted in 2009, the
performance condition is assumed to have been met. As a result, compensation expense is recognized
on these types of awards provided that the requisite service is rendered (regardless of whether the
market condition is achieved).
PSU holders do not receive payments or accruals of dividends or dividend equivalents for
regular cash dividends paid by the Company while the PSU is outstanding. Participants who are
terminated by the Company other than for cause or who terminate their own employment for good
reason or due to retirement or disability are generally entitled to a pro rata portion of the PSUs
that would otherwise vest at the end of the performance period. For the nine months ended September
30, 2009, the Company granted approximately 0.2 million target PSUs at a weighted-average grant
date fair value per PSU of $23.67 ($14.68 net of tax). For the nine months ended September 30,
2008, the Company granted approximately 0.4 million target PSUs at a weighted-average grant date
fair value per PSU of $52.59 ($32.61 net of tax).
In connection with the TWC Separation, and as provided for in the Company’s equity plans, the
number of stock options, RSUs and target PSUs outstanding at the Distribution Record Date and the
exercise prices of such stock options were adjusted to maintain the fair value of those awards. The
changes in the number of equity awards and the exercise prices (which are reflected herein) were
determined by comparing the fair value of such awards immediately prior to the TWC Separation to
the fair value of such awards immediately after the TWC Separation. In performing this analysis,
the only assumptions that changed related to the Time Warner stock price and the employee’s
exercise price. Accordingly, each equity award outstanding as of the Distribution Record Date was
increased by multiplying the size of such award by 1.35, while the per share exercise price of each
stock option was decreased by dividing by 1.35. This adjustment resulted in an increase of
approximately 50 million equity awards (comprised of 46 million stock options and 4 million RSUs).
The modifications to the outstanding equity awards were made pursuant to existing antidilution
provisions in the Company’s equity plans and did not result in any additional compensation expense.
In addition, in connection with the 1-for-3 reverse stock split the Company implemented on
March 27, 2009, the number of outstanding equity awards was proportionately adjusted to reflect the
reverse stock split. As a result, and after giving effect to the adjustment for the TWC Separation,
the number of outstanding equity awards was determined by dividing the number of outstanding equity
awards by three. The per share exercise price of stock options, after giving effect to the
adjustment for the TWC Separation, was determined by multiplying the exercise price by three.
Compensation expense recognized for equity-based compensation plans for the three and nine
months ended September 30, 2009 and 2008 is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Stock options |
|
$ |
17 |
|
|
$ |
24 |
|
|
$ |
62 |
|
|
$ |
83 |
|
Restricted
stock, restricted stock units
and performance stock units |
|
|
24 |
|
|
|
23 |
|
|
|
89 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact on Operating Income |
|
$ |
41 |
|
|
$ |
47 |
|
|
$ |
151 |
|
|
$ |
168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit recognized |
|
$ |
15 |
|
|
$ |
17 |
|
|
$ |
57 |
|
|
$ |
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the terms of Time Warner’s equity plans and related award agreements, as a result of the
TWC Separation, TWC employees who held Time Warner equity awards were treated at the time of the
TWC Separation as if their employment with Time Warner was terminated without cause at the time of
the separation. This treatment resulted in the forfeiture of unvested stock options and shortened
exercise periods for vested stock options and pro rata vesting of the next installment of (and forfeiture of the remainder of) the RSU awards for those TWC employees who do not
satisfy retirement-treatment eligibility provisions in the Time Warner equity plans and related
award agreements.
52
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Upon the exercise of Time Warner stock options and the vesting of Time Warner RSUs held by TWC
employees, TWC is obligated to reimburse Time Warner for the intrinsic value of the applicable
award. As a result of the TWC Separation, TWC is no longer considered a related party. Accordingly,
on the Distribution Record Date, the Company established an asset of $16 million for the estimated
fair value (determined using the Black-Scholes option pricing model) of outstanding equity awards
held by TWC employees, with an offsetting adjustment to Time Warner Inc. shareholders’ equity in
the consolidated balance sheet. The estimated receivable from TWC fluctuates with the fair value
and number of outstanding equity awards and the resulting change is recorded in other income
(loss), net, in the consolidated statement of operations. As of September 30, 2009, the estimated
receivable was $29 million.
In connection with the AOL Separation, and as provided for in the Company’s equity plans, the
number of stock options, RSUs and target PSUs outstanding at the separation and the exercise prices
of such stock options will be adjusted to maintain the fair value of those awards. The changes in
the number of equity awards and the exercise prices will be determined by comparing the fair value
of such awards immediately prior to the AOL Separation to the fair value of such awards immediately
after the AOL Separation. The modifications to the outstanding equity awards will be made pursuant
to existing antidilution provisions in the Company’s equity plans.
8. BENEFIT PLANS
Time Warner and certain of its subsidiaries have both funded and unfunded defined benefit
pension plans, the substantial majority of which are noncontributory, covering certain domestic
employees and, to a lesser extent, have various defined benefit plans covering international
employees. Pension benefits are determined based on formulas that reflect the employees’ years of
service and compensation during their employment period and participation in the plans. Time Warner
uses a December 31 measurement date for its plans. A summary of the components of the net periodic
benefit costs from continuing operations recognized for substantially all of Time Warner’s domestic
and international defined benefit pension plans for the three and nine months ended September 30,
2009 and 2008 is as follows (millions):
Components of Net Periodic Benefit Costs
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Domestic |
|
|
International |
|
|
Domestic |
|
|
International |
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
16 |
|
|
$ |
19 |
|
|
$ |
4 |
|
|
$ |
5 |
|
|
$ |
49 |
|
|
$ |
58 |
|
|
$ |
12 |
|
|
$ |
16 |
|
Interest cost |
|
|
36 |
|
|
|
35 |
|
|
|
10 |
|
|
|
13 |
|
|
|
107 |
|
|
|
106 |
|
|
|
30 |
|
|
|
41 |
|
Expected return on plan
assets |
|
|
(33 |
) |
|
|
(44 |
) |
|
|
(12 |
) |
|
|
(19 |
) |
|
|
(99 |
) |
|
|
(132 |
) |
|
|
(36 |
) |
|
|
(58 |
) |
Amounts amortized |
|
|
29 |
|
|
|
7 |
|
|
|
2 |
|
|
|
- |
|
|
|
88 |
|
|
|
19 |
|
|
|
6 |
|
|
|
- |
|
Settlement charge |
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs |
|
$ |
54 |
|
|
$ |
17 |
|
|
$ |
4 |
|
|
$ |
(1 |
) |
|
$ |
151 |
|
|
$ |
51 |
|
|
$ |
12 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Contributions |
|
$ |
14 |
|
|
$ |
5 |
|
|
$ |
3 |
|
|
$ |
- |
|
|
$ |
35 |
|
|
$ |
115 |
|
|
$ |
10 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected cash flows
After considering the funded status of the Company’s defined benefit pension plans, movements
in the discount rate, investment performance and related tax consequences, the Company may choose
to make contributions to its pension plans in any given year. At September 30, 2009, there were no
minimum required contributions for domestic funded plans. As of December 31, 2008, the Company’s
funded domestic defined benefit pension plans were funded by assets in a pension trust with a fair
market value of $1.702 billion. Between January 1, 2009 and September 30, 2009, the Company’s plan
assets have experienced market gains of approximately 26%. The Company did not make any
discretionary cash contributions to its funded defined benefit pension plans during the nine months
ended September 30, 2009. Subject to market conditions and other considerations, the Company may
make discretionary cash contributions during the remainder of the year. For domestic unfunded plans, contributions will continue to be made to the extent benefits are
paid. Expected benefit payments for domestic unfunded plans for 2009 are approximately $42 million.
In addition, the Company anticipates making an additional $20 million discretionary contribution to
its international plans in the fourth quarter of 2009.
53
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
9. RESTRUCTURING COSTS
Merger Costs Capitalized as a Cost of Acquisition
As of September 30, 2009, merger costs capitalized as a cost of acquisition was $25 million,
with $2 million having been paid during the nine months ended September 30, 2009. As of September
30, 2009, $6 million of the remaining liability was classified as a current liability in the
consolidated balance sheet, with the remaining $19 million classified as a long-term liability.
Amounts classified as long-term, primarily related to lease exit costs, are expected to be paid
through 2014.
Restructuring Costs Expensed
The Company’s restructuring costs primarily related to employee termination costs and ranged
from senior executives to line personnel. Restructuring costs expensed as incurred by segment for
the three and nine months ended September 30, 2009 and 2008 are as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Filmed Entertainment |
|
$ |
17 |
|
|
$ |
17 |
|
|
$ |
85 |
|
|
$ |
130 |
|
Publishing |
|
|
12 |
|
|
|
1 |
|
|
|
7 |
|
|
|
16 |
|
AOL |
|
|
10 |
|
|
|
2 |
|
|
|
83 |
|
|
|
15 |
|
Corporate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring costs |
|
$ |
39 |
|
|
$ |
20 |
|
|
$ |
175 |
|
|
$ |
168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs for the three and nine months ended September 30, 2009 included $28
million and $165 million, respectively, related to 2009 restructuring initiatives. The remaining
restructuring costs for the three and nine months ended September 30, 2009 of $11 million and $10
million, respectively, relate to restructuring
initiatives in 2008 and prior years.
Selected Information
Selected
information relating to accrued restructuring costs is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee |
|
|
|
|
|
|
|
| |
|
Terminations |
|
|
Other Exit Costs |
|
|
Total |
|
Remaining liability as of December 31, 2008 (recast) |
|
$ |
204 |
|
|
$ |
84 |
|
|
$ |
288 |
|
Net accruals |
|
|
105 |
|
|
|
70 |
|
|
|
175 |
|
Noncash reductions(a) |
|
|
(10 |
) |
|
|
— |
|
|
|
(10 |
) |
Cash paid(b) |
|
|
(174 |
) |
|
|
(48 |
) |
|
|
(222 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of September 30, 2009 |
|
$ |
125 |
|
|
$ |
106 |
|
|
$ |
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Noncash reductions relate to the settlement of certain employee-related liabilities with equity instruments. |
| |
| (b) |
|
Of the $222 million paid in 2009, $44 million was paid during the three months ended September 30, 2009. |
54
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of September 30, 2009, of the remaining liability of $231 million, $152 million was
classified as a current liability in the consolidated balance sheet, with the remaining $79 million
classified as a long-term liability. Amounts classified as long-term are expected to be paid through 2017.
10. DERIVATIVE INSTRUMENTS
Time Warner uses derivative instruments, principally forward contracts, to manage the risk
associated with the volatility of future cash flows denominated in foreign currencies and changes
in fair value resulting from changes in foreign currency exchange rates. The Company uses
derivative instruments that generally have maturities of three to eighteen months to hedge various
foreign exchange exposures, including the following: (i) variability in foreign
currency-denominated cash flows, such as the hedges of unremitted or forecasted royalty and license
fees to be received from the sale or anticipated sale of U.S. copyrighted products abroad or cash
flows for certain film costs denominated in a foreign currency (i.e., cash flow hedges) and (ii)
currency risk associated with foreign currency-denominated operating assets and liabilities (i.e.,
fair value hedges). The Company also enters into derivative contracts that economically hedge
certain of its foreign currency risks, even though hedge accounting does not apply or the Company
elects not to apply hedge accounting. These economic
hedges are used primarily to offset the change in certain foreign currency denominated
long-term receivables and certain foreign currency denominated debt due to changes in the
underlying foreign exchange rates. Gains and losses from hedging activities are largely offset by
corresponding economic gains or losses from the respective transactions that were hedged. The
Company monitors its positions with, and the credit quality of, the financial institutions that are
party to any of its financial transactions.
The following is a summary of amounts pertaining to Time Warner’s use of foreign currency
derivatives at September 30, 2009 (millions):
| |
|
|
|
|
| |
|
September 30, |
|
| |
|
2009 |
|
Qualifying Hedges |
|
|
|
|
Assets |
|
$ |
62 |
|
Liabilities |
|
|
(126 |
) |
|
|
|
|
|
Economic Hedges |
|
|
|
|
Assets |
|
$ |
22 |
|
Liabilities |
|
|
(49 |
) |
Netting provisions are provided for in existing International Swap and Derivative Association
Inc. agreements in situations where the Company executes multiple contracts with the same
counterparty. As a result, net assets or liabilities resulting from foreign exchange derivatives
subject to these netting agreements are classified within prepaid expenses and other current assets
or accounts payable and accrued expenses in the Company’s consolidated balance sheet. At September
30, 2009, $86 million of losses related to cash flow hedges are recorded in accumulated other
comprehensive income in the Company’s consolidated balance sheet and are expected to be recognized
in earnings at the same time hedged items affect earnings. Included in this amount are deferred net
losses of $64 million related to hedges of cash flows associated with films that are not expected
to be released within the next twelve months.
55
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following is a summary of amounts pertaining to Time Warner’s use of foreign currency
derivatives for the three and nine months ended September 30, 2009 (millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
|
Nine Months |
|
| |
|
Ended |
|
|
Ended |
|
| |
|
9/30/09 |
|
|
9/30/09 |
|
Fair Value Hedges |
|
|
|
|
|
|
|
|
Gain (loss) — Effective Portion: |
|
|
|
|
|
|
|
|
Costs of revenues |
|
$ |
4 |
|
|
$ |
12 |
|
Gain (loss) recognized in net income and excluded from effectiveness testing
— Ineffective Portion: |
|
|
|
|
|
|
|
|
Other income (loss), net |
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges |
|
|
|
|
|
|
|
|
Gain (loss) — Effective Portion: |
|
|
|
|
|
|
|
|
Recorded to accumulated other comprehensive income |
|
$ |
8 |
|
|
$ |
(5 |
) |
Reclassified from accumulated other comprehensive income to net income: |
|
|
|
|
|
|
|
|
Selling, general and administrative expense |
|
|
(3 |
) |
|
|
(9 |
) |
Costs of revenues |
|
|
(9 |
) |
|
|
(23 |
) |
Gain (loss) recognized in net income and excluded from effectiveness testing
— Ineffective Portion: |
|
|
|
|
|
|
|
|
Other income (loss), net |
|
|
(3 |
) |
|
|
(6 |
) |
Economic Hedges |
|
|
|
|
|
|
|
|
Gain (loss): |
|
|
|
|
|
|
|
|
Costs of revenues |
|
$ |
3 |
|
|
$ |
(22 |
) |
Other income (loss), net |
|
|
1 |
|
|
|
3 |
|
11. SEGMENT INFORMATION
Time Warner classifies its operations into four reportable segments: Networks, consisting
principally of cable television networks that provide programming; Filmed Entertainment, consisting
principally of feature film, television and home video production and distribution; Publishing,
consisting principally of magazine publishing; and AOL, consisting principally of interactive
consumer and advertising services.
Information as to the operations of Time Warner in each of its reportable segments is set
forth below based on the nature of the products and services offered. Time Warner evaluates
performance based on several factors, of which the primary financial measure is operating income
before depreciation of tangible assets and amortization of intangible assets (“Operating Income
before Depreciation and Amortization”). Additionally, the Company has provided a summary of
Operating Income by segment.
56
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, 2009 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks |
|
$ |
1,885 |
|
|
$ |
768 |
|
|
$ |
197 |
|
|
$ |
24 |
|
|
$ |
2,874 |
|
Filmed Entertainment |
|
|
12 |
|
|
|
18 |
|
|
|
2,716 |
|
|
|
34 |
|
|
|
2,780 |
|
Publishing |
|
|
333 |
|
|
|
456 |
|
|
|
22 |
|
|
|
103 |
|
|
|
914 |
|
AOL |
|
|
332 |
|
|
|
415 |
|
|
|
- |
|
|
|
30 |
|
|
|
777 |
|
Intersegment eliminations |
|
|
- |
|
|
|
(25 |
) |
|
|
(181 |
) |
|
|
(4 |
) |
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,562 |
|
|
$ |
1,632 |
|
|
$ |
2,754 |
|
|
$ |
187 |
|
|
$ |
7,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Three Months Ended September 30, 2008 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(recast, millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks |
|
$ |
1,722 |
|
|
$ |
772 |
|
|
$ |
224 |
|
|
$ |
13 |
|
|
$ |
2,731 |
|
Filmed Entertainment |
|
|
10 |
|
|
|
20 |
|
|
|
2,797 |
|
|
|
54 |
|
|
|
2,881 |
|
Publishing |
|
|
382 |
|
|
|
585 |
|
|
|
16 |
|
|
|
135 |
|
|
|
1,118 |
|
AOL |
|
|
470 |
|
|
|
507 |
|
|
|
- |
|
|
|
35 |
|
|
|
1,012 |
|
Intersegment eliminations |
|
|
- |
|
|
|
(28 |
) |
|
|
(131 |
) |
|
|
(4 |
) |
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,584 |
|
|
$ |
1,856 |
|
|
$ |
2,906 |
|
|
$ |
233 |
|
|
$ |
7,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Nine Months Ended September 30, 2009 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks |
|
$ |
5,598 |
|
|
$ |
2,367 |
|
|
$ |
598 |
|
|
$ |
82 |
|
|
$ |
8,645 |
|
Filmed Entertainment |
|
|
31 |
|
|
|
52 |
|
|
|
7,526 |
|
|
|
137 |
|
|
|
7,746 |
|
Publishing |
|
|
959 |
|
|
|
1,321 |
|
|
|
53 |
|
|
|
302 |
|
|
|
2,635 |
|
AOL |
|
|
1,081 |
|
|
|
1,277 |
|
|
|
- |
|
|
|
90 |
|
|
|
2,448 |
|
Intersegment eliminations |
|
|
- |
|
|
|
(74 |
) |
|
|
(497 |
) |
|
|
(14 |
) |
|
|
(585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
7,669 |
|
|
$ |
4,943 |
|
|
$ |
7,680 |
|
|
$ |
597 |
|
|
$ |
20,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Nine Months Ended September 30, 2008 |
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(recast, millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks |
|
$ |
5,136 |
|
|
$ |
2,417 |
|
|
$ |
626 |
|
|
$ |
37 |
|
|
$ |
8,216 |
|
Filmed Entertainment |
|
|
30 |
|
|
|
57 |
|
|
|
8,034 |
|
|
|
164 |
|
|
|
8,285 |
|
Publishing |
|
|
1,134 |
|
|
|
1,783 |
|
|
|
40 |
|
|
|
382 |
|
|
|
3,339 |
|
AOL |
|
|
1,500 |
|
|
|
1,589 |
|
|
|
- |
|
|
|
108 |
|
|
|
3,197 |
|
Intersegment eliminations |
|
|
- |
|
|
|
(83 |
) |
|
|
(422 |
) |
|
|
(14 |
) |
|
|
(519 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
7,800 |
|
|
$ |
5,763 |
|
|
$ |
8,278 |
|
|
$ |
677 |
|
|
$ |
22,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment Revenues
In the normal course of business, the Time Warner segments enter into transactions with one
another. The most common types of intersegment transactions include:
| |
• |
|
the Filmed Entertainment segment generating Content revenues by licensing television and
theatrical programming to the Networks segment; and |
| |
| |
• |
|
the Networks, Publishing and AOL segments generating Advertising revenues by promoting
the products and services of other Time Warner segments. |
57
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
These intersegment transactions are recorded by each segment at estimated fair value as if the
transactions were with third parties and, therefore, affect 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 affect consolidated
results. Additionally, transactions between divisions within the same reporting segment (e.g., a
transaction between HBO and Turner within the Networks segment) are eliminated in arriving at
segment performance and, therefore, do not affect segment results. Revenues recognized by Time
Warner’s segments on intersegment transactions are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
(millions) |
|
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Intersegment Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks |
|
$ |
22 |
|
|
$ |
22 |
|
|
$ |
72 |
|
|
$ |
79 |
|
Filmed Entertainment |
|
|
182 |
|
|
|
130 |
|
|
|
491 |
|
|
|
411 |
|
Publishing |
|
|
5 |
|
|
|
9 |
|
|
|
19 |
|
|
|
22 |
|
AOL |
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intersegment revenues |
|
$ |
210 |
|
|
$ |
163 |
|
|
$ |
585 |
|
|
$ |
519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
(millions) |
|
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Operating Income before Depreciation
and
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks(a) |
|
$ |
1,044 |
|
|
$ |
1,005 |
|
|
$ |
3,089 |
|
|
$ |
2,805 |
|
Filmed Entertainment(b) |
|
|
385 |
|
|
|
381 |
|
|
|
923 |
|
|
|
857 |
|
Publishing(c) |
|
|
139 |
|
|
|
211 |
|
|
|
295 |
|
|
|
625 |
|
AOL(d) |
|
|
234 |
|
|
|
389 |
|
|
|
760 |
|
|
|
1,144 |
|
Corporate(e) |
|
|
(76 |
) |
|
|
(73 |
) |
|
|
(238 |
) |
|
|
(257 |
) |
Intersegment eliminations |
|
|
14 |
|
|
|
19 |
|
|
|
- |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income before
depreciation and
amortization |
|
$ |
1,740 |
|
|
$ |
1,932 |
|
|
$ |
4,829 |
|
|
$ |
5,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the three and nine months ended September 30, 2009, includes a $52 million noncash impairment of intangible assets
related to Turner’s interest in a general entertainment network in India. For the three and nine months ended September 30,
2008, includes a $3 million loss on the completion of the sale of GameTap, an online video game business, and the nine months
ended September 30, 2008, also includes an $18 million noncash impairment of GameTap. |
| |
| (b) |
|
For the nine months ended September 30, 2009, includes a $33 million loss on the sale of Warner Bros.’ Italian cinema assets. |
| |
| (c) |
|
For the three and nine months ended September 30, 2008, includes a $30 million noncash impairment related to a sub-lease
with a tenant that filed for bankruptcy in September 2008. |
| |
| (d) |
|
For the three and nine months ended September 30, 2009, includes a $5 million noncash impairment of certain trade names. For
the three and nine months ended September 30, 2008, includes a $9 million noncash impairment of a building. |
| |
| (e) |
|
For the three and nine months ended September 30, 2009, includes $7 million and $21 million, respectively, and for the three
and nine months ended September 30, 2008, includes $5 million and $13 million, respectively, in net expenses related to
securities litigation and government investigations. |
58
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
(millions) |
|
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Depreciation of Property, Plant and
Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks |
|
$ |
(87) |
|
|
$ |
(82) |
|
|
$ |
(259) |
|
|
$ |
(241) |
|
Filmed Entertainment |
|
|
(43) |
|
|
|
(42) |
|
|
|
(124) |
|
|
|
(126) |
|
Publishing |
|
|
(31) |
|
|
|
(32) |
|
|
|
(93) |
|
|
|
(100) |
|
AOL |
|
|
(66) |
|
|
|
(76) |
|
|
|
(206) |
|
|
|
(238) |
|
Corporate |
|
|
(10) |
|
|
|
(12) |
|
|
|
(30) |
|
|
|
(33) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation of property, plant
and equipment |
|
$ |
(237) |
|
|
$ |
(244) |
|
|
$ |
(712) |
|
|
$ |
(738) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
(millions) |
|
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Amortization of Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks |
|
$ |
(19) |
|
|
$ |
(14) |
|
|
$ |
(57) |
|
|
$ |
(32) |
|
Filmed Entertainment |
|
|
(51) |
|
|
|
(64) |
|
|
|
(151) |
|
|
|
(179) |
|
Publishing |
|
|
(11) |
|
|
|
(17) |
|
|
|
(35) |
|
|
|
(52) |
|
AOL |
|
|
(34) |
|
|
|
(45) |
|
|
|
(105) |
|
|
|
(124) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization of intangible assets |
|
$ |
(115) |
|
|
$ |
(140) |
|
|
$ |
(348) |
|
|
$ |
(387) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
9/30/09 |
|
|
9/30/08 |
|
|
9/30/09 |
|
|
9/30/08 |
|
| |
|
(millions) |
|
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
|
|
|
|
|
(recast) |
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks(a) |
|
$ |
938 |
|
|
$ |
909 |
|
|
$ |
2,773 |
|
|
$ |
2,532 |
|
Filmed Entertainment(b) |
|
|
291 |
|
|
|
275 |
|
|
|
648 |
|
|
|
552 |
|
Publishing(c) |
|
|
97 |
|
|
|
162 |
|
|
|
167 |
|
|
|
473 |
|
AOL(d) |
|
|
134 |
|
|
|
268 |
|
|
|
449 |
|
|
|
782 |
|
Corporate(e) |
|
|
(86) |
|
|
|
(85) |
|
|
|
(268) |
|
|
|
(290) |
|
Intersegment eliminations |
|
|
14 |
|
|
|
19 |
|
|
|
- |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
1,388 |
|
|
$ |
1,548 |
|
|
$ |
3,769 |
|
|
$ |
4,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the three and nine months ended September 30, 2009, includes a $52 million noncash impairment of intangible assets
related to Turner’s interest in a general entertainment network in India. For the three and nine months ended September 30,
2008, includes a $3 million loss on the completion of the sale of GameTap and the nine
months ended September 30, 2008, also includes an $18 million noncash impairment of GameTap. |
| |
| (b) |
|
For the nine months ended September 30, 2009, includes a $33 million loss on the sale of Warner Bros.’ Italian cinema assets. |
| |
| (c) |
|
For the three and nine months ended September 30, 2008, includes a $30 million noncash impairment related to a sub-lease
with a tenant that filed for bankruptcy in September 2008. |
| |
| (d) |
|
For the three and nine months ended September 30, 2009, includes a $5 million noncash impairment of certain trade names. For
the three and nine months ended September 30, 2008, includes a $9 million noncash impairment of a building. |
| |
| (e) |
|
For the three and nine months ended September 30, 2009, includes $7 million and $21 million, respectively, and for the three
and nine months ended September 30, 2008, includes $5 million and $13 million, respectively, in net expenses related to
securities litigation and government investigations. |
59
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A summary of total assets by operating segment is set forth below:
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
(millions) |
|
| |
|
|
|
|
|
(recast) |
|
Assets |
|
|
|
|
|
|
|
|
Networks |
|
$ |
36,223 |
|
|
$ |
36,097 |
|
Filmed Entertainment |
|
|
16,509 |
|
|
|
17,080 |
|
Publishing |
|
|
6,424 |
|
|
|
6,778 |
|
AOL |
|
|
3,728 |
|
|
|
4,075 |
|
Corporate |
|
|
8,382 |
|
|
|
2,316 |
|
Assets of discontinued operations |
|
|
- |
|
|
|
47,711 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
71,266 |
|
|
$ |
114,057 |
|
|
|
|
|
|
|
|
12. COMMITMENTS AND CONTINGENCIES
Commitments
Six Flags
In connection with the Company’s former investment in the Six Flags theme parks located in
Georgia and Texas (“Six Flags Georgia” and “Six Flags Texas,” respectively, and, collectively, the
“Parks”), in 1997, certain subsidiaries of the Company (including Historic TW) agreed to guarantee
(the “Six Flags Guarantee”) certain obligations of the partnerships that hold the Parks (the
“Partnerships”) for the benefit of the limited partners in such Partnerships, including the
following (the “Guaranteed Obligations”): (a) making a minimum annual distribution to the limited
partners of the Partnerships (the minimum was approximately $61 million in 2008 and is subject to
annual cost of living adjustments); (b) making a minimum amount of capital expenditures each year
(an amount approximating 6% of the Parks’ annual revenues); (c) offering each year to purchase 5%
of the limited partnership units of the Partnerships (plus any such units not purchased pursuant to
such offer in any prior year) based on an aggregate price for all limited partnership units at the
higher of (i) $250 million in the case of Six Flags Georgia and $374.8 million in the case of Six
Flags Texas (the “Base Valuations”) and (ii) a weighted average multiple of EBITDA for the
respective Park over the previous four-year period (the “Cumulative LP Unit Purchase Obligation”);
(d) making annual ground lease payments; and (e) either (i) purchasing all of the outstanding
limited partnership units through the exercise of a call option upon the earlier of the occurrence
of certain specified events and the end of the term of each of the Partnerships in 2027 (Six Flags
Georgia) and 2028 (Six Flags Texas) (the “End of Term Purchase”) or (ii) causing each of the
Partnerships to have no indebtedness and to meet certain other financial tests as of the end of the
term of the Partnership. The aggregate amount payable in connection with an End of Term Purchase
option on either Park will be the Base Valuation applicable to such Park, adjusted for changes in
the consumer price index from December 1996, in the case of Six Flags Georgia, and December 1997,
in the case of Six Flags Texas, through December of the year immediately preceding the year in
which the End of Term Purchase occurs, in each case, reduced ratably to reflect limited partnership
units previously purchased.
In connection with the Company’s 1998 sale of Six Flags Entertainment Corporation (which held
the controlling interests in the Parks) to Six Flags, Inc. (formerly Premier Parks Inc.) (“Six
Flags”), Six Flags and Historic TW entered into a Subordinated Indemnity Agreement pursuant to
which Six Flags agreed to guarantee the performance of the Guaranteed Obligations when due and to
indemnify Historic TW, among others, in the event that the Guaranteed Obligations are not performed
and the Six Flags Guarantee is called upon. In the event of a default of Six Flags’ obligations
under the Subordinated Indemnity Agreement, the Subordinated Indemnity Agreement and related
agreements provide, among other things, that Historic TW has the right to acquire control of the
managing partner of the Parks. Six Flags’ obligations to Historic TW are further secured by its
interest in all limited partnership units that are held by Six Flags. To date, no payments have
been made by the Company pursuant to the Six Flags Guarantee.
In connection with the TWC Separation, guarantees previously made by Time Warner Entertainment
Company, L.P. (“TWE”), a subsidiary of TWC, were terminated and, pursuant to and as required under
the original terms of the Six Flags
60
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Guarantee, Warner Bros. Entertainment Inc. (“WBEI”) became a guarantor. In addition, TWE’s
rights and obligations under the Subordinated Indemnity Agreement have been assigned to WBEI. The
Company continues to indemnify TWE in connection with any residual exposure of TWE under the
Guaranteed Obligations.
In April 2009, Six Flags received notices from limited partners of the Partnerships to sell
limited partnership units with an aggregate price of approximately $66 million. The general partner
of the Georgia limited partnership exercised its right to purchase Six Flags Georgia units having a
total purchase price of $7 million. The remaining purchase price for limited partnership units in
the Parks that were put was funded through $6 million of cash that had been held in escrow to
support the Six Flags Guarantee and a loan from a wholly-owned Time Warner subsidiary (TW-SF LLC)
of approximately $53 million (the “TW Loan”). The TW Loan was made to SFOG Acquisition A, Inc., a
Delaware corporation, and SFOT Acquisition I, Inc., a Delaware corporation (collectively, the
“Acquisition Corporations”). The TW Loan accrues interest at 14% per annum with a final maturity
date of March 15, 2011. Up to $10 million of the TW Loan has been guaranteed by Six Flags. Taking
into account the limited partnership units purchased in 2009, the estimated maximum Cumulative LP
Unit Purchase Obligation for 2010 is approximately $300 million. In addition, the aggregate
undiscounted estimated future cash flow requirements covered by the Six Flags Guarantee over the
remaining term (through 2028) of the agreements are approximately $1.15 billion (for a net present
value of approximately $415 million). In July 2009, the Company received a payment on the TW Loan
of $13 million (which included both principal and accrued interest) from the Acquisition
Corporations.
On June 12, 2009, Six Flags and certain of its subsidiaries filed petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court in Delaware. The
reorganization plan that ultimately becomes effective is expected to result in a significant
reduction in debt for Six Flags. It is too early to determine the impact, if any, of the
reorganization proceedings on the guarantee by Six Flags of the TW Loan. The Partnerships holding
the Parks and the Acquisition Corporations were not included in the debtors filing the bankruptcy
proceeding.
In connection with the proposed plan of reorganization of Six Flags, in October 2009, TW-SF
LLC agreed to provide the Acquisition Corporations a new 5-year multiple draw credit facility of up
to $150 million, which the Acquisition Corporations would be able to use only to fund their
obligations to purchase certain limited partnership units of the Partnerships. The new credit
facility, which is subject to a number of conditions precedent, including a final order confirming
the plan of reorganization, would be in addition to the existing TW Loan. New loans drawn under
the facility would mature 5 years from their respective funding date. Interest will accrue at a
rate at least equal to a LIBOR floor of 250 basis points plus a spread of 100 basis points over the
applicable margin for a new Six Flags’ senior term credit facility, which will close simultaneously
with the closing of this facility.
Because the Six Flags Guarantee existed prior to December 31, 2002 and no modifications to the
arrangements have been made since the date the guarantee came into existence, the Company is
required to continue to account for the Guaranteed Obligations as a contingent liability. Based on
its evaluation of the current facts and circumstances surrounding the Guaranteed Obligations and
the Subordinated Indemnity Agreement, the Company is unable to predict the loss, if any, that may
be incurred under these Guaranteed Obligations and no liability for the arrangements has been
recognized at September 30, 2009. Because of the specific circumstances surrounding the
arrangements and the fact that no active or observable market exists for this type of financial
guarantee, the Company is unable to determine a current fair value for the Guaranteed Obligations
and related Subordinated Indemnity Agreement.
Google Investment in AOL
In connection with the expansion of their strategic relationship in April 2006, Google
acquired a 5% interest in AOL, and, as a result, 95% of the equity interests in AOL were indirectly
held by the Company and 5% were indirectly held by Google. As part of the April 2006 transaction,
Google received certain registration rights relating to its equity interest in AOL. In late January
2009, Google exercised its right to request that AOL register Google’s 5% equity interest for sale
in an initial public offering. Time Warner exercised its right to purchase Google’s equity interest
for cash based on the appraised fair market value of the equity interest in lieu of conducting an
initial public offering. On July 8, 2009, the Company repurchased Google’s 5% interest in AOL for
$283 million in cash, which amount included a payment in respect of Google’s pro rata share of cash
distributions to Time Warner by AOL attributable to the period of Google’s investment in AOL. After
repurchasing Google’s stake, Time Warner owns 100% of AOL.
61
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contingencies
Shareholder Derivative Lawsuits
During the Summer and Fall of 2002, numerous shareholder derivative lawsuits were filed in
state and federal courts naming as defendants certain current and former directors and officers of
the Company, as well as the Company as a nominal defendant. The complaints alleged that defendants
breached their fiduciary duties by, among other things, causing the Company to issue corporate
statements that did not accurately represent that AOL had declining advertising revenues. Certain
of these lawsuits were later dismissed, and others were eventually consolidated in their respective
jurisdictions. In 2006, the parties entered into a settlement agreement to resolve all of the
remaining derivative matters, and the Court granted final approval of the settlement on September
6, 2006. The court has yet to rule on plaintiffs’ petition for attorneys’ fees and expenses. At
September 30, 2009, the Company’s remaining reserve related to these matters is $10 million, which
approximates an expected award for plaintiffs’ attorneys’ fees.
Other Matters
Warner Bros. (South) Inc. (“WBS”), a wholly owned subsidiary of the Company, is litigating
numerous tax cases in Brazil. WBS currently is the theatrical distribution licensee for Warner
Bros. Entertainment Nederlands (“Warner Bros. Nederlands”) in Brazil and acts as a service provider
to the Warner Bros. Nederlands home video licensee. All of the ongoing tax litigation involves WBS’
distribution activities prior to January 2004, when WBS conducted both theatrical and home video
distribution. Much of the tax litigation stems from WBS’ position that in distributing videos to
rental retailers, it was conducting a distribution service, subject to a municipal service tax, and
not the “industrialization” or sale of videos, subject to Brazilian federal and state VAT-like
taxes. Both the federal tax authorities and the State of São Paulo, where WBS is based, have
challenged this position. Certain of these matters were settled in September 2007 pursuant to a
government-sponsored amnesty program. In some additional tax cases, WBS, often together with other
film distributors, is challenging the imposition of taxes on royalties remitted outside of Brazil
and the constitutionality of certain taxes. The Company intends to defend against the various
remaining tax cases vigorously.
On October 8, 2004, certain heirs of Jerome Siegel, one of the creators of the “Superman”
character, filed suit against the Company, DC Comics and Warner Bros. Entertainment Inc. in the
U.S. District Court for the Central District of California. Plaintiffs’ complaint seeks an
accounting and demands up to one-half of the profits made on Superman since the alleged April 16,
1999 termination by plaintiffs of Siegel’s grants of one-half of the rights to the Superman
character to DC Comics’ predecessor-in-interest. Plaintiffs have also asserted various Lanham Act
and unfair competition claims, alleging “wasting” of the Superman property by DC Comics and failure
to accord credit to Siegel. The Company answered the complaint and filed counterclaims. On April
30, 2007, the Company filed motions for partial summary judgment on various issues, including the
unavailability of accounting for pre-termination and foreign works. On March 26, 2008, the court
entered an order of summary judgment finding, among other things, that plaintiffs’ notices of
termination were valid and that plaintiffs had thereby recaptured, as of April 16, 1999, their
rights to a one-half interest in the Superman story material, as first published, but that the
accounting for profits would not include profits attributable to foreign exploitation,
republication of pre-termination works and trademark exploitation. On October 6, 2008, the court
dismissed plaintiffs’ Lanham Act and “wasting” claims with prejudice. In orders issued on October
14, 2008, the court determined that the remaining claims in the case will be subject to phased
non-jury trials. The first phase trial concluded on May 21, 2009, and on July 8, 2009, the court
issued a decision in favor of the defendants on the issue of whether the terms of various license
agreements between DC Comics and Warner Bros. Entertainment Inc. were at fair market value or
constituted “sweetheart deals.” The second phase trial was previously scheduled to commence on
December 1, 2009, and the parties are awaiting a new date for the commencement of this trial. The
Company intends to defend against this lawsuit vigorously.
On October 22, 2004, the same Siegel heirs filed a second lawsuit against the Company, DC
Comics, Warner Bros. Entertainment Inc., Warner Communications Inc. and Warner Bros. Television
Production Inc. in the U.S. District Court for the Central District of California. Plaintiffs claim
that Jerome Siegel was the sole creator of the character Superboy and, as such, DC Comics has had
no right to create new Superboy works since the alleged October 17, 2004 termination by plaintiffs
of Siegel’s grants of rights to the Superboy character to DC Comics’ predecessor-in-interest. This
lawsuit seeks a declaration regarding the validity of the alleged termination and an injunction
against future use of the Superboy character.
62
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Plaintiffs have also asserted Lanham Act and unfair competition claims alleging false
statements by DC Comics regarding the creation of the Superboy character. The Company answered the
complaint and filed counterclaims. The case was consolidated for discovery purposes with the
“Superman” action described immediately above. The parties filed cross-motions for summary judgment
or partial summary judgment on February 15, 2006. In its ruling dated March 23, 2006, the court
denied the Company’s motion for summary judgment, granted plaintiffs’ motion for partial summary
judgment on termination and held that further proceedings are necessary to determine whether the
Company’s Smallville television series may infringe on plaintiffs’ rights to the Superboy
character. On January 12, 2007, the Company filed a motion for reconsideration of the court’s
decision granting plaintiffs’ motion for partial summary judgment on termination. On April 30,
2007, the Company filed a motion for summary judgment on non-infringement of Smallville. On July
27, 2007, the court granted the Company’s motion for reconsideration, reversing the bulk of the
March 23, 2006 ruling, and requested additional briefing on certain issues. On March 31, 2008, the
court, among other things, denied the Company’s summary judgment motion as moot in view of the
court’s July 27, 2007 reconsideration ruling. To the extent any issues remain, the Company intends
to defend against this lawsuit vigorously.
On May 24, 1999, two former AOL Community Leader volunteers filed Hallissey et al. v. America
Online, Inc. in the U.S. District Court for the Southern District of New York. This lawsuit was
brought as a collective action under the Fair Labor Standards Act (“FLSA”) and as a class action
under New York state law against AOL and AOL Community, Inc. The plaintiffs allege that, in serving
as Community Leader volunteers, they were acting as employees rather than volunteers for purposes
of the FLSA and New York state law and are entitled to minimum wages. On February 21, 2008, the
court granted plaintiffs’ motion to issue notice to the former community leaders nationwide. Notice
to the putative class was issued in May 2008 and in December 2008 and the putative class had until
February 27, 2009 to opt-in to the collective action. In February 2009, plaintiffs filed a motion,
the briefing for which was completed in May 2009, to amend their complaint to add claims under the
wage laws in 25 states, including state wage claims already filed in the New Jersey and Ohio
actions described below. The court denied plaintiffs’ motion on July 17, 2009. In 2001, a related
case was filed by several of the Hallissey plaintiffs in the U.S. District Court for the Southern
District of New York alleging violations of the retaliation provisions of the FLSA. This case was
stayed pending the outcome of the Company’s motion to dismiss in the Hallissey matter described
above, but has not been activated (although the court denied that motion to dismiss in 2006). Also
in 2001, two related class actions were filed in state courts in New Jersey and Ohio, alleging
violations of the FLSA and/or the respective state laws. These cases were removed to federal court
and subsequently transferred to the U.S. District Court for the Southern District of New York for
consolidated pretrial proceedings with Hallissey. A third related action was filed in state court
in California, which the parties have settled. The Company intends to defend against the remaining
lawsuits vigorously.
On January 17, 2002, Community Leader volunteers filed a class action lawsuit in the U.S.
District Court for the Southern District of New York against the Company, AOL and AOL Community,
Inc. under ERISA. Plaintiffs allege that they are entitled to pension and/or welfare benefits
and/or other employee benefits subject to ERISA. In March 2003, plaintiffs filed and served a
second amended complaint, adding as defendants the Company’s Administrative Committee and the AOL
Administrative Committee. On May 19, 2003, the Company, AOL and AOL Community, Inc. filed a motion
to dismiss and the Administrative Committees filed a motion for judgment on the pleadings. Both of
these motions are pending. The Company intends to defend against these lawsuits vigorously.
On August 1, 2005, Thomas Dreiling filed a derivative suit in the U.S. District Court for the
Western District of Washington against AOL and Infospace Inc. as nominal defendant. The complaint,
brought in the name of Infospace by one of its shareholders, asserts violations of Section 16(b) of
the Exchange Act. Plaintiff alleges that certain AOL executives and the founder of Infospace,
Naveen Jain, entered into an agreement to manipulate Infospace’s stock price through the exercise
of warrants that AOL had received in connection with a commercial agreement with Infospace. Because
of this alleged agreement, plaintiff asserts that AOL and Mr. Jain constituted a “group” that held
more than 10% of Infospace’s stock and, as a result, AOL violated the short-swing trading
prohibition of Section 16(b) in connection with sales of shares received from the exercise of those
warrants. The complaint seeks disgorgement of profits, interest and attorneys’ fees. On October 11,
2007, the parties filed cross-motions for summary judgment. On January 3, 2008, the court granted
AOL’s motion and dismissed the complaint with prejudice. Plaintiff has filed a notice of appeal
with the U.S. Court of Appeals for the Ninth Circuit, and the oral argument on that appeal was held
on May 7, 2009. On August 19, 2009, the Ninth Circuit affirmed the District Court’s opinion on all
issues. The petitioners’ September 2, 2009 motion for rehearing en banc before the Ninth Circuit
was denied on October 13, 2009. The Company intends to defend against this lawsuit vigorously.
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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On February 11, 2008, trustees of the Tolkien Trust and the J.R.R. Tolkien 1967 Discretionary
Settlement Trust, as well as HarperCollins Publishers, Ltd. and two related publishing entities,
sued New Line Cinema Corporation (“NLC Corp.”), a wholly owned subsidiary of the Company, and Katja
Motion Picture Corp. (“Katja”), a wholly owned subsidiary of NLC Corp., and other unnamed
defendants in Los Angeles Superior Court. The complaint alleged that defendants breached contracts
relating to three motion pictures: The Lord of the Rings: The Fellowship of the Ring; The Lord of
the Rings: The Two Towers; and The Lord of the Rings: The Return of the King (collectively, the
“Trilogy”) by, among other things, failing to make full payment to plaintiffs for their
participation in the Trilogy’s gross receipts. The suit also sought declarations as to the meaning
of several provisions of the relevant agreements, including a declaration that would terminate
defendants’ future rights to other motion pictures based on J.R.R. Tolkien’s works, including The
Hobbit. In addition, the complaint set forth related claims of breach of fiduciary duty, fraud and
for reformation, an accounting and imposition of a constructive trust. Plaintiffs sought
compensatory damages in excess of $150 million, unspecified punitive damages, and other relief. In
September 2009, the parties agreed to a binding term sheet, subject to definitive documentation, to
resolve this matter. In accounting for the settlement, the Company allocated amounts based on its
best estimate of the fair value of the rights and the claims that are the subject of the binding
term sheet. The Company allocated the majority of the settlement costs to the Trilogy, and these
amounts were largely accrued, as participation expense, in prior periods in the Company’s
consolidated statement of operations. The remaining costs were allocated to the Company’s
contractual film rights to The Hobbit and were capitalized as part of film costs in the Company’s
consolidated balance sheet.
Between December 27, 2006 and July 6, 2009, AOL Europe Services SARL, a
wholly-owned subsidiary of AOL organized under the laws of Luxembourg, received four assessments
from the French tax authority for French value added tax related to AOL Luxembourg’s
subscription revenues from French subscribers earned during the period from July 1, 2003 through
October 31, 2006. During October 2009, the Company entered into a settlement agreement with the
French tax authority to resolve this matter. The Company recorded an incremental reserve and
corresponding expense of $15 million in the third quarter of 2009 related to this matter. The
settlement payment is expected to be made prior to the spin-off of AOL.
On September 20, 2007, Brantley, et al. v. NBC Universal, Inc., et al. was filed in the U.S.
District Court for the Central District of California against the Company. The complaint, which
also named as defendants several other programming content providers (collectively, the “programmer
defendants”) as well as cable and satellite providers (collectively, the “distributor defendants”),
alleged violations of Sections 1 and 2 of the Sherman Antitrust Act. Among other things, the
complaint alleged coordination between and among the programmer defendants to sell and/or license
programming on a “bundled” basis to the distributor defendants, who in turn purportedly offer that
programming to subscribers in packaged tiers, rather than on a per channel (or “à la carte”) basis.
Plaintiffs, who seek to represent a purported nationwide class of cable and satellite subscribers,
demand, among other things, unspecified treble monetary damages and an injunction to compel the
offering of channels to subscribers on an “à la carte” basis. On December 3, 2007, plaintiffs filed
an amended complaint in this action (the “First Amended Complaint”) that, among other things,
dropped the Section 2 claims and all allegations of horizontal coordination. The defendants,
including the Company, filed motions to dismiss the First Amended Complaint and these motions were
granted, with leave to amend. On March 20, 2008, plaintiffs filed a second amended complaint (the
“Second Amended Complaint”) that modified certain aspects of the First Amended Complaint. On April
22, 2008, the defendants, including the Company, filed motions to dismiss the Second Amended
Complaint, which motions were denied. On July 14, 2008, the defendants filed motions requesting the
court to certify its order for interlocutory appeal to the U.S. Court of Appeals for the Ninth
Circuit, which motions were denied. On November 14, 2008, the Company was dismissed as a programmer
defendant, and Turner Broadcasting System, Inc. was substituted in its place. On May 1, 2009, by
stipulation of the parties, plaintiffs filed a third amended complaint (the “Third Amended
Complaint”) and a related motion to adjudicate an element of plaintiffs’ claim. On June 12, 2009,
all defendants opposed that motion and moved to dismiss the Third Amended Complaint. On the same
date, the distributor defendants also filed a motion to dismiss for lack
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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
of standing. In an order dated October 15, 2009, the court denied plaintiffs’ motion and
granted defendants’ motion, dismissing the Third Amended
Complaint with prejudice. On October 30, 2009, plaintiffs filed a
notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. The Company
intends to defend against this lawsuit vigorously.
On April 4, 2007, the National Labor Relations Board (“NLRB”) issued a complaint against CNN
America Inc. (“CNN America”) and Team Video Services, LLC (“Team Video”). This administrative
proceeding relates to CNN America’s December 2003 and January 2004 terminations of its contractual
relationships with Team Video, under which Team Video had provided electronic newsgathering
services in Washington, DC and New York, NY. The National Association of Broadcast Employees and
Technicians, under which Team Video’s employees were unionized, initially filed charges of unfair
labor practices with the NLRB in February 2004, alleging that CNN America and Team Video were joint
employers, that CNN America was a successor employer to Team Video, and/or that CNN America
discriminated in its hiring practices to avoid becoming a successor employer or due to specific
individuals’ union affiliation or activities. The NLRB investigated the charges and issued the
above-noted complaint. The complaint seeks, among other things, the reinstatement of certain union
members and monetary damages. A hearing in the matter before an NLRB Administrative Law Judge began
on December 3, 2007 and ended on July 21, 2008. On November 19, 2008, the Administrative Law Judge
issued a non-binding recommended decision finding CNN America liable. On February 17, 2009, CNN
America filed exceptions to this decision with the NLRB. The Company intends to defend against this
matter vigorously.
On June 6, 2005, David McDavid and certain related entities (collectively, “McDavid”) filed a
complaint against Turner Broadcasting System, Inc. (“Turner”) and the Company in Georgia state
court. The complaint asserted, among other things, claims for breach of contract, breach of
fiduciary duty, promissory estoppel and fraud relating to an alleged oral agreement between
plaintiffs and Turner for the sale of the Atlanta Hawks and Thrashers sports franchises and certain
operating rights to the Philips Arena. On August 20, 2008, the court issued an order dismissing all
claims against the Company. The court also dismissed certain claims against Turner for breach of an
alleged oral exclusivity agreement, for promissory estoppel based on the alleged exclusivity
agreement and for breach of fiduciary duty. A trial as to the remaining claims against Turner
commenced on October 8, 2008 and concluded on December 2, 2008. On December 9, 2008, the jury
announced its verdict in favor of McDavid on the breach of contract and promissory estoppel claims,
awarding damages on those claims of $281 million and $35 million, respectively. Pursuant to the
court’s direction that McDavid choose one of the two claim awards, McDavid elected the $281 million
award. The jury found in favor of Turner on the two remaining claims of fraud and breach of
confidential information. On January 12, 2009, Turner filed a motion to overturn the jury verdict
or, in the alternative, for a new trial, and, on April 22, 2009, the court denied the motion. On
April 23, 2009, Turner filed a notice of appeal to the Georgia Court of Appeals and on June 15,
2009 posted a $25 million letter of credit as security pending appeal. The parties’ briefs
relating to this appeal have been filed with the appellate court. The Company has a reserve
established for this matter at September 30, 2009 of approximately $297 million (including interest
accrued through such date), although it intends to defend against this lawsuit vigorously.
On March 10, 2009, Anderson News L.L.C. and Anderson Services L.L.C. (collectively, “Anderson
News”) filed an antitrust lawsuit in the U.S. District Court for the Southern District of New York
against several magazine publishers, distributors and wholesalers, including Time Inc. and one of
its subsidiaries, Time/Warner Retail Sales & Marketing, Inc. Plaintiffs allege that defendants
violated Section 1 of the Sherman Antitrust Act by engaging in an antitrust conspiracy against
Anderson News, as well as other related state law claims. Plaintiffs are seeking unspecified
monetary damages. The Company intends to defend against this lawsuit vigorously.
On August 18, 2009, Redbox Automated Retail, LLC (“Redbox”) filed suit against Warner Home
Video (“WHV”), a division of Warner Bros. Home Entertainment Inc., in the U.S. District Court for
the District of Delaware. The complaint alleges violations of Section 1 of the Sherman Antitrust
Act, copyright misuse, and a claim for tortious interference with contractual relations, all in
connection with WHV’s unilateral announcement of a planned change to the terms of distribution of
its DVDs. Redbox seeks declaratory and injunctive relief as well as unspecified damages. WHV
filed a motion to dismiss the complaint on October 1, 2009. The Company intends to defend against
this lawsuit vigorously.
On September 9, 2009, several music labels filed a complaint, and on October 9, 2009 filed an
amended complaint, in the U.S. District Court for the Middle District of Tennessee against the
Company and its wholly-owned subsidiaries, Warner Bros. Entertainment Inc., Telepictures
Productions Inc., and WAD Productions Inc., among other named defendants. Plaintiffs allege that
defendants made unauthorized use of certain sound recordings on The Ellen DeGeneres Show, in
violation of the federal Copyright Act and the Tennessee Consumer Protection Act. Plaintiffs seek
unspecified monetary damages. The Company intends to defend against this lawsuit vigorously.
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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
From time to time, the Company receives notices from third parties claiming that it infringes
their intellectual property rights. Claims of intellectual property infringement could require Time
Warner to enter into royalty or licensing agreements on unfavorable terms, incur substantial
monetary liability or be enjoined preliminarily or permanently from further use of the intellectual
property in question. In addition, certain agreements entered into by the Company may require the
Company to indemnify the other party for certain third-party intellectual property infringement
claims, which could increase the Company’s damages and its costs of defending against such claims.
Even if the claims are without merit, defending against the claims can be time-consuming and
costly.
The costs and other effects of pending or future litigation, governmental investigations,
legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments
and investigations, claims and changes in those matters (including those matters described above),
and developments or assertions by or against the Company relating to intellectual property rights
and intellectual property licenses, could have a material adverse effect on the Company’s business,
financial condition and operating results.
Income Tax Uncertainties
During the nine months ended September 30, 2009, the Company recorded additional income tax
reserves of approximately $218 million and decreases of income tax reserves of approximately $203
million. Of the $218 million additional income tax reserves, approximately $145 million would
affect the Company’s effective tax rate if reversed. During the nine months ended September 30,
2009, the Company recorded interest reserves related to the income tax reserves of approximately
$77 million.
During the three months ended September 30, 2009, the Internal Revenue Service (the “IRS”)
concluded its examination of the Company’s federal income tax returns for the 2002 – 2004 tax
years, which did not result in the Company being required to make any material payments. One matter
relating to the character of certain warrants received from a third party has been referred to the
IRS Appeals Division. The Company believes its position with regard to this matter is more likely
than not to be sustained. However, should the IRS prevail, the additional tax payable by the
Company would be approximately $70 million.
Also during the three months ended September 30, 2009, the IRS commenced its examination of
the Company’s federal income tax returns for the 2005 – 2007 tax years. The Company does not
expect this examination to be completed within the next twelve months and accordingly does not
anticipate a resulting material impact to its income tax reserve balance during such period.
66