TIME WARNER INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
for the quarterly period ended March 31, 2006 or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
for the transition period from to
Commission file number 001-15062
TIME WARNER INC.
(Exact name of Registrant as specified in its charter)
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| Delaware
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13-4099534 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification No.) |
One Time Warner Center
New York, NY 10019-8016
(Address of Principal Executive Offices) (Zip Code)
(212) 484-8000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer” and larger accelerated filer” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2 of the Act). Yes o No þ
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Shares Outstanding |
| Description of Class |
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as of April 28, 2006 |
Common Stock – $.01 par value |
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4,189,470,241 |
Series LMCN-V Common Stock – $.01 par value |
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92,645,036 |
TIME WARNER INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
Management’s discussion and analysis of results of operations and financial condition (“MD&A”)
is provided as a supplement to the accompanying consolidated financial statements and notes to help
provide an understanding of Time Warner Inc.’s (“Time Warner” or the “Company”) financial
condition, changes in financial condition and results of operations. MD&A is organized as follows:
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Overview. This section provides a general description of Time Warner’s business
segments, as well as recent developments the Company believes are important in
understanding the results of operations and financial condition or in understanding
anticipated future trends. |
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Results of operations. This section provides an analysis of the Company’s results of
operations for the three months ended March 31, 2006. This analysis is presented on both a
consolidated and a business segment basis. In addition, a brief description is provided of
significant transactions and events that impact the comparability of the results being
analyzed. |
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Financial condition and liquidity. This section provides an analysis of the Company’s
financial condition as of March 31, 2006 and cash flows for the three months ended March
31, 2006. |
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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 2005 Form 10-K for a discussion of the
risk factors for the Company and to Item 1A of this report for an update to such risk
factors. |
Use of Operating Income before Depreciation and Amortization
The Company utilizes Operating Income before Depreciation and Amortization, among other
measures, to evaluate the performance of its businesses. Operating Income before Depreciation and
Amortization is considered an important indicator of the operational strength of the Company’s
businesses. Operating Income before Depreciation and Amortization eliminates the uneven effect
across all business segments of considerable amounts of noncash depreciation of tangible assets and
amortization of certain intangible assets that were recognized in business combinations. A
limitation of this measure, however, is that it does not reflect the periodic costs of certain
capitalized tangible and intangible assets used in generating revenues in the Company’s businesses.
Management evaluates the investments in such tangible and intangible assets through other financial
measures, such as capital expenditure budgets, investment spending levels and return on capital.
Operating Income before Depreciation and Amortization should be considered in addition to, not
as a substitute for, the Company’s Operating Income and Net Income, as well as other measures of
financial performance reported in accordance with U.S. generally accepted accounting principles
(“GAAP”). A reconciliation of Operating Income before Depreciation and Amortization to both
Operating Income and Net Income is presented under “Results of Operations.”
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
OVERVIEW
Time Warner is a leading media and entertainment company, whose major businesses encompass an
array of the most respected and successful media brands. Among the Company’s brands are HBO, CNN,
AOL, People, Sports Illustrated, Time and Time Warner Cable. The Company produces and distributes
films, including the Harry Potter series, The Lord of the Rings trilogy and Wedding Crashers, as
well as television programs, including ER, Two and a Half Men, Cold Case and Without a Trace.
During the three months ended March 31, 2006, the Company generated revenues of $10.455 billion (up
1% from $10.363 billion in 2005), Operating Income before Depreciation and Amortization of $2.688
billion (up 8% from $2.480 billion in 2005), Operating Income of $1.866 billion (up 11% from $1.682
billion in 2005), Net Income of $1.455 billion (up 59% from $915 million in 2005) and Cash Provided
by Operations of $2.330 billion (up 27% from $1.832 billion in 2005).
Time Warner Businesses
Time Warner classifies its operations into five reportable segments: AOL, Cable, Filmed
Entertainment, Networks and Publishing.
AOL. On April 3, 2006, in connection with an investment by Google Inc. (“Google”) as more
fully described below, America Online, Inc. converted to a Delaware limited liability company and
changed its name to AOL LLC (together with its subsidiaries, “AOL”). AOL operates a leading network
of web brands and the largest Internet access subscription service in the United States, with 24.5
million total AOL brand subscribers in the U.S. and Europe at March 31, 2006. AOL reported total
revenues of $1.981 billion (19% of the Company’s overall revenues), $444 million in Operating
Income before Depreciation and Amortization and $269 million in Operating Income for the three
months ended March 31, 2006. AOL generates its revenues primarily from subscription fees charged to
subscribers and from providing advertising services. AOL is organized into four business units:
Access, Audience, Digital Services and International.
The Access business unit offers Internet access and on-line subscription services, primarily
dial-up telephone Internet access and the AOL service. The AOL service, offered under a variety of
different terms and price plans, generates the substantial majority of AOL’s revenues. Over the
past several years, the Access business unit has experienced significant declines in U.S.
subscribers to the AOL service and in related Subscription revenues, and these declines are
expected to continue. These decreases are due primarily to the continued industry-wide maturing of
the premium dial-up services business, as consumers migrate to high-speed services and lower-cost
dial-up services. AOL continues to develop, change, test and implement marketing and new product
strategies to attract and retain subscribers. AOL has recently entered into a number of agreements
with high-speed access providers to offer the AOL service along with high-speed Internet access.
AOL’s Audience business unit generates Advertising revenues from the sale of advertising on a
fixed impression or fixed placement basis, as well as from the sale of paid-search and other
pay-for-performance advertising on AOL’s and Advertising.com, Inc.’s (“Advertising.com”) networks
of Internet properties, which include owned and third-party properties, as well as certain Internet
properties owned by other divisions of the Company. Currently, a significant majority of
Advertising revenues are generated from traffic by subscribers to the AOL subscription service. The
strategy of the Audience business unit focuses on generating Advertising revenue by increasing the
reach of its audience and depth of its usage across its web properties, including properties such
as AOL.com, AIM, MapQuest and Moviefone. A key component of this strategy was the third-quarter
2005 re-launch of the publicly available version of the AOL.com web portal that includes a
substantial portion of AOL’s content, features and tools that were historically available only to
AOL subscribers. AOL seeks to generate Advertising revenue from increased traffic to AOL’s network
of Internet services and websites through sales of branded advertising and performance-based
advertising, including paid-search, as well as from increased utilization and optimization of AOL’s
advertising inventory.
AOL’s Digital Services business unit works to develop next-generation digital services,
including a variety of wireless, voice and other premium services and applications that appeal to
AOL members and Internet users.
AOL’s International business unit, which primarily includes AOL Europe, has an Internet access
business, sells advertising and develops and offers premium digital services. AOL Europe has
focused on increasing revenues from advertising and digital services. AOL Europe has experienced
declines in subscribers as consumers have shifted from traditional dial-up plans to
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
highly competitive broadband plans offered by AOL and others, which have lower margins, and
this trend is expected to continue.
Cable. Time Warner’s cable business, Time Warner Cable Inc. and its subsidiaries (“TWC”), is
the second-largest cable operator in the U.S. (in terms of basic cable subscribers). At March 31,
2006, TWC managed approximately 11.039 million basic cable subscribers (including approximately
1.577 million subscribers of unconsolidated investees), in highly clustered and technologically
upgraded systems in 27 states. TWC delivered revenues of $2.580 billion (25% of the Company’s
overall revenues), $932 million of Operating Income before Depreciation and Amortization and $501
million in Operating Income for the three months ended March 31, 2006. As part of the strategy to
expand TWC’s cable footprint and improve the clustering of its cable systems, TWC, through a
subsidiary, entered into agreements on April 20, 2005 to acquire, in conjunction with Comcast
Corporation (“Comcast”), substantially all of the assets of Adelphia Communications Corporation
(“Adelphia”). Refer to “Recent Developments” for further details.
TWC principally offers three products — video, high-speed data and voice. Video is TWC’s
largest product in terms of revenues generated; however, the potential growth of its customer base
within TWC’s existing footprint for video cable service is limited, as the customer base has
matured and industry-wide competition has increased. Nevertheless, TWC is continuing to increase
its video revenues through rate increases, subscriber growth and its offerings of advanced digital
video services such as Digital Video, Video-on-Demand (VOD), Subscription-Video-on-Demand (SVOD)
and Digital Video Recorders (DVRs), which are available throughout TWC’s footprint. TWC’s digital
video subscribers provide a broad base of potential customers for these advanced services. Video
programming costs represent a major component of TWC’s expenses and are expected to continue to
increase, reflecting an expansion of service offerings and contractual rate increases.
High-speed data service has been one of TWC’s fastest-growing products over the past several
years and is a key driver of its results. TWC expects continued strong growth in residential
high-speed data subscribers and revenues for the foreseeable future; however, the rate of growth of
both subscribers and revenue could be impacted by intensified competition with other service
providers.
TWC’s voice product, Digital Phone, was available to over 88% of TWC’s homes passed, and
approximately 1.4 million subscribers (including 176,000 subscribers of unconsolidated investees)
received the service as of March 31, 2006. For a monthly fixed fee, Digital Phone customers
typically receive unlimited local, in-state and U.S., Canada and Puerto Rico long-distance calling,
as well as call waiting, caller ID and enhanced “911” services. In the future, TWC intends to offer
additional plans with a variety of local and long-distance options. Digital Phone enables TWC to
offer its customers a convenient package of video, high-speed data and voice services and to
compete effectively against similar bundled products available from its competitors. TWC expects
strong growth in Digital Phone subscribers and revenues for the foreseeable future.
In addition to the subscription services, TWC also earns revenue by selling advertising time
to national, regional and local businesses.
Filmed Entertainment. Time Warner’s Filmed Entertainment businesses, Warner Bros.
Entertainment Inc. (“Warner Bros.”) and New Line Cinema Corporation (“New Line”), generated
revenues of $2.779 billion (25% of the Company’s overall revenues), $457 million in Operating
Income before Depreciation and Amortization and $368 million in Operating Income for the three
months ended March 31, 2006.
One of the world’s leading studios, Warner Bros. has diversified sources of revenues with its
film and television businesses, combined with an extensive film library and global distribution
infrastructure. This diversification has helped Warner Bros. deliver consistent long-term growth
and performance. New Line is the world’s oldest independent film company. Its primary source of
revenues is the creation and distribution of theatrical motion pictures.
Warner Bros. continues to develop its industry-leading television business, including the
successful releases of television series into the home video market. For the 2005-2006 television
season, Warner Bros. has more current prime-time productions on the air than any other studio, with
prime-time series on all six broadcast networks (including Two and a Half Men, ER, Without a Trace,
The O.C., Cold Case and Smallville).
The sale of DVDs has been one of the largest drivers of the segment’s profit growth over the
last few years and Warner Bros.’ extensive library of theatrical and television titles positions it
to continue to benefit from DVD sales; however, the Company has begun to see slower growth in DVD
sales due to several factors, including increasing competition for consumer discretionary spending,
piracy, the maturation of the DVD format and the fragmentation of consumer time.
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Piracy, including physical piracy as well as illegal online file-sharing, continues to be a
significant issue for the filmed entertainment industry. Due to technological advances, piracy has
expanded from music to movies and television programming. The Company has taken a variety of
actions to combat piracy over the last several years, including a pilot program to release low-cost
DVDs and VCDs in China and to coordinate worldwide release dates for franchise films, and will
continue to do so, both individually and together with cross-industry groups, trade associations
and strategic partners.
Networks. Time Warner’s Networks group comprises Turner Broadcasting System, Inc. (“Turner”),
Home Box Office, Inc. (“HBO”) and The WB Television Network (“The WB Network”). The Networks
segment delivered revenues of $2.351 billion (21% of the Company’s overall revenues), $857 million
in Operating Income before Depreciation and Amortization and $788 million in Operating Income for
the three months ended March 31, 2006.
The Turner networks — including such recognized brands as TBS, TNT, CNN, Cartoon Network and
CNN Headline News — are among the leaders in advertising-supported cable TV networks. For over four
consecutive years, more prime-time viewers watched advertising-supported cable TV networks than the
national broadcast networks. For the first quarter of 2006, TNT ranked second among
advertising-supported cable networks in prime-time delivery of its key demographics, adults 18-49
and adults 25-54, and first in total day delivery of adults 25-54. TBS ranked second among
advertising-supported cable networks in prime-time delivery of its key demographic, adults 18-34.
The Turner networks generate revenues principally from the sale of advertising time and
monthly subscriber fees paid by cable systems, direct-to-home (“DTH”) satellite operators and other
affiliates. Key contributors to Turner’s success are its continued investments in high-quality
programming focused on sports, network premieres, licensed and original series, news and animation,
leading to strong ratings and Advertising and Subscription revenue growth, as well as strong brands
and operating efficiency.
HBO operates the HBO and Cinemax multichannel pay television programming services, with the
HBO service ranking as the nation’s most widely distributed pay television network. HBO generates
revenues principally from monthly subscriber fees from cable system operators, satellite companies
and other affiliates. An additional source of revenue is the ancillary sales of its original
programming, including such programs as The Sopranos, Sex and the City, Six Feet Under, Band of
Brothers and Deadwood.
The WB Network is a broadcast television network whose target audience consists primarily of
young adults in the 12-34 demographic. The WB Network generates revenues almost exclusively from
the sale of advertising time. As discussed in more detail in “Recent Developments,” on January 24,
2006, Warner Bros. and CBS Corp. (“CBS”) announced an agreement to form a new fully-distributed
national broadcast network, to be called The CW. At the same time, Warner Bros. and CBS are
preparing to cease the standalone operations of The WB Network and UPN, respectively, at the end of
the 2005/2006 television season (September 2006).
Publishing. Time Warner’s Publishing segment consists principally of magazine publishing and
a number of direct-marketing and direct-selling businesses. The segment generated revenues of
$1.126 billion (10% of the Company’s overall revenues), $116 million in Operating Income before
Depreciation and Amortization and $71 million in Operating Income for the three months ended March
31, 2006.
Time Inc. publishes over 145 magazines globally, including People, Sports Illustrated,
Southern Living, In Style, Real Simple, Entertainment Weekly, Time, Fortune, Cooking Light and
What’s on TV. It generates revenues primarily from advertising, magazine subscriptions and
newsstand sales, and its growth is derived from higher circulation and advertising on existing
magazines, new magazine launches and acquisitions. Time Inc. owns IPC Media (the U.K.’s largest
magazine company, “IPC”) and the magazine subscription marketer Synapse Group, Inc. In addition,
Time Inc. continues to invest in developing digital content, including the launch of
Officepirates.com, the redesign of CNNmoney.com and the acquisition of Golf.com. Time Inc.’s
direct-selling division, Southern Living At Home, sells home decor products through independent
consultants at parties hosted in people’s homes throughout the U.S.
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Recent Developments
AOL-Google Alliance
During December 2005, the Company announced that AOL is expanding its current strategic
alliance with Google to enhance its global online advertising partnership and make more of AOL’s
content available to Google users. In addition, Google agreed to invest $1 billion to acquire a 5%
equity interest in a limited liability company that owns all of the outstanding equity interests in
AOL. On March 24, 2006, the Company and Google signed definitive agreements governing the
investment and the commercial arrangements. Under the alliance, Google will continue to provide
search technology to AOL’s network of Internet properties worldwide and provide AOL with an
improved share in revenues generated through search conducted on the AOL network. Other key aspects
of the alliance include:
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Creating an AOL Marketplace through white labeling of Google’s advertising technology,
which enables AOL to sell search advertising directly to advertisers on AOL-owned
properties; |
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Providing AOL $300 million of marketing credits for promotion of AOL’s content on
Google-owned Internet properties as well as $100 million of AOL/Google co-sponsored
promotion of AOL properties; |
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Collaborating in video search and promoting the AOL Video destination within Google
Video; and |
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Enabling Google Talk and AIM instant messaging users to communicate with each other,
provided certain conditions are met. |
AOL and Google also agreed to collaborate in the future to expand on the alliance, including
the possible sale by AOL of display advertising on the Google network.
On April 13, 2006, the Company completed its issuance of a 5% equity interest in AOL to Google
for $1 billion in cash. In accordance with Staff Accounting Bulletin No. 51, Accounting for the
Sales of Stock of a Subsidiary, Time Warner will recognize a gain of approximately $800 million,
which will be reflected in shareholders’ equity, as an adjustment to paid-in capital in the second
quarter of 2006.
The WB Network
On January 24, 2006, Warner Bros. and CBS announced an agreement to form a new
fully-distributed national broadcast network, to be called The CW. At the same time, Warner Bros.
and CBS are preparing to cease the standalone operations of The WB Network and UPN, respectively,
at the end of the 2005/2006 television season (September 2006). Warner Bros. and CBS will each own
50% of the new network and will have joint and equal control. In addition, Warner Bros. has reached
an agreement with Tribune Corp. (“Tribune”), currently a subordinated 22.25% limited partner in The
WB Network, under which Tribune will surrender its ownership interest in The WB Network and will be
relieved of funding obligations. In addition, Tribune will become one of the principal affiliate
groups for the new network.
Upon the closing of this transaction, the Company will account for its investment in The CW
under the equity method of accounting. The Company anticipates that prior to the closing of this
transaction it will incur restructuring charges ranging from $25 million to $30 million related to
employee terminations and contractual settlements. In addition, The WB Network may incur up to $100
million in terminating certain programming arrangements (primarily licensed movie rights), most of
which are not expected to be contributed to the new network and may not be sold or utilized in
another manner. Included in these costs are approximately $70 million associated with intercompany
programming arrangements with Warner Bros. and New Line. Any costs incurred by The WB Network on
such intercompany programming would be largely offset by amounts recognized by Warner Bros. and New
Line, with the impact of all intercompany transactions being eliminated in consolidation. Excluding
the impact of these intercompany transactions, the anticipated exit costs to the Company of
programming arrangements and employee and other contractual arrangements range from approximately
$55 million to $60 million.
Adelphia Acquisition Agreement
On April 20, 2005, a subsidiary of TWC, Time Warner NY Cable LLC (“TW NY”), and Comcast each
entered into separate definitive agreements with Adelphia to, collectively, acquire substantially
all the assets of Adelphia for a total of $12.7 billion in cash (of which TW NY will pay $9.2
billion and Comcast will pay the remaining $3.5 billion) and 16% of the common stock of TWC (the
“Adelphia Acquisition”).
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
At the same time that Comcast and TW NY entered into the Adelphia Acquisition agreements,
Comcast, TWC and/or their respective affiliates entered into agreements providing for the
redemption of Comcast’s interests in TWC and Time Warner Entertainment Company, L.P. (“TWE”) (the
“TWC Redemption Agreement” and the “TWE Redemption Agreement,” respectively, and, collectively, the
“TWC and TWE Redemption Agreements”). Specifically, Comcast’s 17.9% interest in TWC will be
redeemed in exchange for 100% of the capital stock of a subsidiary of TWC holding cable systems
serving approximately 587,000 subscribers (as of December 31, 2004), as well as approximately $1.9
billion in cash. In addition, Comcast’s 4.7% interest in TWE will be redeemed in exchange for 100%
of the equity interests in a subsidiary of TWE holding cable systems serving approximately 168,000
subscribers (as of December 31, 2004), as well as approximately $133 million in cash. TWC, Comcast
and their respective subsidiaries will also swap certain cable systems to enhance their respective
geographic clusters of subscribers (the “Cable Swaps”).
After giving effect to the transactions, TWC will gain systems passing approximately 7.5
million homes, with approximately 3.5 million basic subscribers (each as of December 31, 2004). TWC
will then manage a total of approximately 14.4 million basic subscribers (as of December 31, 2004).
Time Warner will own 84% of TWC’s common stock (including 83% of the outstanding TWC Class A Common
Stock, which will become publicly traded at the time of closing, and all outstanding shares of TWC
Class B Common Stock) as well as an indirect non-voting economic interest in TW NY, a subsidiary of
TWC, valued at $2.9 billion at the time of entering into the agreement.
The transactions are subject to customary regulatory review and approvals, including antitrust
review by the Federal Trade Commission (“FTC”) pursuant to the Hart-Scott-Rodino Act, review by the
Federal Communications Commission (“FCC”) and local franchise approvals, as well as, in the case of
the Adelphia Acquisition, the Adelphia bankruptcy process, which involves approvals by the
bankruptcy court having jurisdiction over Adelphia’s Chapter 11 case and Adelphia’s creditors. On
January 31, 2006, the FTC completed its antitrust review of the transaction and closed its
investigation without further action. The parties are awaiting final clearance from the FCC and
certain local franchise approvals, as well as completion of the bankruptcy process. The parties
expect to close the Adelphia Acquisition on or before July 31, 2006.
The closing of the Adelphia Acquisition is not dependent on the closing of the Cable Swaps or
the transactions contemplated by the TWC and TWE Redemption Agreements. Furthermore, if Comcast
fails to obtain certain necessary governmental authorizations, TW NY has agreed to acquire the
cable operations of Adelphia that would have been acquired by Comcast, with the purchase price
payable in cash or TWC stock at TWC’s discretion.
Pursuant to registration rights granted to Comcast and certain of its affiliates in
conjunction with the restructuring of TWE in 2003, TWC has an obligation to file a shelf
registration statement with the Securities and Exchange Commission (“SEC”) by June 1, 2006 covering
all the shares of TWC Class A Common Stock held by Comcast and its affiliates if the transactions
contemplated by the TWC Redemption Agreement have not occurred as of such date.
Common Stock Repurchase Program
Time Warner’s Board of Directors has authorized a common stock repurchase program that allows
the Company to purchase up to an aggregate of $20 billion of common stock during the period from
July 29, 2005 through December 31, 2007. Purchases under the stock repurchase program may be made
from time to time on the open market and in privately negotiated transactions. Size and timing of
these purchases will be based on a number of factors, including price and business and market
conditions. As announced on February 1, 2006, the Company increased the pace of stock repurchases
during the first quarter of 2006. At existing price levels, the Company intends to continue the
current pace of purchases under its stock repurchase program within its stated objective of
maintaining a net debt-to-Operating Income before Depreciation and
Amortization ratio, as defined, of
approximately 3-to-1, and expects it will have purchased approximately $15 billion of its common
stock under the program by the end of 2006, and the remainder in 2007. From the program’s inception
through May 2, 2006, the Company repurchased approximately
460 million shares of common stock
for approximately $8.0 billion pursuant to trading programs under Rule 10b5-1 of the Securities
Exchange Act of 1934, as amended.
Sale of Time Warner Book Group
On March 31, 2006, the Company sold Time Warner Book Group (“TWBG”) to Hachette Livre SA
(“Hachette”), a wholly-owned subsidiary of Lagardère SCA (“Lagardère”) for $532 million in cash
resulting in a pretax gain of approximately $206
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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
million, after taking into account selling costs and estimated working capital adjustments. As
a result of the sale, TWBG has been reflected as discontinued operations for all periods presented
(Note 4).
Sale of Turner South
On February 23, 2006, the Company announced an agreement to sell the Turner South network
(“Turner South”), a subsidiary of Turner, to Fox Cable Networks, Inc. (“Fox”) for approximately
$375 million in cash. This transaction closed on May 1,
2006. The
results of Turner South have been reflected as discontinued operations for all periods presented.
The Company expects to record a pretax gain ranging from approximately $120 million to $140 million
(after taking into account selling costs) in the second quarter of 2006. Since the Company has
sufficient tax attribute carryforwards to offset the gain, there will not be any tax expense
recognized on the sale of Turner South (Note 4).
Time Warner Telecom
As of December 31, 2005, wholly-owned subsidiaries of the Company owned a total of 50.4
million shares of Class B common stock of Time Warner Telecom Inc. (“TWT”), a publicly traded
telecommunications company. The Company accounts for this investment using the equity method of
accounting and, as a result of the Company’s share in losses of TWT and impairment losses
recognized in previous years, the carrying value of the investment is zero. In the first quarter of
2006, the Company’s subsidiaries participated as selling shareholders in a TWT secondary offering,
converted approximately 17 million shares of Class B common stock into Class A common stock of TWT
and sold the Class A common stock for approximately $239 million, net of underwriter commissions.
This sale resulted in a pretax gain of approximately $239 million, which is included as a component
of Other income, net, in the accompanying consolidated statement of operations for the three months
ended March 31, 2006. The Company does not consider its remaining investment in TWT to be strategic
and, therefore, additional sales or other dispositions may occur in the future, subject to
customary restrictions on transfer agreed to in connection with the offering and as provided in a
stockholders agreement among the holders of the Class B common stock of TWT.
Amounts Related to Securities Litigation
As previously disclosed, in July 2005, the Company reached an agreement in principle for the
settlement of the securities class action lawsuits included in the matters consolidated under the
caption In re: AOL Time Warner Inc. Securities & “ERISA” Litigation described in Note 13 to the
accompanying consolidated financial statements (the “MSBI consolidated securities class action”).
In connection with reaching the agreement in principle on the securities class action, the Company
established a reserve of $2.4 billion during the second quarter of 2005. Ernst & Young LLP also has
agreed to a settlement in this litigation matter and will pay $100 million. Pursuant to the
settlement, in October 2005, Time Warner paid $2.4 billion into a settlement fund (the “MSBI
Settlement Fund”) for the members of the class represented in the action. In addition, the $150
million previously paid by Time Warner into a fund in connection with the settlement of the
investigation by the U.S. Department of Justice (“DOJ”) was transferred to the MSBI Settlement
Fund, and Time Warner is using its best efforts to have the $300 million it previously paid in
connection with the settlement of its SEC investigation, or at least a substantial portion thereof,
transferred to the MSBI Settlement Fund. The court issued an order dated April 6, 2006 granting
final approval of the settlement.
In addition to the $2.4 billion reserve established in connection with the agreement in
principle regarding the settlement of the MSBI consolidated securities class action, during the
second quarter of 2005, the Company established an additional reserve totaling $600 million in
connection with the other related securities litigation matters (including suits brought by
individual shareholders) described in Note 13 to the accompanying consolidated financial statements
that are pending against the Company. As of May 1, 2006, the Company has reached agreements to
resolve the actions alleging violations of the Employee Retirement Income Security Act (“ERISA”)
and the derivative actions, both of which are subject to preliminary and final court approval, as
well as some of the individual suits. Of the $600 million
reserve, through May 1, 2006, the
Company has paid, or has agreed to pay, approximately $358 million, after considering probable
insurance recoveries, to settle certain of these claims. The Company has been successful in
reaching settlements with respect to certain of the securities actions brought by individual
shareholders. The Company also has engaged in, or expects to engage in, mediation in an attempt to
resolve the additional cases brought by shareholders who elected to “opt out” of the settlement in
the consolidated securities action. Such mediation efforts have not been fruitful to date in
certain of these matters, in which trials are possible and for which plaintiffs have claimed
7
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
several billion dollars in aggregated damages. The Company intends to defend these lawsuits
vigorously. It is possible that the ultimate amount paid to resolve all unsettled litigation in
these matters could be greater than the remaining reserve (Note 13).
The Company
recognizes insurance recoveries when it becomes probable that such
amounts will be received. Amounts
recognized in the first quarter of 2006 and 2005 totaled $50 million and $6 million, respectively.
In 2005, the Company reached an agreement with the carriers on its directors and officers insurance
policies in connection with the securities and derivative action matters described above (other
than the actions alleging violations of ERISA). As a result of this agreement, in the fourth
quarter, the Company recorded a recovery of approximately $185 million (bringing the total 2005
recoveries to $206 million), which was collected in the first quarter of 2006.
Government Investigations
As previously disclosed by the Company, the DOJ and the SEC have resolved their investigations
into the accounting and disclosure practices of the Company, the former through a deferred
prosecution agreement entered into in December 2004 for a two-year period, and the latter through a
settlement agreement that was approved by the SEC in March 2005. These resolutions are described
in more detail in “Management’s Discussion and Analysis – Other Recent Developments – Government
Investigations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005
(the “2005 Form 10-K”). The historical accounting adjustments related thereto were reflected in the
restatement of the Company’s financial results for each of the years ended December 31, 2000
through December 31, 2003, included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2004 (the “2004 Form 10-K”).
With respect to the $300 million that was placed into an SEC Fair Fund as a condition of the
SEC settlement, the Company has used its best efforts to have the $300 million, or a substantial
portion thereof, transferred to the MSBI Settlement Fund and distributed in connection with the
eventual distribution of proceeds pursuant to the settlement of the MSBI consolidated securities
class action. However, the SEC, as yet, has not made any determination as to how to distribute
those funds.
Under the terms of the Company’s settlement with the SEC, the Company agreed to the
appointment of an independent examiner to review whether the Company’s historical accounting for
transactions with 17 counterparties, which were identified by the SEC staff, was in conformity with
GAAP. The transactions subject to review were entered into between June 1, 2000 and December 31,
2001 (but including subsequent amendments thereto), and principally involve online advertising
revenues, as well as three cable programming affiliation agreements with related advertising
elements. Revenue related to the 17 transactions principally was recognized prior to January 1,
2002. The independent examiner has been engaged in his review, and, under the terms of the SEC
settlement, is required to provide a report to the Company’s audit and finance committee of his
conclusions, which is expected to occur by the end of the second quarter. At present, the Company
is not aware of any conclusions yet reached by the independent examiner. Depending on the
independent examiner’s conclusions, a further restatement might be necessary. It is also possible
that, so long as there are unresolved issues associated with the Company’s financial statements,
the effectiveness of any registration statement of the Company or its affiliates may be delayed.
RESULTS OF OPERATIONS
Recently Adopted Accounting Principle
Stock-Based Compensation
The Company has adopted the provisions of Financial Accounting Standards Board (“FASB”)
Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”), as of January 1, 2006. The
provisions of FAS 123R require a Company to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award. That
cost is recognized in the statement of operations over the period during which an employee is
required to provide service in exchange for the award. FAS 123R also amends FASB Statement No. 95,
“Statement of Cash Flows,” to require that excess tax benefits, as defined, realized from the
exercise of stock options be reported as a financing cash inflow rather than as a reduction of
taxes paid in cash flow from operations.
Prior to the adoption of FAS 123R, the Company had followed the provisions of FASB Statement
No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), which allowed the Company to follow
the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees,” and disclose the pro forma effects
8
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
on net income (loss) had the fair value of the equity awards been expensed. In connection
with adopting FAS 123R, the Company elected to adopt the modified retrospective application method
provided by FAS 123R and, accordingly, financial statement amounts for all prior periods presented
herein reflect results as if the fair value method of expensing had been applied from the original
effective date of FAS 123 (Refer to Note 1 for discussion of impact).
Prior to the adoption of FAS 123R, the Company recognized stock-based compensation expense for
awards with graded vesting by treating each vesting tranche as a separate award and recognizing
compensation expense ratably for each tranche. For equity awards granted subsequent to the
adoption of FAS 123R, the Company treats such awards as a single award and recognizes stock-based
compensation expense on a straight-line basis (net of estimated forfeitures) over the employee
service period. Stock-based compensation expense is recorded in costs of revenues or selling,
general and administrative expense depending on the employee’s job function.
Additionally, when recording compensation cost for equity awards, FAS 123R requires companies
to estimate the number of equity awards granted that are expected to be forfeited. Prior to the
adoption of FAS 123R, the Company recognized forfeitures when they occurred, rather than using an
estimate at the grant date and subsequently adjusting the estimated forfeitures to reflect actual
forfeitures. Accordingly, a pretax cumulative effect adjustment totaling $40 million ($25 million,
net of tax) has been recorded in the first quarter of 2006 to adjust for awards granted prior to
January 1, 2006 that are not expected to vest. Total impact of the adoption of FAS 123R and total
equity-based compensation expense recognized for the three months ended March 31, 2006 and 2005 is
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Equity-Based |
|
| |
|
Stock Option Expense(a) |
|
|
Compensation(a)(b) |
|
| |
|
Three Months Ended |
|
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
|
3/31/06 |
|
|
3/31/05 |
|
| |
|
(millions) |
|
|
(millions) |
|
AOL |
|
$ |
13 |
|
|
$ |
10 |
|
|
$ |
14 |
|
|
$ |
11 |
|
Cable |
|
|
12 |
|
|
|
26 |
|
|
|
14 |
|
|
|
26 |
|
Filmed Entertainment |
|
|
19 |
|
|
|
27 |
|
|
|
31 |
|
|
|
29 |
|
Networks |
|
|
13 |
|
|
|
27 |
|
|
|
15 |
|
|
|
28 |
|
Publishing |
|
|
11 |
|
|
|
20 |
|
|
|
13 |
|
|
|
20 |
|
Corporate |
|
|
12 |
|
|
|
17 |
|
|
|
21 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
80 |
|
|
$ |
127 |
|
|
$ |
108 |
|
|
$ |
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The amount expensed in the first quarter of each year is not
consistent with the amounts expected to be incurred during the
remaining quarters of the year, as the first quarter includes the expensing of 100% of the equity awards granted
to retirement eligible employees as part of a broad-based grant. |
| |
| (b) |
|
Total equity-based compensation includes expense recognized related to stock
options, restricted stock and restricted stock units. |
Change in Accounting Principle for Recognizing Programming Inventory Costs at HBO
Effective January 1, 2006, the Company changed its methodology for recognizing programming
inventory costs (for both theatrical and original programming) at its HBO division. Previously, the
Company recognized HBO’s programming costs on a straight-line basis in the calendar year in which
the related programming first aired on the HBO and Cinemax pay television services. Now the Company
recognizes programming costs on a straight-line basis over the license periods or estimated period
of use of the related shows, beginning with the month of initial exhibition. The Company concluded
that this change in accounting for programming inventory costs was preferable after giving
consideration to the cumulative impact that marketplace and technological changes have had in
broadening the variety of viewing options and period over which consumers are now experiencing
HBO’s programming.
Since this change involves a revision to an inventory costing principle, the change is
reflected retrospectively to all prior periods presented, including the impact that such a change
has on retained earnings for the earliest year presented (Refer to Note 1 for discussion of
impact).
9
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Discontinued Operations
As previously noted under “Recent Developments,” the Company has reflected the operations of
TWBG and Turner South as discontinued operations for all periods presented.
Reclassifications
Certain reclassifications have been made to the prior year’s financial information to conform
to the March 31, 2006 presentation.
Significant Transactions and Other Items Affecting Comparability
As more fully described herein and in the related notes to the accompanying consolidated
financial statements, the comparability of Time Warner’s results from continuing operations has
been affected by certain significant transactions and other items in each period as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
| |
|
(millions) |
|
Amounts related to securities litigation and government investigations |
|
$ |
(29 |
) |
|
$ |
(6 |
) |
Merger and restructuring costs |
|
|
(30 |
) |
|
|
(12 |
) |
Asset impairments |
|
|
— |
|
|
|
(24 |
) |
Gain on disposal of assets, net |
|
|
22 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Impact on Operating Income |
|
|
(37 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
Investment gains, net |
|
|
295 |
|
|
|
23 |
|
Gain on WMG option |
|
|
— |
|
|
|
80 |
|
|
|
|
|
|
|
|
Impact on Other income, net |
|
|
295 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax impact |
|
|
258 |
|
|
|
71 |
|
Income tax impact |
|
|
(93 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
After-tax impact |
|
$ |
165 |
|
|
$ |
36 |
|
|
|
|
|
|
|
|
Amounts Related to Securities Litigation and Government Investigations
For the three months ended March 31, 2006 and 2005, the Company recognized legal and other
professional fees related to the SEC and DOJ investigations into certain of the Company’s
historical accounting and disclosure practices and the defense of various shareholder lawsuits, as
well as legal reserves, totaling $79 million and $12 million, respectively. In addition, for the
three months ended March 31, 2006 and 2005, the Company recognized insurance recoveries of $50
million and $6 million, respectively.
Merger and Restructuring Costs
During the three months ended March 31, 2006, the Company incurred restructuring costs,
primarily related to various employee terminations of approximately $23 million, including $12
million at the Publishing segment, $6 million at the Cable segment and $5 million at the Corporate
segment. The Company also expensed $2 million at the Filmed Entertainment segment and $1 million at
the AOL segment as a result of changes in estimates of previously established restructuring
accruals. In addition, during the three months ended March 31, 2006, the Cable segment expensed
approximately $4 million of non-capitalizable merger-related costs associated with the Adelphia
Acquisition.
During the three months ended March 31, 2005, the Company incurred restructuring costs at the
Cable segment primarily related to various employee terminations and exit activities of $17
million. In addition, there were changes in estimates of previously established restructuring
accruals at the AOL segment, which included $3 million of additional restructuring costs and the
reversal of $8 million of restructuring costs that were no longer required (Note 11).
10
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Asset Impairments
During the three months ended March 31, 2005, the Company recorded a $24 million noncash
impairment charge related to goodwill associated with America Online Latin America, Inc. (“AOLA”).
Gains on Disposal of Assets, Net
For the three months ended March 31, 2006, the Company recorded a gain of approximately $20
million at the Corporate segment related to the sale of two aircraft and a $2 million gain at the
AOL segment from the resolution of a previously contingent gain related to the 2004 sale of
Netscape Security Solutions (“NSS”).
For the three months ended March 31, 2005, the Company recorded a $2 million gain at the AOL
segment from the resolution of a previously contingent gain related to the 2004 sale of NSS and an
$8 million gain at the Publishing segment related to the collection of a loan made in conjunction
with the Company’s 2003 sale of Time Life Inc., which was previously fully reserved due to concerns
about recoverability.
Investment Gains, Net
For the three months ended March 31, 2006, the Company recognized net gains of $295 million
primarily related to the sale of investments, including a $239 million gain on the sale of a
portion of the Company’s investment in TWT and a $51 million gain on the sale of the Company’s
investment in Canal Satellite Digital. Investment gains, net also include $7 million of gains to
reflect market fluctuations in equity derivative instruments.
For the three months ended March 31, 2005, the Company recognized net gains of $23 million
primarily related to the sale of investments. Investment gains, net included $3 million of
writedowns to reduce the carrying value of certain investments that experienced
other-than-temporary declines in market value, partially offset by $1 million of gains to reflect
market fluctuations in equity derivative instruments.
Gain on WMG Option
For the three months ended March 31, 2005, the Company recorded an $80 million gain reflecting
a fair value adjustment related to the Company’s option in Warner Music Group (“WMG”).
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
Consolidated Results
Revenues. The components of revenues are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
|
% Change |
|
| |
|
(recast) |
|
| |
|
(millions) |
|
Subscription |
|
$ |
5,667 |
|
|
$ |
5,485 |
|
|
|
3 |
% |
Advertising |
|
|
1,761 |
|
|
|
1,645 |
|
|
|
7 |
% |
Content |
|
|
2,756 |
|
|
|
2,976 |
|
|
|
(7 |
%) |
Other |
|
|
271 |
|
|
|
257 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
10,455 |
|
|
$ |
10,363 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
The increase in Subscription revenues is primarily related to increases at the Cable and
Networks segments, offset partially by a decline at the AOL segment. The increase at the Cable
segment was principally due to the continued penetration of advanced services (primarily high-speed
data services, advanced digital video services and Digital Phone) and video rate increases. The
increase at the Networks segment was due primarily to higher subscription rates and, to a lesser
extent, an increase in the number of subscribers at Turner and HBO. The AOL segment declined
primarily as a result of lower domestic AOL brand subscribers and the unfavorable impact of foreign
currency exchange rates at AOL Europe.
The increase in Advertising revenues was primarily due to growth at the AOL and Networks
segments. The increase at the AOL segment was due to revenues from growth in traditional
advertising, paid-search advertising and sales of advertising run
11
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
on third-party websites generated by Advertising.com. The increase at the Networks segment was
primarily driven by higher CPMs (advertising cost per one thousand viewers) and sellouts at
Turner’s domestic entertainment networks, partly offset by a decline at The WB Network as a result
of lower ratings.
The decrease in Content revenues was principally due to decreases at the Filmed Entertainment
and Networks segments. The decrease at the Filmed Entertainment segment was driven by declines in
both theatrical and television product revenues. The decrease at the Networks segment was due
primarily to the absence of HBO’s licensing revenue from Everybody Loves Raymond, which ended its
broadcast network run in 2005, and, to a lesser extent, a decline in ancillary sales of HBO’s
original programming.
Each of the revenue categories is discussed in greater detail by segment in “Business Segment
Results.”
Costs of Revenues. For the three months ended March 31, 2006 and 2005, costs of revenues
totaled $5.819 billion and $5.914 billion, respectively, and as a percentage of revenues were 56%
and 57%, respectively. The improvement in costs of revenues as a percentage of revenues related
primarily to improved margins at the Filmed Entertainment, Networks and Publishing segments,
partially offset by a decline in margins at the AOL and Cable segments. The segment variations are
discussed in detail in “Business Segment Results.”
Selling, General and Administrative Expenses. For the three months ended March 31, 2006 and
2005, selling, general and administrative expenses remained essentially flat ($2.600 billion in
2006 and $2.587 billion in 2005). The segment variations are discussed in detail in “Business
Segment Results.”
Amounts Related to Securities Litigation and Government Investigations. As previously
discussed in “Recent Developments,” in the results for the three months ended March 31, 2006 and
2005, the Company recognized legal and other professional fees related to the SEC and DOJ
investigations into certain of the Company’s historical accounting and disclosure practices and the
defense of various shareholder lawsuits, as well as legal reserves, totaling $79 million and $12
million, respectively. In addition, for the three months ended March 31, 2006 and 2005, the Company
recognized insurance recoveries of $50 million and $6 million, respectively (Note 1).
Reconciliation of Operating Income before Depreciation and Amortization to Operating Income and Net Income.
The following table reconciles Operating Income before Depreciation and Amortization to
Operating Income. In addition, the table provides the components from Operating Income to Net
Income for purposes of the discussions that follow:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
|
% Change |
|
| |
|
(recast) |
|
| |
|
(millions) |
|
Operating Income before Depreciation and Amortization |
|
$ |
2,688 |
|
|
$ |
2,480 |
|
|
|
8 |
% |
Depreciation |
|
|
(689 |
) |
|
|
(650 |
) |
|
|
6 |
% |
Amortization |
|
|
(133 |
) |
|
|
(148 |
) |
|
|
(10 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
1,866 |
|
|
|
1,682 |
|
|
|
11 |
% |
Interest expense, net |
|
|
(299 |
) |
|
|
(346 |
) |
|
|
(14 |
%) |
Other income, net |
|
|
318 |
|
|
|
111 |
|
|
|
186 |
% |
Minority interest expense, net |
|
|
(79 |
) |
|
|
(54 |
) |
|
|
46 |
% |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, discontinued operations and cumulative
effect of accounting change |
|
|
1,806 |
|
|
|
1,393 |
|
|
|
30 |
% |
Income tax provision |
|
|
(608 |
) |
|
|
(485 |
) |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations and cumulative effect of
accounting change |
|
|
1,198 |
|
|
|
908 |
|
|
|
32 |
% |
Discontinued operations, net of tax |
|
|
232 |
|
|
|
7 |
|
|
NM |
|
Cumulative effect of accounting change, net of tax |
|
|
25 |
|
|
|
— |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,455 |
|
|
$ |
915 |
|
|
|
59 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization. Time Warner’s Operating Income before
Depreciation and Amortization increased 8% to $2.688 billion for the three months ended March 31,
2006 from $2.480 billion for the three
12
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
months ended March 31, 2005, principally as a result of growth at the Cable, Filmed
Entertainment and Networks segments, offset by a decline at the AOL and Publishing segments.
The segment variations are discussed in detail under “Business Segment Results.”
Depreciation Expense. Depreciation expense increased to $689 million for the three months
ended March 31, 2006 from $650 million for the three months ended March 31, 2005. The increase in
depreciation expense primarily related to an increase at the Cable segment reflecting continued
higher spending on customer premise equipment that is depreciated over a shorter useful life
compared to the mix of assets previously purchased.
Amortization Expense. Amortization expense decreased to $133 million for the three months
ended March 31, 2006 from $148 million for the three months ended March 31, 2005. The decrease in
amortization expense primarily relates to the Publishing segment as a result of certain short-lived
intangibles, such as customer lists, becoming fully amortized in the latter part of 2005. This
increase at the Publishing segment was partially offset by amortization from certain
indefinite-lived trade name intangibles being assigned a finite life beginning in the first quarter
of 2006.
Operating Income. Time Warner’s Operating Income increased to $1.866 billion for the three
months ended March 31, 2006 from $1.682 billion for the three months ended March 31, 2005,
reflecting the changes in Operating Income before Depreciation and Amortization and the decline in
amortization expense, offset partially by the increase in depreciation expense as discussed above.
Interest Expense, Net. Interest expense, net, decreased to $299 million for the three months
ended March 31, 2006 from $346 million for the three months ended March 31, 2005 due primarily to
higher interest income on cash investments and lower average interest rates on borrowings.
Other Income, Net. Other income, net, detail is shown in the table below:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
| |
|
(millions) |
|
Investment gains, net |
|
$ |
295 |
|
|
$ |
23 |
|
Gain on WMG option |
|
|
— |
|
|
|
80 |
|
Income from equity investees |
|
|
22 |
|
|
|
11 |
|
Other |
|
|
1 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
Other income, net |
|
$ |
318 |
|
|
$ |
111 |
|
|
|
|
|
|
|
|
The changes in investment gains, net, and the net gain on the WMG option are discussed in
detail under “Significant Transactions and Other Items Affecting Comparability.” Excluding the
impact of these items, Other income, net, increased principally from an increase in income from
equity method investees, primarily related to the Texas and Kansas City Cable Partners, L.P., a
joint venture between TWC and Comcast.
Minority Interest Expense, Net. Time Warner had $79 million of minority interest expense for
the three months ended March 31, 2006 compared to $54 million for the three months ended March 31,
2005. The increase relates primarily to larger profits recorded by TWC, in which Comcast has a
minority interest.
Income Tax Provision. Income tax expense was $608 million for the three months ended March
31, 2006 compared to $485 million for the three months ended March 31, 2005. The Company’s
effective tax rate was 34% and 35% for the three months ended March 31, 2006 and 2005,
respectively. The decrease in the effective tax rate results primarily from $93 million of tax
attribute carryforwards recognized during the period compared to $51 million for the same period in
the prior year.
Income before Discontinued Operations and Cumulative Effect of Accounting Change. Income
before discontinued operations and cumulative effect of accounting change was $1.198 billion for
the three months ended March 31, 2006 compared to $908 million for the three months ended March 31,
2005. Basic and diluted net income per share before discontinued operations and cumulative effect
of accounting change were $0.27 and $0.26 in 2006, respectively, compared to $0.20 and $0.19 in
2005, respectively. Excluding the items previously discussed under “Significant Transactions and
Other Items Affecting Comparability” totaling $165 million and $36 million of net income for the
three months ended March 31,
13
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
2006 and 2005, respectively, Income before discontinued operations and cumulative effect of
accounting change improved by $161 million primarily due to higher Operating Income, higher other
income, net, lower interest expense, net, and the income tax provision as discussed above.
Discontinued Operations. The three months ended March 31, 2006 and 2005 results include the
impact of the treatment of TWBG and Turner South as discontinued operations. Included in the
results for the three months ended March 31, 2006 is a pretax gain of $206 million and a tax
benefit of $22 million related to the sale of TWBG. The tax benefit resulted primarily from the
release of a valuation allowance associated with tax attribute carryforwards offsetting the tax
gain on the transaction.
Cumulative Effect of Accounting Change, net of tax. The Company recorded a $40 million pretax
benefit ($25 million, net of tax), as the cumulative effect of a change in accounting principle
upon the adoption of FAS 123R to recognize the effect of estimating the number of awards granted
prior to January 1, 2006 that are not ultimately expected to vest.
Net Income and Net Income Per Common Share. Net income was $1.455 billion for the three
months ended March 31, 2006 compared to $915 million for the three months ended March 31, 2005.
Basic and diluted net income per common share were both $0.32 in 2006, compared to $0.20 and $0.19
in 2005, respectively.
Business Segment Results
AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of
the AOL segment for the three months ended March 31, 2006 and 2005 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
|
% Change |
|
| |
|
(recast) |
|
| |
|
(millions) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
1,538 |
|
|
$ |
1,774 |
|
|
|
(13 |
%) |
Advertising |
|
|
392 |
|
|
|
311 |
|
|
|
26 |
% |
Other |
|
|
51 |
|
|
|
48 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,981 |
|
|
|
2,133 |
|
|
|
(7 |
%) |
Costs of revenues(a) |
|
|
(946 |
) |
|
|
(982 |
) |
|
|
(4 |
%) |
Selling, general and administrative(a) |
|
|
(592 |
) |
|
|
(626 |
) |
|
|
(5 |
%) |
Gain on disposal of consolidated businesses |
|
|
2 |
|
|
|
2 |
|
|
|
— |
|
Asset impairments |
|
|
— |
|
|
|
(24 |
) |
|
NM |
|
Restructuring costs |
|
|
(1 |
) |
|
|
5 |
|
|
|
(120 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
444 |
|
|
|
508 |
|
|
|
(13 |
%) |
Depreciation |
|
|
(135 |
) |
|
|
(147 |
) |
|
|
(8 |
%) |
Amortization |
|
|
(40 |
) |
|
|
(47 |
) |
|
|
(15 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
269 |
|
|
$ |
314 |
|
|
|
(14 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The reduction in Subscription revenues primarily reflects a decline in domestic
Subscription revenues (from $1.313 billion in 2005 to $1.109 billion in 2006) and a decline in
Subscription revenues at AOL Europe (from $449 million in 2005 to $407 million in 2006). AOL’s
domestic Subscription revenues declined due primarily to a decrease in the number of domestic AOL
brand subscribers and related revenues. The decrease in AOL Europe’s Subscription revenues was
driven by the unfavorable impact of foreign currency exchange rates ($41 million). AOL Europe’s
dial-up Subscription revenues declined, however this decline was almost entirely offset by an
increase in broadband and telephony revenues.
14
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
The number of AOL brand domestic and European subscribers is as follows at March 31, 2006,
December 31, 2005 and March 31, 2005 (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2005 |
|
Subscriber category: |
|
|
|
|
|
|
|
|
|
|
|
|
AOL brand domestic(a) |
|
|
|
|
|
|
|
|
|
|
|
|
$15 and over |
|
|
12.8 |
|
|
|
13.7 |
|
|
|
16.8 |
|
Under $15 |
|
|
5.8 |
|
|
|
5.8 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
Total AOL brand domestic |
|
|
18.6 |
|
|
|
19.5 |
|
|
|
21.7 |
|
|
|
|
|
|
|
|
|
|
|
AOL Europe |
|
|
5.9 |
|
|
|
6.0 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
AOL includes in its subscriber count individuals, households or entities that have
provided billing information and completed the registration process sufficiently to allow for
an initial log-on to the AOL service. |
The average monthly Subscription revenue per subscriber (“ARPU”) for each significant
category of subscribers, calculated as average monthly subscription revenue (including premium
subscription services revenues) for the category divided by the average monthly subscribers in the
category for the applicable period, is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
Subscriber category: |
|
|
|
|
|
|
|
|
AOL brand domestic |
|
|
|
|
|
|
|
|
$15 and over |
|
$ |
20.88 |
|
|
$ |
20.52 |
|
Under $15 |
|
|
12.78 |
|
|
|
13.11 |
|
Total AOL brand domestic |
|
|
18.43 |
|
|
|
18.91 |
|
AOL Europe |
|
|
22.46 |
|
|
|
23.11 |
|
Domestic subscribers to the AOL brand service include subscribers during introductory
free-trial periods and subscribers at no or reduced monthly fees through member service and
retention programs. Total AOL brand domestic subscribers include free-trial and retention members
of approximately 11% at both March 31, 2006 and December 31, 2005 and 14% at March 31, 2005. AOL
has recently entered into agreements with certain high-speed Internet access providers to offer the
AOL service along with high-speed Internet access. The price plan for the AOL service portion of
these offers is less than $15 and, therefore, subscribers to these plans are included in the under
$15 category price plans. In addition, late in the first quarter of 2006 and continuing into the
second quarter, AOL implemented price increases on certain AOL brand service price plans, including
increasing the price of the $23.90 plan to $25.90. The price increases are expected to have an
incremental short-term adverse impact on the number of AOL brand subscribers. The price increases
and the recent agreements with high-speed Internet access providers are also expected to result in
the further migration of subscribers from higher-priced to lower-priced AOL service plans in 2006,
resulting in a further decline in Subscription revenues and AOL brand domestic ARPU during the
remainder of 2006.
The largest component of the AOL brand domestic $15 and over price plans is the $25.90 price
plan, which provides unlimited access to the AOL service using AOL’s dial-up network and unlimited
usage of the AOL service through any other Internet connection. The largest component of the AOL
brand domestic under $15 price plans is the $14.95 per month price plan, which generally includes a
limited number of hours of dial-up access and unlimited usage of the AOL service through an
Internet connection not provided by AOL, such as a high-speed broadband Internet connection via
cable or digital subscriber lines. AOL continues to develop, test, change, market and implement
price plans, service offerings and payment methods as well as other strategies to attract and
retain members to its AOL service and, therefore, the composition of AOL’s subscriber base is
expected to change over time.
The decline in AOL brand domestic subscribers on plans priced $15 and over per month resulted
from a number of factors, including declining registrations in response to AOL’s marketing
campaigns, competition from broadband access providers and reduced subscriber acquisition efforts.
Further, during the period, subscribers migrated from the premium-priced unlimited dial-up plans,
including the $25.90 plan, to lower-priced plans. The decline in AOL brand domestic subscribers
overall, and specifically in the $15 and over per month price plans, is expected to continue in the
foreseeable future.
Year-over-year growth in AOL brand domestic subscribers on plans below $15 per month was
driven principally by the migration of subscribers from plans $15 and over per month and, to a
lesser extent, by new subscribers. AOL expects that the
15
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
proportion of its subscribers on lower-priced plans will continue to increase. This trend is
expected to be accelerated by the impacts of the recent price plan increases and the new agreements
with high-speed Internet access providers. The growth in subscribers on plans below $15 per month
is expected to come primarily from subscribers who are currently on the $25.90 price plan.
Within the $15 and over per month category, the increase in ARPU over the prior year was
primarily due to an increase in the percentage of revenue generating customers, partially offset by
a shift in the mix to lower-priced subscriber price plans. Premium subscription services revenues
included in ARPU were $20 million for both the three months ended March 31, 2006 and 2005.
Within the under $15 per month category, the decrease in ARPU over the prior year was
primarily due to a decrease in revenues generated by members on limited plans who exceeded their
free time, partially offset by an increase in the percentage of revenue generating customers.
Premium subscription services revenues included in ARPU for the three months ended March 31, 2006
and 2005 were $9 million and $6 million, respectively.
The decline in total AOL brand domestic ARPU was due primarily to the shift in AOL’s
membership base to lower-priced subscriber plans. AOL brand domestic members on price plans under
$15 was 31% of total AOL brand domestic membership as of March 31, 2006 as compared to 22% as of
March 31, 2005.
AOL Europe offers a variety of price plans, including bundled broadband, unlimited access to
the AOL service using AOL’s dial-up network and limited access plans, which are generally billed
based on actual usage. AOL Europe continues to actively market bundled broadband plans, as AOL
Europe’s subscribers have been migrating from dial-up plans to bundled broadband plans, and this
trend is expected to continue.
The ARPU for European subscribers decreased primarily due to the negative effect of changes in
foreign currency exchange rates. In addition, although bundled broadband subscribers continue to
grow as a percentage of total subscribers at AOL Europe, broadband price reductions in France,
Germany and the U.K. due to competition have offset the impact of this migration on ARPU.
In addition to the AOL brand service, AOL has subscribers to other lower-priced services, both
domestically and internationally, including the Netscape and CompuServe brands. These other brand
services are not a significant source of revenues.
Advertising revenues improved due to increased revenues from growth in traditional
advertising, paid-search advertising and sales of advertising run on third-party websites generated
by Advertising.com. Paid-search revenues and revenues generated by Advertising.com increased $27
million and $16 million, respectively, for the three months ended March 31, 2006 as compared to the
three months ended March 31, 2005. AOL expects Advertising revenues to continue to increase during
the remainder of 2006 as compared to the similar periods in 2005 due to expected growth in
paid-search and traditional online advertising and contributions from Advertising.com’s
performance-based advertising.
Costs of revenues decreased 4% and, as a percentage of revenues, increased to 48% in 2006 from
46% in 2005. The decrease in cost of revenues related primarily to lower network-related expenses.
Network-related expenses decreased 11% to $318 million in 2006 from $359 million in 2005. The
decline in network-related expenses was principally attributable to improved pricing and network
utilization, decreased levels of long-term fixed commitments and lower usage of AOL’s dial-up
network associated with the declining dial-up subscriber base. Domestic network expenses are
expected to continue to decline in 2006, although at a lower rate than in 2005. However, this
decline is expected to be more than offset by increased network expenses at AOL Europe due to the
continued migration of AOL Europe dial-up subscribers to bundled broadband plans for which network
expenses per subscriber are significantly higher, resulting in lower margins.
The decrease in selling, general and administrative expenses primarily related to an $18
million benefit related to employee incentive compensation, including the reversal of previously
established accruals that are no longer required and lower current year accruals, other cost
savings initiatives and a decrease in third-party marketing costs. The three months ended March 31,
2006 also includes an approximate $14 million benefit related to the favorable resolution of
certain tax matters.
16
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
As previously discussed under “Significant Transactions and Other Items Affecting
Comparability,” the results for the three months ended March 31, 2006 include a $2 million gain
from the resolution of a previously contingent gain related to the 2004 sale of NSS and a $1
million restructuring charge, primarily related to changes in estimates of previously established
restructuring accruals. The results for the three months ended March 31, 2005 include a $24 million
noncash goodwill impairment charge related to AOLA, changes in estimates of previously established
restructuring accruals, which include the reversal of $8 million of restructuring charges that were
no longer required, partially offset by $3 million of additional restructuring charges and a $2
million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS.
The decreases in Operating Income before Depreciation and Amortization and Operating Income
are due primarily to lower Subscription revenues, partially offset by higher Advertising revenues
and lower costs of revenues and selling, general and administrative expenses and the absence of the
$24 million noncash goodwill impairment charge. Operating Income before Depreciation and
Amortization included a $27 million decline at AOL Europe for the first quarter of 2006, as
compared to the similar period in 2005, reflecting a decline in revenues and higher costs.
Operating Income also improved due to lower depreciation expense reflecting a decline in network
assets as the result of membership declines.
In response to the changing dynamics of its business, AOL is undertaking efforts to realign
its resources more efficiently and expects to incur restructuring charges ranging from $15 million
to $20 million related to a second quarter 2006 restructuring action. The restructuring costs
relate to a reduction in headcount, lease termination costs and an impairment of certain long-lived
assets. As AOL continues to analyze its resource needs, further restructuring charges may be
incurred during 2006.
As noted above, the Company expects a continued decline in AOL’s domestic and European
subscribers, ARPU and related revenues. As a result of the decline in revenues, which are not
expected to be offset by cost decreases, the Company anticipates Operating Income before
Depreciation and Amortization and Operating Income will continue to decline during the second
quarter of 2006 as compared to the comparable 2005 period.
Cable. Revenues, Operating Income before Depreciation and Amortization and Operating Income
of the Cable segment for the three months ended March 31, 2006 and 2005 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
|
% Change |
|
| |
|
(recast) |
|
| |
|
(millions) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
2,463 |
|
|
$ |
2,127 |
|
|
|
16 |
% |
Advertising |
|
|
117 |
|
|
|
119 |
|
|
|
(2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,580 |
|
|
|
2,246 |
|
|
|
15 |
% |
Costs of revenues(a) |
|
|
(1,175 |
) |
|
|
(1,006 |
) |
|
|
17 |
% |
Selling, general and administrative(a) |
|
|
(463 |
) |
|
|
(427 |
) |
|
|
8 |
% |
Merger-related and restructuring costs |
|
|
(10 |
) |
|
|
(17 |
) |
|
|
(41 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
932 |
|
|
|
796 |
|
|
|
17 |
% |
Depreciation |
|
|
(411 |
) |
|
|
(376 |
) |
|
|
9 |
% |
Amortization |
|
|
(20 |
) |
|
|
(20 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
501 |
|
|
$ |
400 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The components of Subscription revenues are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
|
% Change |
|
| |
|
(millions) |
|
Subscription revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Video services |
|
$ |
1,711 |
|
|
$ |
1,602 |
|
|
|
7 |
% |
High-speed data |
|
|
612 |
|
|
|
493 |
|
|
|
24 |
% |
Digital Phone |
|
|
140 |
|
|
|
32 |
|
|
|
338 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Subscription revenues |
|
$ |
2,463 |
|
|
$ |
2,127 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
17
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Subscription revenues increased due to the continued penetration of advanced services
(primarily high-speed data services, advanced digital video services and Digital Phone) and video
rate increases. Strong growth rates for Subscription revenues associated with high-speed data
services and Digital Phone are expected to continue.
TWC subscriber counts include all billable subscribers for each level of service received.
Basic cable subscribers include all subscribers who receive basic video cable service. Digital
video subscribers reflect all subscribers who receive any level of video service received via
digital technology. High-speed data subscribers include all subscribers who receive TWC’s Road
Runner Internet service or any of the other Internet services offered by TWC. Digital Phone
subscribers include all subscribers who receive telephony service. At March 31, 2006, as compared
to March 31, 2005, basic cable subscribers increased 1.2% (129,000) and totaled 11.039 million
(including 1.577 million subscribers of unconsolidated investees, which are managed by TWC),
digital video subscribers increased by 15% to 5.642 million (including 789,000 subscribers of
unconsolidated investees, which are managed by TWC), residential high-speed data subscribers
increased by 25% to 5.168 million (including 731,000 subscribers of unconsolidated investees, which
are managed by TWC) and commercial high-speed data subscribers increased by 19% to 216,000
(including 27,000 subscribers of unconsolidated investees, which are managed by TWC). Additionally,
Digital Phone subscribers increased by 998,000 to 1.370 million (including 176,000 subscribers of
unconsolidated investees, which are managed by TWC).
Costs of revenues increased 17% and, as a percentage of revenues, were 46% for 2006 compared
to 45% for 2005. The increase in costs of revenues is primarily related to increases in video
programming costs, telephony service costs and employee costs. For the three months ended March 31,
2006, video programming costs increased 9% to $558 million due primarily to contractual rate
increases and the ongoing deployment of new digital video services, partially offset by an $11
million benefit reflecting an adjustment in the amortization of certain launch support payments.
Video programming costs for the remainder of 2006 are expected to increase at a rate similar to the
12% rate experienced during the first quarter, excluding the $11 million benefit. This increase
reflects the continued expansion of service offerings and contractual rate increases. Telephony
service costs increased approximately $47 million due to the growth in Digital Phone subscribers.
Employee costs increased primarily due to salary increases and higher headcount resulting from the
roll-out of advanced services. These increases in costs of revenues were partially offset by an $18
million benefit (with an additional $5 million benefit recorded in selling, general and
administrative expenses) in the first quarter of 2006 due to changes in estimates related to
certain medical benefit accruals.
The increase in selling, general and administrative expenses is primarily the result of higher
employee and administrative costs due to salary increases and higher headcount resulting from the
continued roll-out of advanced services, partially offset by a decrease in equity-based
compensation expense. The first quarter of 2005 also included a $9 million reserve related to legal
matters.
As previously discussed under “Significant Transactions and Other Items Affecting
Comparability,” during the three months ended March 31, 2006, the Cable segment expensed
approximately $4 million of non-capitalizable merger-related costs associated with the Adelphia
Acquisition and the Cable Swaps. Such costs are expected to increase between now and the closing
date and continue thereafter. Closing of these transactions is expected to occur on or before July
31, 2006. In addition, the results for the three months ended March 31, 2006 include approximately
$6 million of restructuring costs, primarily associated with a reduction in headcount associated
with efforts to reorganize the Company’s operations in a more efficient manner. The results for the
three months ended March 31, 2005 included $17 million of restructuring costs, primarily associated
with the early retirement of certain senior executives. These charges are part of TWC’s broader
plans to simplify its organizational structure and enhance its customer focus. TWC is in the
process of executing these initiatives and expects to incur additional costs as these plans are
implemented throughout 2006.
Operating Income before Depreciation and Amortization increased principally as a result of
revenue growth (particularly high margin high-speed data revenues), partially offset by higher
costs of revenues and selling, general and administrative expenses as discussed above.
Operating Income increased due primarily to the increase in Operating Income before
Depreciation and Amortization described above, partially offset by an increase in depreciation
expense. Depreciation expense increased $35 million due primarily to the continued higher spending
on customer premise equipment in recent years, which generally has a significantly shorter useful
life compared to the mix of assets previously purchased.
18
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Filmed Entertainment. Revenues, Operating Income before Depreciation and Amortization and
Operating Income of the Filmed Entertainment segment for the three months ended March 31, 2006 and
2005 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
|
% Change |
|
| |
|
(recast) |
|
| |
|
(millions) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
$ |
— |
|
|
$ |
3 |
|
|
NM |
|
Content |
|
|
2,709 |
|
|
|
2,951 |
|
|
|
(8 |
%) |
Other |
|
|
70 |
|
|
|
60 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,779 |
|
|
|
3,014 |
|
|
|
(8 |
%) |
Costs of revenues(a) |
|
|
(1,944 |
) |
|
|
(2,227 |
) |
|
|
(13 |
%) |
Selling, general and administrative(a) |
|
|
(376 |
) |
|
|
(404 |
) |
|
|
(7 |
%) |
Restructuring costs |
|
|
(2 |
) |
|
|
— |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
457 |
|
|
|
383 |
|
|
|
19 |
% |
Depreciation |
|
|
(34 |
) |
|
|
(30 |
) |
|
|
13 |
% |
Amortization |
|
|
(55 |
) |
|
|
(52 |
) |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
368 |
|
|
$ |
301 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
Content revenues decreased during the three months ended March 31, 2006 as a result of
declines from both content made available for initial airing in theaters (“theatrical product”) and
content made available for initial airing on television (“television product”). The components of
Content revenues are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
|
% Change |
|
| |
|
(millions) |
|
Theatrical product: |
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical film |
|
$ |
361 |
|
|
$ |
465 |
|
|
|
(22 |
%) |
Television licensing |
|
|
332 |
|
|
|
433 |
|
|
|
(23 |
%) |
Home video |
|
|
966 |
|
|
|
957 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total theatrical product |
|
|
1,659 |
|
|
|
1,855 |
|
|
|
(11 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Television product: |
|
|
|
|
|
|
|
|
|
|
|
|
Television licensing |
|
|
755 |
|
|
|
747 |
|
|
|
1 |
% |
Home video |
|
|
178 |
|
|
|
244 |
|
|
|
(27 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Total television product |
|
|
933 |
|
|
|
991 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer product and other |
|
|
117 |
|
|
|
105 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Content revenues |
|
$ |
2,709 |
|
|
$ |
2,951 |
|
|
|
(8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
The decline in theatrical film revenues was due primarily to difficult comparisons to the
first quarter of 2005, which included the release of Constantine and carryover from Ocean’s Twelve
and Million Dollar Baby, compared to the carryover success from Harry Potter and the Goblet of Fire
and the releases of V For Vendetta and Final Destination 3 in the first quarter of 2006. The
decrease in theatrical product revenues from television licensing primarily related to the timing
and quantity of various international availabilities, including a greater number of significant
titles in 2005. Home video sales of theatrical product were essentially flat reflecting the
worldwide release of Harry Potter and the Goblet of Fire and the domestic release of Wedding
Crashers in the first quarter of 2006, partially offset by the international success of Harry
Potter and the Prisoner of Azkaban and the domestic release of Troy in the first quarter of 2005.
The decline in home video sales of television product reflects difficult comparisons to the
prior year, which included revenue from the releases of Friends: The Complete Ninth Season and
Seinfeld Seasons 1-3 and higher catalog revenue.
The decrease in costs of revenues resulted primarily from lower film costs ($1.132 billion in
2006 compared to $1.373 billion in 2005) and lower advertising and print costs resulting from the
quantity and mix of films released. Included in film costs are theatrical valuation adjustments,
which increased to $69 million in 2006 from $38 million in 2005. Costs of revenues as a percentage
of revenues decreased to 70% in 2006 from 74% in 2005, due to the quantity and mix of product
released.
19
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Selling, general and administrative expenses decreased primarily due to lower distribution
fees and the impact of cost saving initiatives.
As previously discussed in “Significant Transactions and Other Items Affecting Comparability,”
the results for the three months ended March 31, 2006 include $2 million of restructuring charges
as a result of changes in estimates of previously established restructuring accruals.
Operating Income before Depreciation and Amortization and Operating Income increased as a
result of lower costs of revenues and selling, general and administrative expenses, partially
offset by the decline in revenues as discussed above. Operating Income before Depreciation and
Amortization and Operating Income also included a benefit of $42 million from the sale of certain
international film rights in the first quarter of 2006.
The Company anticipates that the rate of growth in Operating Income before Depreciation and
Amortization experienced in the first quarter of 2006 will not continue during the remainder of
2006. The first quarter of 2006 benefited from the sale of certain international film rights, as
discussed above, and higher contributions from the consumer products business.
Networks. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Networks segment for the three months ended March 31, 2006 and 2005 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
|
% Change |
|
| |
|
(recast) |
|
| |
|
(millions) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
1,442 |
|
|
$ |
1,334 |
|
|
|
8 |
% |
Advertising |
|
|
702 |
|
|
|
681 |
|
|
|
3 |
% |
Content |
|
|
195 |
|
|
|
253 |
|
|
|
(23 |
%) |
Other |
|
|
12 |
|
|
|
7 |
|
|
|
71 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,351 |
|
|
|
2,275 |
|
|
|
3 |
% |
Costs of revenues(a) |
|
|
(1,057 |
) |
|
|
(1,055 |
) |
|
|
— |
|
Selling, general and administrative(a) |
|
|
(437 |
) |
|
|
(426 |
) |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
857 |
|
|
|
794 |
|
|
|
8 |
% |
Depreciation |
|
|
(66 |
) |
|
|
(55 |
) |
|
|
20 |
% |
Amortization |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(25 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
788 |
|
|
$ |
735 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The increase in Subscription revenues was due primarily to higher subscription rates and,
to a lesser extent, an increase in the number of subscribers at Turner and HBO.
The increase in Advertising revenues was driven primarily by higher CPMs (advertising cost per
thousand viewers) and sellouts at Turner’s domestic entertainment networks, partially offset by a
decline at The WB Network as a result of lower ratings.
The decrease in Content revenues was primarily due to the absence of HBO’s licensing revenues
from Everybody Loves Raymond, which ended its broadcast network run in 2005, and, to a lesser
extent, a decline in ancillary sales of HBO’s original programming.
Costs of revenues increased slightly; however, as a percentage of revenues, it decreased from
46% in 2005 to 45% in 2006. The slight increase in costs of revenues was primarily attributable to
an increase in programming costs, offset by lower distribution costs resulting from the decline in
Content revenues and lower equity-based compensation expense. Programming costs increased to $754
million in 2006 from $717 million in 2005. The increase in programming expenses is primarily due to
increased amortization related to fewer expected airings of certain shows due to the anticipated
shutdown of The WB Network, higher acquired theatrical costs at HBO and an increase in sports
programming costs, particularly NBA related, at Turner.
20
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
The increase in selling, general and administrative expenses reflects higher marketing and
promotional expenses.
Operating Income before Depreciation and Amortization and Operating Income increased during
2006 primarily due to an increase in revenues, partially offset by higher selling, general and
administrative expenses, as described above.
On January 24, 2006, Warner Bros. and CBS announced an agreement to form a new
fully-distributed national broadcast network, to be called The CW. At the same time, Warner Bros.
and CBS are preparing to cease the standalone operations of The WB Network and UPN, respectively,
at the end of the 2005/2006 television season (September 2006).
Upon the closing of this transaction, the Company will account for its investment in The CW
under the equity method of accounting. The Company anticipates that prior to the closing of this
transaction it will incur restructuring charges ranging from $25 million to $30 million related to
employee terminations and contractual settlements. In addition, The WB Network may incur up to $100
million in terminating certain programming arrangements (primarily licensed movie rights), most of
which are not expected to be contributed to the new network and may not be sold or utilized in
another manner. Included in these costs are approximately $70 million associated with intercompany
programming arrangements with Warner Bros. and New Line. Any costs incurred by The WB Network on
such intercompany programming would be largely offset by amounts recognized by Warner Bros. and New
Line, with the impact of all intercompany transactions being eliminated in consolidation. Excluding
the impact of these intercompany transactions, the anticipated exit costs to the Company of
programming arrangements and employee and other contractual arrangements range from approximately
$55 million to $60 million.
Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating
Income of the Publishing segment for the three months ended March 31, 2006 and 2005 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
|
% Change |
|
| |
|
(recast) |
|
| |
|
(millions) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription |
|
$ |
372 |
|
|
$ |
381 |
|
|
|
(2 |
%) |
Advertising |
|
|
583 |
|
|
|
571 |
|
|
|
2 |
% |
Content |
|
|
20 |
|
|
|
20 |
|
|
|
— |
|
Other |
|
|
151 |
|
|
|
157 |
|
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,126 |
|
|
|
1,129 |
|
|
|
— |
|
Costs of revenues(a) |
|
|
(474 |
) |
|
|
(487 |
) |
|
|
(3 |
%) |
Selling, general and administrative(a) |
|
|
(524 |
) |
|
|
(510 |
) |
|
|
3 |
% |
Gain on sale of assets |
|
|
— |
|
|
|
8 |
|
|
NM |
|
Restructuring costs |
|
|
(12 |
) |
|
|
— |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income before Depreciation and Amortization |
|
|
116 |
|
|
|
140 |
|
|
|
(17 |
%) |
Depreciation |
|
|
(30 |
) |
|
|
(33 |
) |
|
|
(9 |
%) |
Amortization |
|
|
(15 |
) |
|
|
(25 |
) |
|
|
(40 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
71 |
|
|
$ |
82 |
|
|
|
(13 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Costs of revenues and selling, general and administrative expenses exclude
depreciation. |
The decline in Subscription revenues primarily resulted from unfavorable effects of
foreign currency exchange rates at IPC.
Advertising revenues increased slightly due primarily to growth in online Advertising
revenues. Magazine Advertising revenues remained essentially flat as contributions from the
acquisitions of Essence Communication Partners (“Essence”) and Grupo Editorial Expansión (“GEE”)
and contributions from recent magazine launches were offset by lower Advertising revenues at IPC
and certain magazines, including People, Parenting and Time.
Other revenues decreased primarily due to declines at Southern Living At Home, partially
offset by growth at Synapse, a subscription marketing business.
Costs of revenues decreased 3% and, as a percentage of revenues, were 42% and 43% in 2006 and
2005, respectively. Costs of revenues for the magazine publishing business include manufacturing
(paper, printing and distribution) and editorial-related costs, which together decreased 1% to $422
million primarily due to print cost savings.
21
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Selling, general and administrative expenses increased 3% primarily due to an increase in
advertising and marketing costs, primarily related to the inclusion of Essence and GEE.
As previously discussed in “Significant Transactions and Other Items Affecting Comparability,”
the results for the three months ended March 31, 2006 include $12 million of restructuring costs,
primarily associated with continuing efforts to streamline operations. In April 2006, Time Inc.
further reduced headcount, which will result in additional restructuring charges ranging from $18
million to $22 million. The results for the three months ended March 31, 2005 reflect an $8 million
gain related to the collection of a loan made in conjunction with the Company’s 2003 sale of Time
Life, which was previously fully reserved due to concerns about recoverability.
Operating Income before Depreciation and Amortization decreased primarily due to an increase
in selling, general and administrative expenses, $12 million of restructuring charges in 2006 and
the absence of the prior year gain related to the collection of a loan, partially offset by lower
costs of revenues. Also included in Operating Income before Depreciation and Amortization are $8
million of lower start-up losses on magazine launches.
Operating Income decreased primarily due to the changes in Operating Income before
Depreciation and Amortization discussed above, partially offset by the decline in amortization
expense as a result of certain short-lived intangibles, such as customer lists, becoming fully
amortized in the latter part of 2005. This increase was partially offset by amortization from
certain indefinite-lived trade name intangibles being assigned a finite life beginning in the first
quarter of 2006.
As discussed in more detail in “Recent Developments,” on March 31, 2006, the Company sold TWBG
to Hachette for $532 million in cash resulting in a pretax gain of approximately $206 million,
after taking into account selling costs and estimated working capital adjustments. As a result of
the sale, TWBG has been reflected as discontinued operations for all periods presented.
Corporate. Operating Loss before Depreciation and Amortization and Operating Loss of the
Corporate segment for the three months ended March 31, 2006 and 2005 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
|
% Change |
|
| |
|
(recast) |
|
| |
|
(millions) |
|
Amounts related to securities litigation and government investigations |
|
$ |
(29 |
) |
|
$ |
(6 |
) |
|
NM |
|
Selling, general and administrative(a) |
|
|
(112 |
) |
|
|
(113 |
) |
|
|
(1 |
%) |
Gain on sale of assets |
|
|
20 |
|
|
|
— |
|
|
NM |
|
Restructuring costs |
|
|
(5 |
) |
|
|
— |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss before Depreciation and Amortization |
|
|
(126 |
) |
|
|
(119 |
) |
|
|
6 |
% |
Depreciation |
|
|
(13 |
) |
|
|
(9 |
) |
|
|
44 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
$ |
(139 |
) |
|
$ |
(128 |
) |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Selling, general and administrative expenses exclude depreciation. |
As previously discussed, the Company recognized legal and other professional fees related
to the SEC and DOJ investigations into certain of the Company’s historical accounting and
disclosure practices and the defense of various shareholder lawsuits, as well as legal reserves,
totaling $79 million and $12 million, respectively. In addition, for the three months ended March
31, 2006 and 2005, the Company recognized insurance recoveries of $50 million and $6 million,
respectively. Legal and other professional fees are expected to continue to be incurred in future
periods (Note 1).
As previously discussed under “Significant Transactions and Other Items Affecting
Comparability,” the three months ended March 31, 2006 results include approximately $5 million of
restructuring costs and a gain of approximately $20 million on the sale of two aircraft.
Excluding the items discussed above, Operating Loss before Depreciation and Amortization and
Operating Loss remained essentially flat for the three months ended March 31, 2006, due primarily
to higher professional fees and financial advisory services costs, offset by lower transactional
costs.
22
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
FINANCIAL CONDITION AND LIQUIDITY
Current Financial Condition
At March 31, 2006, Time Warner had $20.115 billion of debt, $2.295 billion of cash and
equivalents (net debt of $17.820 billion, defined as total debt less cash and equivalents) and
$62.521 billion of shareholders’ equity, compared to $20.330 billion of debt, $4.220 billion of
cash and equivalents (net debt of $16.110 billion) and $65.170 billion of shareholders’ equity at
December 31, 2005.
The following table shows the significant items contributing to the increase in net debt from
December 31, 2005 to March 31, 2006 (millions):
| |
|
|
|
|
Net debt at December 31, 2005 |
|
$ |
16,110 |
|
Cash provided by operations |
|
|
(2,330 |
) |
Capital expenditures and product development costs |
|
|
781 |
|
Dividends paid to common shareholders(a) |
|
|
225 |
|
Common stock repurchases |
|
|
3,936 |
|
Proceeds from the sale of Time Warner Book Group |
|
|
(532 |
) |
Proceeds from the sale of Time Warner Telecom |
|
|
(239 |
) |
All other, net |
|
|
(131 |
) |
|
|
|
|
Net debt at March 31, 2006(b) |
|
$ |
17,820 |
|
|
|
|
|
|
|
|
| (a) |
|
The Company began paying a quarterly cash dividend of $0.05 per share on its common
stock in the third quarter 2005. |
| |
| (b) |
|
Included in the net debt balance is approximately $248 million that represents the
net unamortized fair value adjustment recognized as a result of the merger of AOL and Historic
TW. |
As noted in “Overview — Recent Developments,” Time Warner’s Board of Directors has
authorized a common stock repurchase program that allows the Company to purchase up to an aggregate
of $20 billion of common stock during the period from July 29, 2005 through December 31, 2007.
Purchases under the stock repurchase program may be made from time to time on the open market and
in privately negotiated transactions. Size and timing of these purchases will be based on a number
of factors, including price and business and market conditions. As announced on February 1, 2006,
the Company increased the pace of stock repurchases during the first quarter of 2006. At existing
price levels, the Company intends to continue the current pace of purchases under its stock
repurchase program within its stated objective of maintaining a net debt-to-Operating Income before
Depreciation and Amortization ratio, as defined, of approximately 3-to-1, and expects it will have purchased
approximately $15 billion of its common stock under the program by the end of 2006, and the
remainder in 2007. From the program’s inception through May 2, 2006, the Company repurchased
approximately 460 million shares of common stock for
approximately $8.0 billion pursuant to
trading programs under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.
In connection with the Company’s stock repurchase program, the Company plans to enter into
prepaid stock repurchase contracts with a number of counterparties that would provide for
repurchases effected over the next three months, or longer, depending on the share price of the
Company’s common stock. As currently contemplated, the Company would make an aggregate payment of
approximately $3.6 billion upon entry into such contracts and would receive shares of the Company’s
common stock at the end of each repurchase contract term at prices based upon a formula that is
expected to deliver an effective, average repurchase price per share below the volume weighted
average price of the common stock over the term of the relevant contract. The majority of the
expected $3.6 billion prepayment amount will be funded through borrowings under the Company’s
revolving credit facility and/or commercial paper programs.
In April 2005, a subsidiary of the Company entered into agreements to jointly acquire
substantially all of the assets of Adelphia with Comcast for a combination of cash and stock of
TWC. TWC also has agreed to redeem Comcast’s interests in TWC and TWE following the Adelphia
Acquisition. Upon closing, these transactions will impact the Company’s financial condition and
liquidity. For additional details, see “Overview — Recent Developments.”
As noted in “Overview — Recent Developments,” in December 2005, the Company announced that AOL
was expanding its current strategic alliance with Google and that Google would invest $1 billion
for a 5% equity interest in AOL. On March 24, 2006, the Company and Google signed definitive
agreements governing the investment and the commercial arrangements and
23
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
on April 13, 2006, the Company received Google’s
$1 billion investment in AOL and will
recognize a gain of approximately $800 million, which will be reflected in shareholders’ equity as
an adjustment to paid-in-capital in the second quarter of 2006.
As noted in “Overview —
Recent Developments,” on February 23, 2006, the Company announced an
agreement to sell Turner South to Fox for approximately
$375 million in cash. This transaction closed on May 1,
2006. The Company expects to record a pretax gain
ranging from approximately $120 million to $140 million (after taking into account selling costs)
in the second quarter of 2006.
In April 2006, the Company
purchased the remaining interest in Synapse Group Inc. for $140
million.
As discussed in more detail
below, management believes that cash generated by or available to
Time Warner should be sufficient to fund its capital and liquidity needs for the foreseeable
future, including the quarterly dividend payments, the common stock repurchase program and the
Adelphia Acquisition and the redemption of Comcast’s interests in TWC and TWE. Time Warner’s
sources of cash include cash provided by operations, cash and equivalents, available borrowing
capacity under its committed credit facilities ($6.917 billion at Time Warner Inc. and $12.963
billion at TWC as of March 31, 2006, including $10.0 billion at TWC which becomes available at the
time of the Adelphia Acquisition), availability under its commercial paper programs, the $1 billion
investment in AOL by Google, proceeds from a new $500 million term loan at AOL and proceeds from
the sale of Turner South. The Company may use a portion of its available borrowing capacity to
refinance approximately $1.5 billion of debt maturing in 2006.
With the anticipated Adelphia Acquisition and the accelerated pace of the common stock
repurchase program, the Company’s outstanding debt is expected to increase. Accordingly, cash paid
for interest is expected to negatively impact cash provided by operations.
Cash Flows
Cash and equivalents decreased by $1.925 billion and increased by $873 million for the three
months ended March 31, 2006 and 2005, respectively. The decrease in cash and equivalents is
primarily due to repurchases of common stock totaling $3.936 billion made in connection with the
Company’s common stock repurchase program in the first quarter of 2006. Components of these changes
are discussed in more detail in the pages that follow.
24
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Operating Activities
Details of cash provided by operations are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
Operating Income before Depreciation and Amortization |
|
$ |
2,688 |
|
|
$ |
2,480 |
|
Legal reserves related to securities litigation and government
investigations, net of payments and recoveries(a) |
|
|
5 |
|
|
|
(300 |
) |
Noncash asset impairments |
|
|
— |
|
|
|
24 |
|
Net interest payments(b) |
|
|
(260 |
) |
|
|
(268 |
) |
Net income taxes paid(c) |
|
|
(60 |
) |
|
|
(69 |
) |
Equity-based
compensation |
|
|
108 |
|
|
|
134 |
|
Adjustments relating to discontinued operations(d) |
|
|
6 |
|
|
|
21 |
|
Merger and restructuring payments(e) |
|
|
(44 |
) |
|
|
(62 |
) |
All other, net, including working capital changes |
|
|
(113 |
) |
|
|
(128 |
) |
|
|
|
|
|
|
|
Cash provided by operations |
|
$ |
2,330 |
|
|
$ |
1,832 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
2006 includes approximately $210 million paid for securities litigation,
partially offset by approximately $215 million of insurance
recoveries. 2005 includes payment of the $300 million SEC settlement. |
| |
| (b) |
|
Includes interest income received of $45 million in both 2006 and 2005. |
| |
| (c) |
|
Includes income tax refunds received of $16 million and $13 million in 2006 and
2005, respectively. |
| |
| (d) |
|
Includes net income from discontinued operations of $232 million and $7 million in
2006 and 2005, respectively. Amounts also include working capital-related adjustments
associated with discontinued operations of $(226) million and $14 million in 2006 and 2005,
respectively. |
| |
| (e) |
|
Includes payments for restructuring and merger-related costs, as well as payments
for certain other merger-related liabilities. |
Cash provided by operations increased to $2.330 billion in 2006 compared to $1.832
billion in 2005. The increase in cash provided by operations is related primarily to a reduction in
payments made in settling securities litigation and the government investigations and an increase
in Operating Income before Depreciation and Amortization.
Investing Activities
Details of cash used by investing activities are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
| |
|
(millions) |
|
Investments and acquisitions, net of cash acquired: |
|
|
|
|
|
|
|
|
Essence |
|
$ |
— |
|
|
$ |
(127 |
) |
All other, principally funding of joint ventures |
|
|
(126 |
) |
|
|
(97 |
) |
Capital expenditures and product development costs from continuing operations |
|
|
(781 |
) |
|
|
(650 |
) |
Capital expenditures and product development costs from discontinued operations |
|
|
— |
|
|
|
(1 |
) |
Proceeds from the sale of other available-for-sale securities |
|
|
4 |
|
|
|
13 |
|
Proceeds from the sale of Time Warner Book Group |
|
|
532 |
|
|
|
— |
|
Proceeds from the sale of a portion of the Company’s interest in Time Warner
Telecom |
|
|
239 |
|
|
|
— |
|
All other investment and asset sale proceeds |
|
|
36 |
|
|
|
73 |
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
$ |
(96 |
) |
|
$ |
(789 |
) |
|
|
|
|
|
|
|
Cash used by investing activities decreased to $96 million in 2006 compared to $789 million in
2005. The decrease in cash used by investing activities is primarily due to proceeds from the sales
of TWBG and of a portion of the Company’s interest in TWT, partially offset by an increase in
capital expenditures and product development costs, principally at the Company’s Cable segment.
25
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Financing Activities
Details of cash used by financing activities are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
Borrowings |
|
$ |
1 |
|
|
$ |
— |
|
Debt repayments |
|
|
(226 |
) |
|
|
(247 |
) |
Proceeds from exercise of stock options |
|
|
242 |
|
|
|
99 |
|
Excess tax benefit on stock options |
|
|
32 |
|
|
|
22 |
|
Principal payments on capital leases |
|
|
(23 |
) |
|
|
(37 |
) |
Repurchases of common stock |
|
|
(3,936 |
) |
|
|
— |
|
Dividends paid |
|
|
(225 |
) |
|
|
— |
|
Other financing activities |
|
|
(24 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
Cash used by financing activities |
|
$ |
(4,159 |
) |
|
$ |
(170 |
) |
|
|
|
|
|
|
|
Cash used by financing activities increased to $4.159 billion in 2006 compared to $170 million
in 2005. The increase in cash used by financing activities is due principally to repurchases of
common stock made in connection with the Company’s common stock repurchase program and dividends
paid to common stock shareholders in 2006.
AOL Term Loan
On April 13, 2006, TW AOL Holdings Inc., a wholly owned subsidiary of Time Warner, entered
into a $500 million term loan with a maturity date of April 13, 2009 (the “AOL Facility”).
Simultaneous with the Google investment of $1 billion for a 5% equity interest in AOL Holdings LLC,
a subsidiary of TW AOL Holdings Inc. and the parent of AOL, the liability under the AOL Facility
was assigned to AOL Holdings LLC. Immediately following, the AOL Facility was assigned from AOL
Holdings LLC to AOL. The AOL Facility is not guaranteed by Time Warner. Borrowings under the AOL
Facility bear interest at a rate based on the credit rating of Time Warner, which rate is currently
LIBOR plus 0.45% per annum. The AOL Facility includes a maximum leverage ratio covenant
restricting consolidated total debt of AOL to 4.5 times the consolidated EBITDA (as defined in the
credit agreement) of AOL (excluding AOL guarantees of Time Warner’s and its other subsidiaries’
debt obligations). The AOL Facility does not contain any credit ratings-based defaults or covenants
or any ongoing covenant or representation specifically relating to a material adverse change in
Time Warner’s or AOL’s financial condition or results of operations. The proceeds of the AOL
Facility were used to pay off $500 million of the $1 billion 6.125% Time Warner notes due April 15,
2006.
Capital Expenditures and Product Development Costs
Time Warner’s total capital expenditures and product development costs from continuing
operations were $781 million for the three months ended March 31, 2006 compared to $650 million for
the three months ended March 31, 2005. The majority of capital expenditures and product development
costs relate to the Company’s Cable segment, which had capital expenditures of $497 million for the
three months ended March 31, 2006 as compared to $387 million for the three months ended March 31,
2005.
The Cable segment’s capital expenditures include the following major components:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
3/31/06 |
|
|
3/31/05 |
|
| |
|
(millions) |
|
Cable Segment Capital Expenditures |
|
|
|
|
|
|
|
|
Customer premise equipment |
|
$ |
282 |
|
|
$ |
198 |
|
Scalable infrastructure |
|
|
54 |
|
|
|
45 |
|
Line extensions |
|
|
58 |
|
|
|
63 |
|
Upgrades/rebuilds |
|
|
23 |
|
|
|
30 |
|
Support capital |
|
|
80 |
|
|
|
51 |
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
497 |
|
|
$ |
387 |
|
|
|
|
|
|
|
|
26
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
TWC incurs expenditures associated with the construction and maintenance of its cable systems.
Costs associated with the construction of the cable transmission and distribution facilities and
new cable service installations are capitalized. TWC generally capitalizes expenditures for
tangible fixed assets having a useful life of greater than one year. Capitalized costs include
direct material, direct labor, overhead and, in some cases, interest. Sales and marketing costs, as
well as the costs of repairing or maintaining existing fixed assets, are expensed as incurred.
Types of capitalized expenditures include customer premise equipment, scalable infrastructure, line
extensions, plant upgrades and rebuilds and support capital. With respect to customer premise
equipment, which includes converters and cable modems, TWC capitalizes installation charges only
upon the initial deployment of these assets. All costs incurred in subsequent disconnects and
reconnects are expensed as incurred. Depreciation on these assets is provided generally using the
straight-line method over their estimated useful lives. For converters and modems, the useful life
is generally 3 to 4 years, and, for plant upgrades, the useful life is up to 16 years.
The increase in capital expenditures in 2006 is primarily associated with the continued
roll-out of TWC’s advanced digital services, including Digital Phone.
Backlog
Backlog represents the amount of future revenue not yet recorded from cash contracts for the
licensing of theatrical and television product for pay cable, basic cable, network and syndicated
television exhibition. Backlog was approximately $4.2 billion and $4.5 billion at March 31, 2006
and December 31, 2005, respectively. Included in these amounts is licensing of film product from
the Filmed Entertainment segment to the Networks segment of $788 million and $774 million at March
31, 2006 and December 31, 2005, respectively.
Selected Investment Information
Cable Joint Ventures
On May 1, 2004, the Company completed the restructuring of two joint ventures that it manages,
Kansas City Cable Partners (“KCCP”), previously a 50-50 joint venture between Comcast and TWE
serving approximately 299,000 basic video subscribers as of March 31, 2006, and Texas Cable
Partners, L.P. (“TCP”), previously a 50-50 joint venture between Comcast and the
TWE-Advance/Newhouse Partnership (“TWE-A/N”) serving approximately 1.278 million basic video
subscribers as of March 31, 2006. Prior to the restructuring, the Company accounted for its
investment in these joint ventures using the equity method. Under the restructuring, KCCP was
merged into TCP, which was renamed “Texas and Kansas City Cable Partners, L.P.” (“TKCCP”) Following
the restructuring, the combined partnership was owned 50% by Comcast and 50% collectively by TWE
and TWE-A/N. In February 2005, TWE’s interest in the combined partnership was contributed to
TWE-A/N in exchange for preferred equity in TWE-A/N. Since the net assets of the combined
partnership were owned 50% by TWC and 50% by Comcast both before and after the restructuring and
there were no changes in the rights or economic interests of either party, the Company viewed the
transaction as a non-substantive reorganization to be accounted for at book value, similar to the
transfer of assets under common control. TWC continues to account for its investment in the
restructured joint venture using the equity method. Beginning on June 1, 2006, either TWC or
Comcast can trigger a dissolution of the partnership. If a dissolution is triggered, the
non-triggering party has the right to choose and take full ownership of one of two pools of the
combined partnership’s systems — one pool consisting of the Houston systems and the other
consisting of the Kansas City, southwest Texas and New Mexico systems — with an arrangement to
distribute the partnership’s debt between the two pools. The party triggering the dissolution would
own the remaining pool of systems and any debt associated with that pool.
In conjunction with the Adelphia Acquisition, TWC and Comcast agreed that if the Adelphia
Acquisition and Cable Swaps occur and if Comcast receives the pool of assets consisting of the
Kansas City, southwest Texas and New Mexico systems upon distribution of the TKCCP assets as
described above, Comcast will have an option, exercisable for 180 days commencing one year after
the date of such distribution, to require TWC or a subsidiary to transfer to Comcast, in exchange
for the southwest Texas and New Mexico systems, certain cable systems held by TWE and its
subsidiaries.
Court TV Joint Venture
The Company and Liberty Media (“Liberty”) each have a 50% interest in Courtroom Television
Network (“Court TV”). Beginning January 2006, Liberty may give written notice to Time Warner
requiring Time Warner to purchase all of Liberty’s interest in Court TV (the “Liberty Put”). In
addition, as of the same date, Time Warner may, by notice to Liberty, require
27
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Liberty to sell all of its interest in Court TV to Time Warner (the “Time Warner Call”). The
price to be paid upon exercise of either the Liberty Put or the Time Warner Call will be an amount
equal to one-half of the fair market value of Court TV, determined by an appraisal. The
consideration is required to be paid in cash if the Liberty Put is exercised. If the Time Warner
Call is exercised, the consideration is also payable in cash only if Liberty determines that the
transaction cannot be structured as a tax efficient transaction, or if Time Warner determines that
a tax efficient transaction may either violate applicable law or cause a breach or default under
any other agreement affecting Time Warner. As of the date of this filing, Liberty has not given
notice to Time Warner nor has Time Warner given notice to Liberty.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in
revenues, Operating Income before Depreciation and Amortization and cash from operations. Words
such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words
and terms of similar substance used in connection with any discussion of future operating or
financial performance identify forward-looking statements. These forward-looking statements are
based on management’s current expectations and beliefs about future events. As with any projection
or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the
Company is under no obligation to, and expressly disclaims any obligation to, update or alter its
forward-looking statements whether as a result of such changes, new information, subsequent events
or otherwise.
Various factors could adversely affect the operations, business or financial results of Time
Warner or its business segments in the future and cause Time Warner’s actual results to differ
materially from those contained in the forward-looking statements, including those factors
discussed in detail in Item 1A, “Risk Factors,” in the 2005 Form 10-K, which should be read in
conjunction with this report (as updated by Item 1A, “Risk Factors,” in Part II of this report),
and in Time Warner’s other filings made from time to time with the SEC after the date of this
report. In addition, Time Warner operates in highly competitive, consumer and technology-driven and
rapidly changing media, entertainment, interactive services and cable businesses. These businesses
are affected by government regulation, economic, strategic, political and social conditions,
consumer response to new and existing products and services, technological developments and,
particularly in view of new technologies, the continued ability to protect intellectual property
rights. Time Warner’s actual results could differ materially from management’s expectations because
of changes in such factors.
Further, for Time Warner generally, lower than expected valuations associated with the cash
flows and revenues at Time Warner’s segments may result in Time Warner’s inability to realize the
value of recorded intangibles and goodwill at those segments. In addition, achieving the Company’s
financial objectives, including growth in operations, maintaining financial ratios and a strong
balance sheet, could be adversely affected by the factors discussed in detail in Item 1A, “Risk
Factors,” in the 2005 Form 10-K, as well as:
| |
• |
|
decreased liquidity in the capital markets, including any reduction in the ability to
access either the capital markets for debt securities or bank financings; |
| |
| |
• |
|
the failure to meet earnings expectations; |
| |
| |
• |
|
significant acquisitions such as the Adelphia Acquisition or other transactions such as
the proposed redemption of Comcast’s interests in TWC and TWE; |
| |
| |
• |
|
economic slowdowns; |
| |
| |
• |
|
the impact of terrorist acts and hostilities; and |
| |
| |
• |
|
changes in the Company’s plans, strategies and intentions. |
For Time Warner’s AOL business, actual results could differ materially from management’s
expectations due to the factors discussed in detail in Item 1A, “Risk Factors,” in the 2005 Form
10-K, as updated by Item 1A, “Risk Factors,” in Part II of this report, as well as:
| |
• |
|
the ability to provide adequate server, network and system capacity; |
28
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
| |
• |
|
the risk of unanticipated increased costs for network services; |
| |
| |
• |
|
the ability to maintain or enter into new content, electronic commerce or marketing
arrangements and the risk that the cost of such arrangements may increase; and |
| |
| |
• |
|
the risks from changes in U.S. and international regulatory environments affecting
interactive services. |
For Time Warner’s cable business, actual results could differ materially from management’s
expectations due to the factors discussed in detail in Item 1A, “Risk Factors,” in the 2005 Form
10-K, as well as:
| |
• |
|
increases in government regulation of video services, including regulation that limits
cable operators’ ability to raise rates or that dictates set-top box or other equipment
features, functionalities or specifications; |
| |
| |
• |
|
increased difficulty in obtaining franchise renewals; |
| |
| |
• |
|
unanticipated funding obligations relating to its cable joint ventures; |
| |
| |
• |
|
a future decision by the FCC or Congress to require cable operators to contribute to the
federal “Universal Service Fund” based on the provision of cable modem service, which could
raise the price of cable modem service and impair TWC’s competitive position; and |
| |
| |
• |
|
the award of franchises or similar grants of rights through state or federal legislation
that would allow competitors of cable providers to offer video service on terms
substantially more favorable than those afforded existing cable operators (e.g., without the
need to obtain local franchise approval or to comply with local franchising regulations as
cable operators currently must). |
29
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 of 1934 (the “Exchange Act”)) as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the Company’s disclosure controls and procedures are effective in timely
making known to them material information relating to the Company and the Company’s consolidated
subsidiaries required to be disclosed in the Company’s reports filed or submitted under the
Exchange Act. The Company has investments in certain unconsolidated entities. As the Company does
not control these entities, its disclosure controls and procedures with respect to such entities
are necessarily substantially more limited than those it maintains with respect to its consolidated
subsidiaries. The Company began consolidating the financial results of AOLA effective March 31,
2004 pursuant to the requirements of FASB Interpretation No. 46, “Consolidation of Variable
Interest Entities — an Interpretation of ARB No. 51,” as revised. Because the Company does not
control AOLA, the Company’s disclosure controls and procedures with respect to information
regarding AOLA also are more limited than those for consolidated subsidiaries the Company controls.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting
during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting.
30
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions, except |
|
| |
|
per share amounts) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
2,295 |
|
|
$ |
4,220 |
|
Receivables, less allowances of $2.044 and $2.061 billion |
|
|
5,413 |
|
|
|
6,546 |
|
Inventories |
|
|
2,134 |
|
|
|
2,041 |
|
Prepaid expenses and other current assets |
|
|
980 |
|
|
|
892 |
|
Current assets of discontinued operations |
|
|
— |
|
|
|
351 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
10,822 |
|
|
|
14,050 |
|
Noncurrent inventories and film costs |
|
|
4,678 |
|
|
|
4,645 |
|
Investments, including available-for-sale securities |
|
|
3,574 |
|
|
|
3,518 |
|
Property, plant and equipment, net |
|
|
13,935 |
|
|
|
13,664 |
|
Intangible assets subject to amortization, net |
|
|
4,658 |
|
|
|
3,492 |
|
Intangible assets not subject to amortization |
|
|
38,425 |
|
|
|
39,685 |
|
Goodwill |
|
|
40,381 |
|
|
|
40,234 |
|
Other assets |
|
|
3,077 |
|
|
|
3,120 |
|
Noncurrent assets of discontinued operations |
|
|
232 |
|
|
|
383 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
119,782 |
|
|
$ |
122,791 |
|
|
|
|
|
|
|
|
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,253 |
|
|
$ |
1,335 |
|
Participations payable |
|
|
2,443 |
|
|
|
2,401 |
|
Royalties and programming costs payable |
|
|
936 |
|
|
|
988 |
|
Deferred revenue |
|
|
1,658 |
|
|
|
1,473 |
|
Debt due within one year |
|
|
84 |
|
|
|
92 |
|
Other current liabilities |
|
|
5,196 |
|
|
|
5,988 |
|
Current liabilities of discontinued operations |
|
|
66 |
|
|
|
230 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
11,636 |
|
|
|
12,507 |
|
Long-term debt |
|
|
20,031 |
|
|
|
20,238 |
|
Deferred income taxes |
|
|
13,815 |
|
|
|
13,063 |
|
Deferred revenue |
|
|
637 |
|
|
|
681 |
|
Other liabilities |
|
|
5,339 |
|
|
|
5,370 |
|
Noncurrent liabilities of discontinued operations |
|
|
7 |
|
|
|
15 |
|
Minority interests |
|
|
5,796 |
|
|
|
5,747 |
|
Commitments and contingencies (Note 13) |
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Series LMCN-V common stock, $0.01 par value, 92.6 and 87.2 million shares outstanding |
|
|
1 |
|
|
|
1 |
|
Time Warner common stock, $0.01 par value, 4.280 and 4.498 billion shares outstanding |
|
|
43 |
|
|
|
45 |
|
Paid-in-capital |
|
|
168,790 |
|
|
|
168,637 |
|
Treasury stock, at cost (441.3 and 208.0 million shares) |
|
|
(9,540 |
) |
|
|
(5,463 |
) |
Accumulated other comprehensive loss, net |
|
|
(18 |
) |
|
|
(65 |
) |
Accumulated deficit |
|
|
(96,755 |
) |
|
|
(97,985 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
62,521 |
|
|
|
65,170 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
119,782 |
|
|
$ |
122,791 |
|
|
|
|
|
|
|
|
See accompanying notes.
31
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31,
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions, except per share amounts) |
|
Revenues: |
|
|
|
|
|
|
|
|
Subscription |
|
$ |
5,667 |
|
|
$ |
5,485 |
|
Advertising |
|
|
1,761 |
|
|
|
1,645 |
|
Content |
|
|
2,756 |
|
|
|
2,976 |
|
Other |
|
|
271 |
|
|
|
257 |
|
|
|
|
|
|
|
|
Total revenues(a) |
|
|
10,455 |
|
|
|
10,363 |
|
Costs of revenues(a) |
|
|
(5,819 |
) |
|
|
(5,914 |
) |
Selling, general and administrative(a) |
|
|
(2,600 |
) |
|
|
(2,587 |
) |
Amortization of intangible assets |
|
|
(133 |
) |
|
|
(148 |
) |
Amounts related to securities litigation and government investigations |
|
|
(29 |
) |
|
|
(6 |
) |
Merger-related and restructuring costs |
|
|
(30 |
) |
|
|
(12 |
) |
Asset impairments |
|
|
— |
|
|
|
(24 |
) |
Gains on disposal of assets, net |
|
|
22 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Operating income |
|
|
1,866 |
|
|
|
1,682 |
|
Interest expense, net(a) |
|
|
(299 |
) |
|
|
(346 |
) |
Other income, net |
|
|
318 |
|
|
|
111 |
|
Minority interest expense, net |
|
|
(79 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
Income before income taxes, discontinued operations and cumulative effect of
accounting change |
|
|
1,806 |
|
|
|
1,393 |
|
Income tax provision |
|
|
(608 |
) |
|
|
(485 |
) |
|
|
|
|
|
|
|
Income before discontinued operations and cumulative effect of accounting change |
|
|
1,198 |
|
|
|
908 |
|
Discontinued operations, net of tax |
|
|
232 |
|
|
|
7 |
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change |
|
|
1,430 |
|
|
|
915 |
|
Cumulative effect of accounting change, net of tax |
|
|
25 |
|
|
|
— |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,455 |
|
|
$ |
915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share before discontinued operations and cumulative
effect of accounting change |
|
$ |
0.27 |
|
|
$ |
0.20 |
|
Discontinued operations |
|
|
0.05 |
|
|
|
— |
|
Cumulative effect of accounting change |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.32 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
Average basic common shares |
|
|
4,499.5 |
|
|
|
4,587.8 |
|
|
|
|
|
|
|
|
Diluted income per common share before discontinued operations and cumulative
effect of accounting change |
|
$ |
0.26 |
|
|
$ |
0.19 |
|
Discontinued operations |
|
|
0.05 |
|
|
|
— |
|
Cumulative effect of accounting change |
|
|
0.01 |
|
|
|
— |
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.32 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
Average diluted common shares |
|
|
4,542.9 |
|
|
|
4,722.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share of common stock |
|
$ |
0.05 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
| |
|
|
| (a) Includes the following income (expenses) resulting from transactions with related
companies: |
| |
Revenues |
|
$ |
84 |
|
|
$ |
68 |
|
Costs of revenues |
|
|
(54 |
) |
|
|
(48 |
) |
Selling, general and administrative |
|
|
9 |
|
|
|
8 |
|
Interest income, net |
|
|
11 |
|
|
|
7 |
|
See accompanying notes.
32
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
Net income(a) |
|
$ |
1,455 |
|
|
$ |
915 |
|
Adjustments for noncash and nonoperating items: |
|
|
|
|
|
|
|
|
Cumulative effect of accounting change, net of tax |
|
|
(25 |
) |
|
|
— |
|
Depreciation and amortization |
|
|
822 |
|
|
|
798 |
|
Amortization of film costs |
|
|
822 |
|
|
|
911 |
|
Asset impairments |
|
|
— |
|
|
|
24 |
|
Gain on investments and other assets, net |
|
|
(309 |
) |
|
|
(32 |
) |
Equity in income of investee companies, net of cash distributions |
|
|
(12 |
) |
|
|
(7 |
) |
Equity-based compensation |
|
|
108 |
|
|
|
134 |
|
Amounts related to securities litigation and government investigations |
|
|
5 |
|
|
|
(300 |
) |
Changes in operating assets and liabilities, net of acquisitions |
|
|
(310 |
) |
|
|
(625 |
) |
Adjustments relating to discontinued operations |
|
|
(226 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
Cash provided by operations(b) |
|
|
2,330 |
|
|
|
1,832 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investments and acquisitions, net of cash acquired |
|
|
(126 |
) |
|
|
(224 |
) |
Capital expenditures and product development costs |
|
|
(781 |
) |
|
|
(650 |
) |
Capital expenditures from discontinued operations |
|
|
— |
|
|
|
(1 |
) |
Investment proceeds from available-for-sale securities |
|
|
4 |
|
|
|
13 |
|
Other investment proceeds |
|
|
807 |
|
|
|
73 |
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
|
(96 |
) |
|
|
(789 |
) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Borrowings |
|
|
1 |
|
|
|
— |
|
Debt repayments |
|
|
(226 |
) |
|
|
(247 |
) |
Proceeds from exercise of stock options |
|
|
242 |
|
|
|
99 |
|
Excess tax benefit on stock options |
|
|
32 |
|
|
|
22 |
|
Principal payments on capital leases |
|
|
(23 |
) |
|
|
(37 |
) |
Repurchases of common stock |
|
|
(3,936 |
) |
|
|
— |
|
Dividends paid |
|
|
(225 |
) |
|
|
— |
|
Other |
|
|
(24 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
Cash used by financing activities |
|
|
(4,159 |
) |
|
|
(170 |
) |
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND EQUIVALENTS |
|
|
(1,925 |
) |
|
|
873 |
|
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
4,220 |
|
|
|
6,139 |
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END OF PERIOD |
|
$ |
2,295 |
|
|
$ |
7,012 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The first quarters of 2006 and 2005 include net income from discontinued operations
of $232 million and $7 million, respectively. |
| |
| (b) |
|
The first quarters of 2006 and 2005 include an approximate $181 million source of
cash and $36 million use of cash, respectively, related to changing the fiscal year end of
certain international operations from November 30 to December 31. |
See accompanying notes.
33
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Three Months Ended March 31,
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
BALANCE AT BEGINNING OF PERIOD |
|
$ |
65,170 |
|
|
$ |
63,379 |
|
Net income |
|
|
1,455 |
|
|
|
915 |
|
Other comprehensive income (loss) |
|
|
47 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
Comprehensive income |
|
|
1,502 |
|
|
|
898 |
|
Conversion of mandatorily convertible preferred stock |
|
|
— |
|
|
|
1,500 |
|
Cash dividends ($0.05 per common share) |
|
|
(225 |
) |
|
|
— |
|
Common stock repurchases |
|
|
(4,073 |
) |
|
|
— |
|
Other(a) |
|
|
147 |
|
|
|
129 |
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD |
|
$ |
62,521 |
|
|
$ |
65,906 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The first quarter of 2006 includes approximately $164 million pursuant to
stock option and other benefit plans and an approximate $17 million net loss related to
changing the fiscal year end of international operations from November 30 to December 31 (net
of the related income tax benefit of approximately $7 million). The first quarter of 2005
includes approximately $117 million pursuant to stock option and other benefit plans and an
approximate $23 million net loss related to changing the fiscal year end of certain
international operations from November 30 to December 31 (net of the related income tax
benefit of approximately $9 million). |
See accompanying notes.
34
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND RECENT TRANSACTIONS
Description of Business and Basis of Presentation
Description of Business
Time Warner Inc. (“Time Warner” or the “Company”) is a leading media and entertainment
company, whose businesses include interactive services, cable systems, filmed entertainment,
television networks and publishing. Time Warner classifies its business interests into five
reportable segments: AOL: consisting principally of interactive services; Cable: consisting
principally of interests in cable systems that provide video, high-speed data and Digital Phone
services; Filmed Entertainment: consisting principally of feature film, television and home video
production and distribution; Networks: consisting principally of cable television and broadcast
networks; and Publishing: consisting principally of magazine publishing. Financial information for
Time Warner’s various reportable segments is presented in Note 12.
On April 3, 2006, America Online, Inc. converted to a Delaware limited liability company and
changed its name to AOL LLC (together with its subsidiaries, “AOL”).
Pending Transactions
Amounts Related to Securities Litigation
As previously disclosed, in July 2005, the Company reached an agreement in principle for the
settlement of the securities class action lawsuits included in the matters consolidated under the
caption In re: AOL Time Warner Inc. Securities & “ERISA” Litigation described in Note 13 (the “MSBI
consolidated securities class action”). In connection with reaching the agreement in principle on
the securities class action, the Company established a reserve of $2.4 billion during the second
quarter of 2005. Ernst & Young LLP also has agreed to a settlement in this litigation matter and
will pay $100 million. Pursuant to the settlement, in October 2005, Time Warner paid $2.4 billion
into a settlement fund (the “MSBI Settlement Fund”) for the members of the class represented in the
action. In addition, the $150 million previously paid by Time Warner into a fund in connection with
the settlement of the investigation by the U.S. Department of Justice (“DOJ”) was transferred to
the MSBI Settlement Fund, and Time Warner is using its best efforts to have the $300 million it
previously paid in connection with the settlement of its Securities and Exchange Commission (“SEC”)
investigation, or at least a substantial portion thereof, transferred to the MSBI Settlement Fund.
The court issued an order dated April 6, 2006 granting final approval of the settlement.
In addition to the $2.4 billion reserve established in connection with the agreement in
principle regarding the settlement of the MSBI consolidated securities class action, during the
second quarter of 2005, the Company established an additional reserve totaling $600 million in
connection with the other related securities litigation matters (including suits brought by
individual shareholders) described in Note 13 that are pending against the Company. As of May 1,
2006, the Company has reached agreements to resolve the actions alleging violations of the Employee
Retirement Income Security Act (“ERISA”) and the derivative actions, both of which are subject to
preliminary and final court approval, as well as some of the individual suits. Of the $600 million
reserve, through May 1, 2006, the Company has paid, or has agreed to pay, approximately $358
million, after considering probable insurance recoveries, to settle certain of these claims. The
Company has been successful in reaching settlements with respect to certain of the securities
actions brought by individual shareholders. The Company also has engaged in, or expects to engage
in, mediation in an attempt to resolve the additional cases brought by shareholders who elected to
“opt out” of the settlement in the consolidated securities action. Such mediation efforts have not
been fruitful to date in certain of these matters, in which trials are possible and for which
plaintiffs have claimed several billion dollars in aggregated damages. The Company intends to
defend these lawsuits vigorously. It is possible that the ultimate amount paid to resolve all
unsettled litigation in these matters could be greater than the remaining reserve (Note 13).
The Company recognizes insurance
recoveries when it becomes probable that such amounts will be received. Amounts recognized in the first quarter of 2006 and
2005 totaled $50 million and $6 million, respectively. In
2005, the Company reached an agreement with the carriers on its directors and officers insurance policies
in connection with the securities and derivative action matters described above (other than the
actions alleging violations of ERISA). As a result of this agreement, in the fourth quarter, the
Company recorded a recovery of approximately $185 million (bringing the total 2005 recoveries to
$206 million), which was collected in the first quarter of 2006.
35
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Government Investigations
As previously disclosed by the Company, the DOJ and the SEC have resolved their investigations
into the accounting and disclosure practices of the Company, the former through a deferred
prosecution agreement entered into in December 2004 for a two-year period, and the latter through a
settlement agreement that was approved by the SEC in March 2005. These resolutions are described
in more detail in Note 13. The historical accounting adjustments related thereto were reflected in
the restatement of the Company’s financial results for each of the years ended December 31, 2000
through December 31, 2003, included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2004 (the “2004 Form 10-K”).
With respect to the $300 million that was placed into an SEC Fair Fund as a condition of the
SEC settlement, the Company has used its best efforts to have the $300 million, or a substantial
portion thereof, transferred to the MSBI Settlement Fund and distributed in connection with the
eventual distribution of proceeds pursuant to the settlement of the MSBI consolidated securities
class action. However, the SEC, as yet, has not made any determination as to how to distribute
those funds.
Under the terms of the Company’s settlement with the SEC, the Company agreed to the
appointment of an independent examiner to review whether the Company’s historical accounting for
transactions with 17 counterparties, which were identified by the SEC staff, was in conformity with
GAAP. The transactions subject to review were entered into between June 1, 2000 and December 31,
2001 (but including subsequent amendments thereto), and principally involve online advertising
revenues, as well as three cable programming affiliation agreements with related advertising
elements. Revenue related to the 17 transactions principally was recognized prior to January 1,
2002. The independent examiner has been engaged in his review, and, under the terms of the SEC
settlement, is required to provide a report to the Company’s audit and finance committee of his
conclusions, which is expected to occur by the end of the second quarter. At present, the Company
is not aware of any conclusions yet reached by the independent examiner. Depending on the
independent examiner’s conclusions, a further restatement might be necessary. It is also possible
that, so long as there are unresolved issues associated with the Company’s financial statements,
the effectiveness of any registration statement of the Company or its affiliates may be delayed.
Basis of Presentation
Basis of Consolidation
The consolidated financial statements include 100% of the assets, liabilities, revenues,
expenses and cash flows of Time Warner and all entities in which Time Warner has a controlling
voting interest (“subsidiaries”) and variable interest entities (“VIE”) required to be consolidated
in accordance with U.S. generally accepted accounting principles (“GAAP”). Intercompany accounts
and transactions between consolidated companies have been eliminated in consolidation.
The financial position and operating results of substantially all foreign operations are
consolidated using the local currency as the functional currency. Local currency assets and
liabilities are translated at the rates of exchange on the balance sheet date, and local currency
revenues and expenses are translated at average rates of exchange during the period. Resulting
translation gains or losses are included in the accompanying consolidated statement of
shareholders’ equity as a component of Accumulated other comprehensive income, net.
The effects of any changes in the Company’s ownership interests resulting from the issuance of
equity capital by consolidated subsidiaries or equity investees to unaffiliated parties are
accounted for as capital transactions pursuant to the SEC’s Staff Accounting Bulletin No. 51,
“Accounting for Sales of Stock by a Subsidiary.”
Changes in Basis of Presentation
The 2005 financial statements have been recast so that the basis of presentation is consistent
with that of 2006. Specifically, the amounts have been recast for the adoption of Financial
Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS
123R”), a change in accounting principle for recognizing programming inventory costs at HBO and
certain discontinued operations.
36
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock-Based Compensation
The Company has adopted the provisions of FAS 123R, as of January 1, 2006. The provisions of
FAS 123R require a company to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. That cost is
recognized in the statement of operations over the period during which an employee is required to
provide service in exchange for the award. FAS 123R also amends FASB Statement No. 95, “Statement
of Cash Flows,” to require that excess tax benefits, as defined, realized from the exercise of
stock options be reported as a financing cash inflow rather than as a reduction of taxes paid in
cash flow from operations.
Prior to the adoption of FAS 123R, the Company had followed the provisions of FASB Statement
No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), which allowed the Company to follow
the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees,” and disclose the pro forma effects on net income (loss) had the fair
value of the equity awards been expensed. In connection with adopting FAS 123R, the Company elected
to adopt the modified retrospective application method provided by FAS 123R and, accordingly,
financial statement amounts for all prior periods presented herein reflect results as if the fair
value method of expensing had been applied from the original effective date of FAS 123. The
following tables set forth the increase (decrease) to the
Company’s consolidated statements of operations and balance sheets as a result of the adoption of FAS 123R for the three months ended
March 31, 2005 and for the years ended December 31, 2005 and 2004 (in millions, except per share
amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Impact of Change for adoption of FAS 123R |
| |
|
For the three |
|
|
| |
|
months ended |
|
For the year ended |
| |
|
March 31, 2005 |
|
December 31, 2005 |
|
December 31, 2004 |
| |
|
(millions) |
Consolidated Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
127 |
|
|
$ |
316 |
|
|
$ |
540 |
|
Income before income taxes, discontinued
operations and cumulative effect of
accounting change |
|
|
(121 |
) |
|
|
(304 |
) |
|
|
(525 |
) |
Net income |
|
|
(74 |
) |
|
|
(242 |
) |
|
|
(298 |
) |
Net income per share (basic) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.07 |
) |
Net income per share (diluted) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.06 |
) |
| |
|
|
|
|
|
|
|
|
| |
|
Impact of Change |
| |
|
for adoption of FAS 123R |
| |
|
December 31, 2005 |
|
December 31, 2004 |
| |
|
(millions) |
Consolidated Balance Sheet |
|
|
|
|
|
|
|
|
Deferred
income tax liabilities, net |
|
$ |
(2,206 |
) |
|
$ |
(2,360 |
) |
Minority
interest liabilities, net |
|
|
(37 |
) |
|
|
(30 |
) |
Shareholders’ equity |
|
|
2,243 |
|
|
|
2,390 |
|
Prior to the adoption of FAS 123R, the Company recognized stock-based compensation expense for
awards with graded vesting by treating each vesting tranche as a separate award and recognizing
compensation expense ratably for each tranche. For equity awards granted subsequent to the
adoption of FAS 123R, the Company treats such awards as a single award and recognizes stock-based
compensation expense on a straight-line basis (net of estimated forfeitures) over the employee
service period. Stock-based compensation expense is recorded in costs of revenues or selling,
general and administrative expense depending on the employee’s job function.
Additionally, when recording compensation cost for equity awards, FAS 123R requires companies
to estimate the number of equity awards granted that are expected to be forfeited. Prior to the
adoption of FAS 123R, the Company recognized forfeitures when they occurred, rather than using an
estimate at the grant date and subsequently adjusting the estimated forfeitures to reflect actual
forfeitures. Accordingly, a pretax cumulative effect adjustment totaling $40 million ($25 million,
net of tax) has been recorded in the first quarter of 2006 to adjust for awards granted prior to
January 1, 2006, that are not expected to vest.
37
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Change in Accounting Principle for Recognizing Programming Inventory Costs at HBO
Effective January 1, 2006, the Company changed its methodology for recognizing programming
inventory costs (for both theatrical and original programming) at its HBO division. Previously, the
Company recognized HBO’s programming costs on a straight-line basis in the calendar year in which
the related programming first aired on the HBO and Cinemax pay television services. Now the Company
recognizes programming costs on a straight-line basis over the license periods or estimated period
of use of the related shows, beginning with the month of initial exhibition. The Company concluded
that this change in accounting for programming inventory costs was preferable after giving
consideration to the cumulative impact that marketplace and technological changes have had in
broadening the variety of viewing options and period over which consumers are now experiencing
HBO’s programming.
Since this change involves a revision to an inventory costing principle, the change is
reflected retrospectively to all prior periods presented, including the impact that such a change
has on retained earnings for the earliest year presented. Although it was not practical for the
Company to continue to calculate its programming costs using the prior methodology, the Company
believes that the first quarter 2006 statement of operations would not have been materially
different if the prior methodology had been applied. The following
tables set forth certain changes to the Company’s consolidated
statements of operations and balance sheets as a
result of the change in the method of accounting for HBO’s programming inventory costs for the
three months ended March 31, 2005 and for the years ended December 31, 2005 and 2004 (in millions,
except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, 2005 |
| |
|
|
|
|
|
Impact of |
|
|
| |
|
As Reported(a) |
|
Change |
|
As Adjusted |
| |
|
(millions) |
Consolidated Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
$ |
(5,956 |
) |
|
$ |
42 |
|
|
$ |
(5,914 |
) |
Operating Income |
|
|
1,640 |
|
|
|
42 |
|
|
|
1,682 |
|
Income before income taxes, discontinued
operations and cumulative effect of
accounting change |
|
|
1,351 |
|
|
|
42 |
|
|
|
1,393 |
|
Net income |
|
|
889 |
|
|
|
26 |
|
|
|
915 |
|
Net income per share (basic) |
|
$ |
0.19 |
|
|
$ |
0.01 |
|
|
$ |
0.20 |
|
Net income per share (diluted) |
|
$ |
0.19 |
|
|
$ |
— |
|
|
$ |
0.19 |
|
|
|
|
| (a) |
|
Amounts have been adjusted to reflect the impact of adopting FAS 123R and reflecting
certain businesses as discontinued operations. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2005 |
| |
|
|
|
|
|
Impact of |
|
|
| |
|
As Reported(a) |
|
Change |
|
As Adjusted |
| |
|
(millions) |
Consolidated Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
$ |
(24,805 |
) |
|
$ |
(8 |
) |
|
$ |
(24,813 |
) |
Operating Income |
|
|
4,135 |
|
|
|
(8 |
) |
|
|
4,127 |
|
Income before income taxes, discontinued
operations and cumulative effect of
accounting change |
|
|
3,718 |
|
|
|
(8 |
) |
|
|
3,710 |
|
Net income |
|
|
2,662 |
|
|
|
(5 |
) |
|
|
2,657 |
|
Net income per share (basic) |
|
$ |
0.57 |
|
|
$ |
— |
|
|
$ |
0.57 |
|
Net income per share (diluted) |
|
$ |
0.56 |
|
|
$ |
— |
|
|
$ |
0.56 |
|
|
|
|
| (a) |
|
Amounts have been adjusted to reflect the impact of adopting FAS 123R and reflecting
certain businesses as discontinued operations. |
38
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2004 |
| |
|
|
|
|
|
Impact of |
|
|
| |
|
As Reported(a) |
|
Change |
|
As Adjusted |
| |
|
(millions) |
Consolidated Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
$ |
(24,261 |
) |
|
$ |
31 |
|
|
$ |
(24,230 |
) |
Operating Income |
|
|
5,588 |
|
|
|
31 |
|
|
|
5,619 |
|
Income before income taxes, discontinued
operations and cumulative effect of
accounting change |
|
|
4,346 |
|
|
|
31 |
|
|
|
4,377 |
|
Net income |
|
|
3,067 |
|
|
|
19 |
|
|
|
3,086 |
|
Net income per share (basic) |
|
$ |
0.67 |
|
|
$ |
0.01 |
|
|
$ |
0.68 |
|
Net income per share (diluted) |
|
$ |
0.65 |
|
|
$ |
0.01 |
|
|
$ |
0.66 |
|
|
|
|
| (a) |
|
Amounts have been adjusted to reflect the impact of adopting FAS 123R and reflecting
certain businesses as discontinued operations. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2005 |
| |
|
|
|
|
|
Impact of |
|
|
| |
|
As Reported(a) |
|
Change |
|
As Adjusted |
| |
|
(millions) |
Consolidated Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories (current and non current) |
|
$ |
6,347 |
|
|
$ |
339 |
|
|
$ |
6,686 |
|
Accumulated deficit |
|
|
(98,198 |
) |
|
|
213 |
|
|
|
(97,985 |
) |
|
|
|
| (a) |
|
Amounts have been adjusted to reflect the impact of adopting FAS 123R and reflecting
certain businesses as discontinued operations. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 |
| |
|
|
|
|
|
Impact of |
|
|
| |
|
As Reported(a) |
|
Change |
|
As Adjusted |
| |
|
(millions) |
Consolidated Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories (current and non current) |
|
$ |
6,101 |
|
|
$ |
352 |
|
|
$ |
6,453 |
|
Accumulated deficit |
|
|
(100,394 |
) |
|
|
218 |
|
|
|
(100,176 |
) |
|
|
|
| (a) |
|
Amounts have been adjusted to reflect the impact of adopting FAS 123R and reflecting
certain businesses as discontinued operations. |
Discontinued Operations
As discussed more fully in Note 4, the Company has reflected the operations of Time Warner
Book Group (“TWBG”) and Turner South network (“Turner South”) as discontinued operations for all
periods presented.
Reclassifications
Certain reclassifications have been made to the prior year financial information to conform to
the March 31, 2006 presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the accompanying consolidated financial
statements include reserves established for securities litigation matters, accounting for asset
impairments, allowances for doubtful accounts, depreciation and amortization, film ultimate
revenues, home video and magazine returns, business combinations, pensions and other postretirement
benefits, income taxes, contingencies and certain programming arrangements.
39
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interim Financial Statements
The accompanying consolidated financial statements are unaudited; however, in the opinion of
management, they contain all the adjustments (consisting of those of a normal recurring nature)
considered necessary to present fairly the financial position and the results of operations and
cash flows for the periods presented in conformity with GAAP applicable to interim periods. The
accompanying consolidated financial statements should be read in conjunction with the audited
consolidated financial statements of Time Warner included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2005 (the “2005 Form 10-K”).
Income Per Common Share
Basic income per common share is computed by dividing the net income applicable to common
shares after preferred dividend requirements, if any, by the weighted average of common shares
outstanding during the period. Weighted-average common shares include shares of Time Warner’s
common stock and Series LMCN-V common stock. Diluted income per common share adjusts basic income
per common share for the effects of convertible securities, stock options, restricted stock and
other potentially dilutive financial instruments, only in the periods in which such effect is
dilutive.
Set forth below is a reconciliation of basic and diluted income per common share before
discontinued operations and cumulative effect of accounting change:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions, except per share |
|
| |
|
amounts) |
|
Income before discontinued operations and cumulative
effect of accounting change — basic and diluted |
|
$ |
1,198 |
|
|
$ |
908 |
|
|
|
|
|
|
|
|
Average number of common shares outstanding — basic |
|
|
4,499.5 |
|
|
|
4,587.8 |
|
Dilutive effect of stock options and restricted stock |
|
|
43.4 |
|
|
|
51.6 |
|
Dilutive effect of mandatorily convertible preferred stock |
|
|
— |
|
|
|
82.9 |
|
|
|
|
|
|
|
|
Average number of common shares outstanding — diluted |
|
|
4,542.9 |
|
|
|
4,722.3 |
|
|
|
|
|
|
|
|
Income per common share before discontinued operations and
cumulative effect of accounting change: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.27 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.26 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
2. INTANGIBLE ASSETS
As a result of increased competition in the publishing business related to certain magazine
titles, indefinite-lived tradename intangibles totaling approximately $1.3 billion at December 31,
2005 were assigned a 25-year finite life and began to be amortized in January 2006. The impact of
amortizing such tradenames in 2006 and beyond will be approximately $50 million annually. Based on
the current amount of intangible assets subject to amortization, the total estimated amortization
expense for each of the succeeding five years ended December 31 is as follows (millions):
| |
|
|
|
|
2006 |
|
$ |
482 |
|
2007 |
|
|
390 |
|
2008 |
|
|
354 |
|
2009 |
|
|
302 |
|
2010 |
|
|
304 |
|
These amounts may vary as acquisitions and dispositions occur in the future and as purchase
price allocations are finalized.
3. STOCK-BASED COMPENSATION PLANS
The Company has two active equity plans under which it is authorized to grant options to
purchase up to an aggregate of 300 million shares of Time Warner common stock. Such 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 options vest ratably,
over a four-year vesting period, and expire ten years from the date of grant. Certain option
awards provide for accelerated vesting
40
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Time Warner also has various restricted stock plans for employees and non-employee directors.
Under these plans, shares of common stock or restricted stock units (“RSUs”) are granted, which
vest generally between three to five years. 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. For the three months ended March 31, 2006, the Company issued
approximately 3.8 million RSUs at a weighted-average fair value of $17.40. For the three months
ended March 31, 2005, the Company issued approximately 3.4 million RSUs at a weighted-average fair
value of $17.97.
Upon the exercise of a stock option award, the vesting of a RSU or the grant of restricted
stock, common shares are issued from authorized but unissued shares or from treasury stock. At
March 31, 2006 and December 31, 2005, the Company had approximately 441 million and 208 million,
respectively, shares of treasury stock. As noted in Note 9, for the three months ended March 31, 2006 and the year ended December
31, 2005, the Company has repurchased approximately 233 million and 126 million, respectively,
shares of common stock pursuant to a Board approved stock repurchase program.
Certain information for stock-based compensation plans for the three months ended March 31,
2006 and 2005 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(millions) |
|
Compensation Cost Recognized: |
|
|
|
|
|
|
|
|
Stock option plans |
|
$ |
80 |
|
|
$ |
125 |
|
Restricted stock and restricted stock units |
|
|
28 |
|
|
|
7 |
|
Stock purchase plan(a) |
|
|
— |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
108 |
|
|
$ |
134 |
|
|
|
|
|
|
|
|
Tax benefit recognized |
|
$ |
40 |
|
|
$ |
51 |
|
|
|
|
| (a) |
|
Prior to 2006, the Company had a compensatory Stock Purchase Plan
that provided certain employees in the AOL division with the ability to purchase Company stock
at a 15% discount. In late 2005, the plan was amended to reduce the discount to 5% and is no
longer a compensatory Stock Purchase Plan under applicable accounting literature. |
Other information pertaining to each category of stock-based compensation appears below.
Stock Option Plans
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model, consistent with the provisions of FAS 123R and SEC Staff Accounting Bulletin
No. 107 “Share-Based Payment.” Because option-pricing models require the use of subjective
assumptions, changes in these assumptions can materially affect the fair value of the options. The
assumptions presented in the table below represent the weighted average value of the applicable
assumption used to value stock options at their grant date. In determining the volatility
assumption, the Company considers implied volatilities from traded options as well as quotes from
third-party investment banks. The expected term, which represents the period of time that options
granted are expected to be outstanding, is estimated based on the historical exercise experience of
Time Warner employees. The Company evaluated the historical exercise behaviors of five employee
groups, one of which related to retirement-eligible employees while the other four of which were
segregated based on the number of options granted, when determining the expected term assumptions.
The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in
effect at the time of grant for the expected term of the option. The Company determines the
expected dividend yield percentage by dividing the expected annual dividend by the market price of
Time Warner common stock at the date of grant.
41
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2006 |
|
2005 |
Expected volatility |
|
|
22.2 |
% |
|
|
24.4 |
% |
Expected term to exercise from grant date |
|
5.08 years |
|
|
4.79 years |
|
Risk-free rate |
|
|
4.6 |
% |
|
|
3.9 |
% |
Expected dividend yield |
|
|
1.1 |
% |
|
|
0 |
% |
The following table summarizes information about stock options outstanding at March 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
|
|
| |
|
Number |
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
| |
|
of Options |
|
|
Exercise |
|
|
Life (In |
|
|
Intrinsic |
|
| Options |
|
as of 3/31/06 |
|
|
Price |
|
|
Years) |
|
|
Value |
|
| |
|
(thousands) |
|
|
|
|
|
|
|
|
|
|
(thousands) |
|
Outstanding at January 1, 2006 |
|
|
590,687 |
|
|
$ |
30.48 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
51,557 |
|
|
|
17.40 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(20,731 |
) |
|
|
11.72 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(25,402 |
) |
|
|
42.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
596,111 |
|
|
|
29.51 |
|
|
|
5.68 |
|
|
$ |
708,675 |
|
Exercisable at March 31, 2006 |
|
|
453,625 |
|
|
|
33.34 |
|
|
|
4.76 |
|
|
$ |
595,165 |
|
At March 31, 2006, the number, weighted-average exercise price, aggregate intrinsic value and
weighted-average remaining contractual term of options vested and expected to vest approximate
amounts for options outstanding. As of March 31, 2006, approximately 70 million shares were
available for future grants of stock options. Total unrecognized compensation cost related to
unvested stock option awards at March 31, 2006 prior to the consideration of expected forfeitures
is approximately $384 million and is expected to be recognized over a weighted-average period of 2
years.
The weighted average fair value of an option granted during the three months ended March 31,
2006 and 2005 was $4.46 ($2.77 net of taxes) and $5.14 ($3.08, net of taxes), respectively. The
total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005
was $120 million and $123 million, respectively. Cash received from the exercise of stock options
was $242 million and $99 million, respectively, for the three months ended March 31, 2006 and 2005.
The tax benefits realized from stock options exercised in the three months ended March 31, 2006 and
2005 were approximately $46 million and $49 million, respectively.
Restricted Stock and Restricted Stock Unit Plans
The following table summarizes information about restricted stock and RSUs unvested at March 31,
2006:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
| |
|
Number of |
|
Average |
| |
|
Shares/Units |
|
Grant Date |
| Restricted Stock and Restricted Stock Units |
|
as of 3/31/06 |
|
Fair Value |
| |
|
(thousands) |
|
|
|
|
Unvested at January 1, 2006 |
|
|
7,960 |
|
|
$ |
16.32 |
|
Granted |
|
|
3,824 |
|
|
|
17.40 |
|
Vested |
|
|
(944 |
) |
|
|
18.01 |
|
Forfeited |
|
|
(90 |
) |
|
|
16.86 |
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2006 |
|
|
10,750 |
|
|
|
17.07 |
|
At March 31, 2006, the intrinsic value of restricted stock and restricted stock unit awards is
approximately $180 million. Total unrecognized compensation cost related to unvested restricted
stock and restricted stock unit awards at March 31, 2006 prior to the consideration of expected
forfeitures is approximately $106 million and is expected to be recognized over a weighted-average
period of 2 years. The fair value of restricted stock and restricted stock units that vested
during the three months ended March 31, 2006 was approximately $17 million.
42
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. BUSINESS ACQUISITIONS AND DISPOSITIONS
Sale of Time Warner Book Group
On March 31, 2006, the Company sold Time Warner Book Group (“TWBG”) to Hachette Livre SA, a
wholly-owned subsidiary of Lagardère SCA, for $532 million in cash, resulting in a pretax gain of
approximately $206 million, after taking into account selling costs and estimated working capital
adjustments. As a result of the sale, TWBG has been reflected as discontinued operations for all
periods presented. A tax benefit of $22 million was also recognized on this transaction resulting
primarily from the release of a valuation allowance associated with tax attribute carryforwards
offsetting the tax gain on the transaction.
Sale of Turner South
On February 23, 2006, the Company announced an agreement to sell the Turner South network
(“Turner South”), a subsidiary of Turner, to Fox Cable Networks, Inc. for approximately $375
million in cash. This transaction closed on May 1, 2006. The
results of Turner South have been reflected as discontinued operations for all periods presented.
The Company expects to record a pretax gain ranging from approximately $120 million to $140 million
(after taking into account selling costs) in the second quarter of 2006. Since the Company has
sufficient tax attribute carryforwards to offset the gain, there will not be any tax expense
recognized on the sale of Turner South. As of March 31, 2006, Turner South had assets of
approximately $230 million.
Financial data for TWBG and Turner South operations, included in discontinued operations for
the three months ended March 31, 2006 and 2005, is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
March 31, |
| |
|
2006 |
|
2005 |
| |
|
(millions) |
Total revenues |
|
$ |
125 |
|
|
$ |
120 |
|
Pretax income |
|
|
210 |
|
|
|
11 |
|
Income tax benefit |
|
|
22 |
|
|
|
(4 |
) |
Net income |
|
|
232 |
|
|
|
7 |
|
The WB Network
On January 24, 2006, Warner Bros. and CBS Corp. (“CBS”) announced an agreement to form a new
fully-distributed national broadcast network, to be called The CW. At the same time, Warner Bros.
and CBS are preparing to cease the standalone operations of The WB Network and UPN, respectively,
at the end of the 2005/2006 television season (September 2006). Warner Bros. and CBS will each own
50% of the new network and will have joint and equal control. In addition, Warner Bros. has reached
an agreement with Tribune Corp. (“Tribune”), currently a subordinated 22.25% limited partner in The
WB Network, under which Tribune will surrender its ownership interest in The WB Network and will be
relieved of funding obligations. In addition, Tribune will become one of the principal affiliate
groups for the new network.
Upon the closing of this transaction, the Company will account for its investment in The CW
under the equity method of accounting. The Company anticipates that prior to the closing of this
transaction it will incur restructuring charges ranging from $25 million to $30 million related to
employee terminations and contractual settlements. In addition, The WB Network may incur up to $100
million in terminating certain programming arrangements (primarily licensed movie rights), most of
which are not expected to be contributed to the new network and may not be sold or utilized in
another manner. Included in these costs are approximately $70 million associated with intercompany
programming arrangements with Warner Bros. and New Line. Any costs incurred by The WB Network on
such intercompany programming would be largely offset by amounts recognized by Warner Bros. and New
Line, with the impact of all intercompany transactions being eliminated in consolidation. Excluding
the impact of these intercompany transactions, the anticipated exit costs to the Company of
programming arrangements and employee and other contractual arrangements range from approximately
$55 million to $60 million.
AOL-Google Alliance
During December 2005, the Company announced that AOL is expanding its current strategic
alliance with Google Inc. (“Google”) to enhance its global online advertising partnership and make
more of AOL’s content available to Google users. In addition, Google agreed to invest $1 billion to
acquire a 5% equity interests in a limited liability company that owns all of the outstanding
equity
43
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
interest in AOL. On March 24, 2006, the Company and Google signed definitive agreements
governing the investment and the commercial arrangements. Under the alliance, Google will continue
to provide search technology to AOL’s network of Internet properties worldwide and provide AOL with
an improved share in revenues generated through search conducted on the AOL network. Other key
aspects of the alliance include:
| |
• |
|
Creating an AOL Marketplace through white labeling of Google’s advertising technology,
which enables AOL to sell search advertising directly to advertisers on AOL-owned
properties; |
| |
| |
• |
|
Providing AOL $300 million of marketing credits for promotion of AOL’s content on
Google-owned Internet properties as well as $100 million of AOL/Google co-sponsored
promotion of AOL properties; |
| |
| |
• |
|
Collaborating in video search and promoting the AOL Video destination within Google
Video; and |
| |
| |
• |
|
Enabling Google Talk and AIM instant messaging users to communicate with each other,
provided certain conditions are met. |
AOL and Google also agreed to collaborate in the future to expand on the alliance, including
the possible sale by AOL of display advertising on the Google network.
On April 13, 2006, the Company completed its issuance of a 5% equity interest in AOL to Google
for $1 billion in cash. In accordance with Staff Accounting Bulletin No. 51, Accounting for the
Sales of Stock of a Subsidiary, Time Warner will recognize a gain of approximately $800 million,
which will be reflected in shareholders’ equity, as an adjustment to paid-in capital in the second
quarter of 2006.
5. TIME WARNER CABLE INC.
Ownership
Comcast Corporation (“Comcast”) has a 21% economic interest in Time Warner Cable Inc.’s
(“TWC”) cable business held through a 17.9% direct common ownership interest in TWC (representing a
10.7% voting interest) and a limited partnership interest in Time Warner Entertainment Company,
L.P. (“TWE”) representing a 4.7% residual equity interest. Time Warner’s 79% economic interest in
TWC’s cable business is held through an 82.1% common ownership interest in TWC (representing an
89.3% voting interest) and a limited partnership interest in TWE representing a 1% residual equity
interest. Time Warner also holds a $2.4 billion mandatorily redeemable preferred equity interest in
TWE. The remaining interests in TWE are held indirectly by TWC.
Adelphia/Comcast
Adelphia Acquisition Agreement
On April 20, 2005, a subsidiary of TWC, Time Warner NY Cable LLC (“TW NY”), and Comcast each
entered into separate definitive agreements with Adelphia Communications Corporation (“Adelphia”)
to, collectively, acquire substantially all the assets of Adelphia for a total of $12.7 billion in
cash (of which TW NY will pay $9.2 billion and Comcast will pay the remaining $3.5 billion) and 16%
of the common stock of TWC (the “Adelphia Acquisition”).
At the same time that Comcast and TW NY entered into the Adelphia Acquisition agreements,
Comcast, TWC and/or their respective affiliates entered into agreements providing for the
redemption of Comcast’s interests in TWC and TWE (the “TWC Redemption Agreement” and the “TWE
Redemption Agreement,” respectively, and, collectively, the “TWC and TWE Redemption Agreements”).
Specifically, Comcast’s 17.9% interest in TWC will be redeemed in exchange for 100% of the capital
stock of a subsidiary of TWC holding cable systems serving approximately 587,000 subscribers (as of
December 31, 2004), as well as approximately $1.9 billion in cash. In addition, Comcast’s 4.7%
interest in TWE will be redeemed in exchange for 100% of the equity interests in a subsidiary of
TWE holding cable systems serving approximately 168,000 subscribers (as of December 31, 2004), as
well as approximately $133 million in cash. TWC, Comcast and their respective subsidiaries will
also swap certain cable systems to enhance their respective geographic clusters of subscribers (the
“Cable Swaps”).
After giving effect to the transactions, TWC will gain systems passing approximately 7.5
million homes, with approximately 3.5 million basic subscribers (each as of December 31, 2004). TWC
will then manage a total of approximately 14.4 million basic subscribers (as of December 31, 2004).
Time Warner will own 84% of TWC’s common stock (including 83% of the outstanding TWC Class A Common
Stock, which will become publicly traded at the time of closing, and all outstanding shares of TWC
Class B Common Stock) as well as an indirect non-voting economic interest in TW NY, a subsidiary of
TWC, valued at $2.9 billion at the time of entering into the agreement.
44
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The transactions are subject to customary regulatory review and approvals, including antitrust
review by the Federal Trade Commission (“FTC”) pursuant to the Hart-Scott-Rodino Act, review by the
Federal Communications Commission (“FCC”) and local franchise approvals, as well as, in the case of
the Adelphia Acquisition, the Adelphia bankruptcy process, which involves approvals by the
bankruptcy court having jurisdiction over Adelphia’s Chapter 11 case and Adelphia’s creditors. On
January 31, 2006, the FTC completed its antitrust review of the transaction and closed its
investigation without further action. The parties are awaiting final clearance from the FCC and
certain local franchise approvals, as well as completion of the bankruptcy process. The parties
expect to close the Adelphia Acquisition on or before July 31, 2006.
The closing of the Adelphia Acquisition is not dependent on the closing of the Cable Swaps or
the transactions contemplated by the TWC and TWE Redemption Agreements. Furthermore, if Comcast
fails to obtain certain necessary governmental authorizations, TW NY has agreed to acquire the
cable operations of Adelphia that would have been acquired by Comcast, with the purchase price
payable in cash or TWC stock at TWC’s discretion.
Pursuant to registration rights granted to Comcast and certain of its affiliates in
conjunction with the restructuring of TWE in 2003, TWC has an obligation to file a shelf
registration statement with the SEC by June 1, 2006 covering all the shares of TWC Class A Common
Stock held by Comcast and its affiliates if the transactions contemplated by the TWC Redemption
Agreement have not occurred as of such date.
6. TIME WARNER TELECOM
As of December 31, 2005, wholly-owned subsidiaries of the Company owned a total of 50.4
million shares of Class B common stock of Time Warner Telecom Inc. (“TWT”), a publicly traded
telecommunications company. The Company accounts for this investment using the equity method of
accounting and, as a result of the Company’s share in losses of TWT and impairment losses
recognized in previous years, the carrying value of the investment is zero. In the first quarter
of 2006, the Company’s subsidiaries participated as selling shareholders in a TWT secondary
offering, converted approximately 17 million shares of Class B common stock into Class A common
stock of TWT and sold the Class A common stock for approximately $239 million, net of underwriter
commissions. This sale resulted in a pretax gain of approximately $239 million, which is included
as a component of Other income, net, in the accompanying consolidated statement of operations for
the three months ended March 31, 2006. The Company does not consider its remaining investment in
TWT to be strategic and, therefore, additional sales or other dispositions may occur in the future,
subject to customary restrictions on transfer agreed to in connection with the offering and as
provided in a stockholders agreement among the holders of the Class B common stock of TWT.
45
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. INVENTORIES AND FILM COSTS
Inventories and film costs consist of:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
Programming costs, less amortization |
|
$ |
3,297 |
|
|
$ |
3,261 |
|
Videocassettes, DVDs, books, paper and other merchandise |
|
|
451 |
|
|
|
410 |
|
Film costs — Theatrical: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
565 |
|
|
|
724 |
|
Completed and not released |
|
|
219 |
|
|
|
123 |
|
In production |
|
|
806 |
|
|
|
782 |
|
Development and pre-production |
|
|
85 |
|
|
|
80 |
|
Film costs — Television: |
|
|
|
|
|
|
|
|
Released, less amortization |
|
|
494 |
|
|
|
529 |
|
Completed and not released |
|
|
225 |
|
|
|
230 |
|
In production |
|
|
663 |
|
|
|
545 |
|
Development and pre-production |
|
|
7 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total inventories and film costs(a) |
|
|
6,812 |
|
|
|
6,686 |
|
Less: current portion of inventory(b) |
|
|
(2,134 |
) |
|
|
(2,041 |
) |
|
|
|
|
|
|
|
Total noncurrent inventories and film costs |
|
$ |
4,678 |
|
|
$ |
4,645 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Does not include $2.847 billion and $2.903 billion of net film library
costs as of March 31, 2006 and December 31, 2005, respectively, which are included in
intangible assets subject to amortization on the accompanying consolidated balance sheet. |
| |
| (b) |
|
Current inventory as of March 31, 2006 and December 31, 2005 is comprised
of programming inventory at the Networks segment ($1.685 billion and $1.629 billion,
respectively), books, magazines, paper and other merchandise at the Publishing segment ($189
million and $170 million, respectively), DVDs and videocassettes at the Filmed Entertainment
segment ($258 million and $239 million, respectively) and general merchandise at the AOL
segment ($2 million and $3 million, respectively). |
8. AOL TERM LOAN
On April 13, 2006, TW AOL Holdings Inc., a wholly owned subsidiary of Time Warner, entered
into a $500 million term loan with a maturity date of April 13, 2009 (the “AOL Facility”).
Simultaneous with the Google investment of $1 billion for a 5% equity interest in AOL Holdings LLC,
a subsidiary of TW AOL Holdings Inc. and the parent of AOL, the liability under the AOL Facility
was assigned to AOL Holdings LLC. Immediately following, the AOL Facility was assigned from AOL
Holdings LLC to AOL. The AOL Facility is not guaranteed by Time Warner. Borrowings under the AOL
Facility bear interest at a rate based on the credit rating of Time Warner, which rate is currently
LIBOR plus 0.45% per annum. The AOL Facility includes a maximum leverage ratio covenant
restricting consolidated total debt of AOL to 4.5 times the consolidated EBITDA (as defined in the
credit agreement) of AOL (excluding AOL guarantees of Time Warner’s and its other subsidiaries’
debt obligations). The AOL Facility does not contain any credit ratings-based defaults or covenants
or any ongoing covenant or representation specifically relating to a material adverse change in
Time Warner’s or AOL’s financial condition or results of operations. The proceeds of the AOL
Facility were used to pay off $500 million of the $1 billion 6.125% Time Warner notes due April 15,
2006.
9. SHAREHOLDERS’ EQUITY
Shares Authorized and Outstanding
As of March 31, 2006, shareholders’ equity of Time Warner included 92.6 million shares of
Series LMCN-V common stock and 4.298 billion shares of common stock (net of approximately 441
million shares of common stock held in treasury). As of March 31, 2006, Time Warner is authorized
to issue up to 750 million shares of preferred stock, up to 25 billion shares of common stock and
up to 1.8 billion shares of additional classes of common stock, including Series LMCN-V common
stock. Shares of Series LMCN-V common stock have substantially identical rights as shares of Time
Warner’s common stock, except that shares of Series LMCN-V common stock have limited voting rights
and are nonredeemable. The holders of Series LMCN-V common stock are entitled to 1/100 of a vote
per share on the election of directors and do not have any other voting rights, except as required
by law or with respect to limited matters, including amendments to the terms of the Series LMCN-V
common stock adverse to such holders. The Series LMCN-V common stock is not transferable, except in
limited circumstances, and is not listed on any securities exchange. Each share of Series
46
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
LMCN-V common stock is convertible into one share of Time Warner common stock at any time,
assuming certain restrictive provisions have been met. During the first quarter of 2006, 5.4
million shares of common stock were converted into 5.4 million shares of Series LMCN-V common
stock. This conversion partially reverses the conversion of 9.4 million shares of Series LMCN-V
common stock into common stock that took place on February 1, 2005 to facilitate Liberty Media’s
stock loan arrangement.
Common Stock Repurchase Program
Time Warner’s Board of Directors has authorized a common stock repurchase program that
allows the Company to purchase up to an aggregate of $20 billion of common stock during the period
from July 29, 2005 through December 31, 2007. Purchases under the stock repurchase program may be
made from time to time on the open market and in privately negotiated transactions. Size and timing
of these purchases will be based on a number of factors, including price and business and market
conditions. As announced on February 1, 2006, the Company increased the pace of stock repurchases
during the first quarter of 2006. At existing price levels, the Company intends to continue the
current pace of purchases under its stock repurchase program within its stated objective of
maintaining a net debt-to-Operating Income before Depreciation and
Amortization ratio, as defined, of
approximately 3-to-1, and expects it will have purchased approximately $15 billion of its common
stock under the program by the end of 2006, and the remainder in 2007. From the program’s inception
through March 31, 2006, the Company repurchased approximately 359 million shares of common stock
for approximately $6.3 billion pursuant to trading programs under Rule 10b5-1 of the Securities
Exchange Act of 1934, as amended.
Common Stock Dividends
On March 15, 2006, the Company paid a cash dividend of $0.05 per share on its common stock to
shareholders of record on February 28, 2006. The total amount of dividends paid during the first
quarter of 2006 was $225 million.
10. BENEFIT PLANS
Time Warner and certain of its subsidiaries have both funded and unfunded noncontributory
defined benefit pension plans covering a majority of domestic employees and, to a lesser extent,
have various defined benefit plans covering international employees. Pension benefits are based on
formulas that reflect the employees’ years of service and compensation during their employment
period and participation in the plans. Time Warner uses a December 31 measurement date for the
majority of its plans. A summary of the components of the net periodic benefit cost recognized by
substantially all of Time Warner’s domestic and international defined benefit pension plans for the
three months ending March 31, 2006 and 2005 are as follows (millions):
Components of Net Periodic Benefit Costs
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Domestic |
|
|
International |
|
| |
|
March 31, |
|
|
March 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
| |
|
(millions) |
|
|
(millions) |
|
Service cost |
|
$ |
42 |
|
|
$ |
31 |
|
|
$ |
6 |
|
|
$ |
5 |
|
Interest cost |
|
|
46 |
|
|
|
42 |
|
|
|
9 |
|
|
|
9 |
|
Expected return on plan assets |
|
|
(57 |
) |
|
|
(49 |
) |
|
|
(13 |
) |
|
|
(10 |
) |
Amounts amortized |
|
|
18 |
|
|
|
13 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs |
|
$ |
49 |
|
|
$ |
37 |
|
|
$ |
4 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions |
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. There currently are no minimum
required contributions for domestic funded plans and no discretionary or noncash contributions are
currently planned. For domestic unfunded plans, contributions will continue to be made to the
extent benefits are paid. Expected benefit payments for domestic unfunded plans for 2006 is
approximately $18 million.
47
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. MERGER AND RESTRUCTURING COSTS
Merger Costs
Adelphia Merger-Related Costs
For the year ended December 31, 2005 and for the three months ended March 31, 2006, the
Company incurred non-capitalizable merger-related costs of approximately $8 million and $4 million,
respectively, at the Cable segment related primarily to consulting fees covering integration
planning for the Adelphia Acquisition and the Cable Swaps. None of the 2005 charges occurred in the
first quarter of 2005.
As of March 31, 2006, payments of $7 million ($3 million in the first quarter of 2006) have
been made against this accrual. The remaining $5 million was classified as a current liability in
the accompanying consolidated balance sheet.
Merger Costs Capitalized as a Cost of Acquisition
In connection with the AOL-Historic TW Merger, the Company reviewed its operations and
implemented several plans to restructure the operations of both companies. As of December 31, 2005,
out of the original $1.031 billion charge, approximately $32 million of liabilities remained.
During the first quarter of 2006, $5 million was paid against these liabilities and $1 million was
recorded as a noncash reduction, which represents adjustments to the restructuring accrual, with a
corresponding reduction in goodwill, as actual costs related to employee terminations and other
exit costs were less than originally estimated.
As of March 31, 2006, out of the remaining liability of $26 million, $5 million was classified
as a current liability, with the remaining $21 million classified as a long-term liability in the
accompanying consolidated balance sheet. Amounts are expected to be paid through 2013.
Restructuring Costs
2006 Restructuring Costs
For the three months ended March 31, 2006, the Company incurred restructuring costs of
approximately $23 million, including $6 million at the Cable segment, $12 million at the Publishing
segment and $5 million at the Corporate segment. These charges primarily related to various
employee terminations and the total number of employees terminated was 172. As of March 31, 2006,
158 employees had been terminated. During the first quarter of 2006, $2 million was paid against
these liabilities.
As of March 31, 2006, out of the remaining liability of $21 million, $15 million was
classified as a current liability, with the remaining $6 million classified as a long-term
liability in the accompanying consolidated balance sheet. Amounts are expected to be paid through
2009.
2005 Restructuring Costs
During 2005, the Company incurred restructuring costs of approximately $116 million, including
$17 million at the AOL segment, $34 million at the Cable segment, $33 million at the Filmed
Entertainment segment, $4 million at the Networks segment and $28 million at the Publishing
segment. These charges primarily related to various employee terminations and the total number of
employees terminated was 1,333. As of March 31, 2006, all employees had been terminated. The
termination costs occurred across each of the segments and ranged from senior executives to line
personnel. In addition, in the first quarter of 2006, the Company incurred $3 million of additional
restructuring charges ($2 million at the Filmed Entertainment segment and $1 million at the AOL
segment) as a result of changes in estimates of previously established restructuring accruals.
As of March 31, 2006, out of the remaining liability of $66 million, $45 million was
classified as a current liability, with the remaining $21 million classified as a long-term
liability in the accompanying consolidated balance sheet. Amounts are expected to be paid through
2011.
48
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Selected information relating to the 2005 restructuring costs is as follows (millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee |
|
|
Other |
|
|
|
|
| |
|
Terminations |
|
|
Exit Costs |
|
|
Total |
|
2005 accruals (a) |
|
$ |
109 |
|
|
$ |
7 |
|
|
$ |
116 |
|
Cash paid — 2005(b) |
|
|
(23 |
) |
|
|
(2 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of December 31,
2005 |
|
|
86 |
|
|
|
5 |
|
|
|
91 |
|
Additional accruals |
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
Cash paid — 2006 |
|
|
(27 |
) |
|
|
(1 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of March 31, 2006 |
|
$ |
62 |
|
|
$ |
4 |
|
|
$ |
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Of the $116 million charge, $17 million was incurred during the three months
ended March 31, 2005. |
| |
| (b) |
|
Of the $25 million paid in 2005, no payments were made during the three months
ended March 31, 2005. |
2004 and Prior Restructuring Costs
The Company incurred various restructuring charges prior to 2005 with remaining accruals
totaling $34 million as of December 31, 2005 and $28 million as of March 31, 2006. During the first
quarter of 2006, $6 million was paid against these liabilities and there were no noncash reductions
during the first quarter of 2006. The first quarter of 2005 results included a $5 million net
noncash reduction as a result of changes in estimates of previously established restructuring
accruals that were no longer required at the AOL segment.
As of March 31, 2006, out of the remaining liability of $28 million, $8 million was classified
as a current liability, with the remaining $20 million classified as a long-term liability in the
accompanying consolidated balance sheet. Amounts are expected to be paid through 2013.
12. SEGMENT INFORMATION
Time Warner classifies its business interests into five reportable segments: AOL, consisting
principally of interactive services; Cable, consisting principally of interests in cable systems
that provide video, high-speed data and Digital Phone services; Filmed Entertainment, consisting
principally of feature film, television and home video production and distribution; Networks,
consisting principally of cable television and broadcast networks; and Publishing, consisting
principally of magazine publishing.
Information as to the operations of Time Warner in each of its business segments is set forth
below based on the nature of the products and services offered. Time Warner evaluates performance
based on several factors, of which the primary financial measure is operating income before
depreciation of tangible assets and amortization of intangible assets (“Operating Income before
Depreciation and Amortization”). Additionally, the Company has provided a summary of Operating
Income by segment.
Three Months Ended March 31, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Subscription |
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
1,538 |
|
|
$ |
392 |
|
|
$ |
— |
|
|
$ |
51 |
|
|
$ |
1,981 |
|
Cable |
|
|
2,463 |
|
|
|
117 |
|
|
|
— |
|
|
|
— |
|
|
|
2,580 |
|
Filmed Entertainment |
|
|
— |
|
|
|
— |
|
|
|
2,709 |
|
|
|
70 |
|
|
|
2,779 |
|
Networks |
|
|
1,442 |
|
|
|
702 |
|
|
|
195 |
|
|
|
12 |
|
|
|
2,351 |
|
Publishing |
|
|
372 |
|
|
|
583 |
|
|
|
20 |
|
|
|
151 |
|
|
|
1,126 |
|
Intersegment elimination |
|
|
(148 |
) |
|
|
(33 |
) |
|
|
(168 |
) |
|
|
(13 |
) |
|
|
(362 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
5,667 |
|
|
$ |
1,761 |
|
|
$ |
2,756 |
|
|
$ |
271 |
|
|
$ |
10,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended March 31, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Subscription |
|
|
|
Advertising |
|
|
Content |
|
|
Other |
|
|
Total |
|
| |
|
(millions) |
| |
|
(recast) |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOL |
|
$ |
1,774 |
|
|
|
$ |
311 |
|
|
$ |
— |
|
|
$ |
48 |
|
|
$ |
2,133 |
|
Cable |
|
|
2,127 |
|
|
|
|
119 |
|
|
|
— |
|
|
|
— |
|
|
|
2,246 |
|
Filmed Entertainment |
|
|
— |
|
|
|
|
3 |
|
|
|
2,951 |
|
|
|
60 |
|
|
|
3,014 |
|
Networks |
|
|
1,334 |
|
|
|
|
681 |
|
|
|
253 |
|
|
|
7 |
|
|
|
2,275 |
|
Publishing |
|
|
381 |
|
|
|
|
571 |
|
|
|
20 |
|
|
|
157 |
|
|
|
1,129 |
|
Intersegment elimination |
|
|
(131 |
) |
|
|
|
(40 |
) |
|
|
(248 |
) |
|
|
(15 |
) |
|
|
(434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
5,485 |
|
|
|
$ |
1,645 |
|
|
$ |
2,976 |
|
|
$ |
257 |
|
|
$ |
10,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment Revenues
In the normal course of business, the Time Warner segments enter into transactions with one
another. The most common types of intersegment transactions include:
| |
• |
|
The Filmed Entertainment segment generating Content revenues by licensing television and
theatrical programming to the Networks segment; |
| |
| |
• |
|
The Networks segment generating Subscription revenues by selling cable network
programming to the Cable segment; |
| |
| |
• |
|
The AOL, Cable, Networks and Publishing segments generating Advertising revenues by
cross-promoting the products and services of all Time Warner segments; and |
| |
| |
• |
|
The AOL segment generating Other revenues by providing the Cable segment’s customers
access to the AOL Transit Data Network for high-speed access to the Internet. |
These intersegment transactions are recorded by each segment at estimated fair value as if the
transactions were with third parties and, therefore, impact segment performance. While intersegment
transactions are treated like third-party transactions to determine segment performance, the
revenues (and corresponding expenses or assets recognized by the segment that is counterparty to
the transaction) are eliminated in consolidation and, therefore, do not themselves impact
consolidated results. Additionally, transactions between divisions within the same reporting
segment (e.g., a transaction between HBO and Turner within the Networks segment) are eliminated in
arriving at segment performance and, therefore, do not themselves impact segment results. Revenues
recognized by Time Warner’s segments on intersegment transactions are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
Intersegment Revenues(a) |
|
|
|
|
|
|
|
|
AOL |
|
$ |
14 |
|
|
$ |
6 |
|
Cable |
|
|
7 |
|
|
|
10 |
|
Filmed Entertainment |
|
|
155 |
|
|
|
242 |
|
Networks |
|
|
171 |
|
|
|
158 |
|
Publishing |
|
|
15 |
|
|
|
18 |
|
|
|
|
|
|
|
|
Total intersegment revenues |
|
$ |
362 |
|
|
$ |
434 |
|
|
|
|
|
|
|
|
| |
(a) |
|
Intersegment revenues include intercompany Advertising revenues of $33 million and
$39 million for the three months ended March 31, 2006 and 2005, respectively. |
50
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
Operating Income before Depreciation and Amortization |
|
|
|
|
|
|
|
|
AOL(a) |
|
$ |
444 |
|
|
$ |
508 |
|
Cable |
|
|
932 |
|
|
|
796 |
|
Filmed Entertainment |
|
|
457 |
|
|
|
383 |
|
Networks |
|
|
857 |
|
|
|
794 |
|
Publishing(b) |
|
|
116 |
|
|
|
140 |
|
Corporate(c) |
|
|
(126 |
) |
|
|
(119 |
) |
Intersegment elimination |
|
|
8 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
Total Operating Income before Depreciation and Amortization |
|
$ |
2,688 |
|
|
$ |
2,480 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the three months ended March 31, 2006, includes a $2 million gain from the
resolution of a previously contingent gain related to the 2004 sale of NSS. For the three
months ended March 31, 2005, includes a $24 million noncash goodwill impairment charge related
to AOLA and a $2 million gain from the resolution of a previously contingent gain related to
the 2004 sale of NSS. |
| |
| (b) |
|
For the three months ended March 31, 2005, includes an $8 million gain related to
the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life which
was previously fully reserved due to concerns about recoverability. |
| |
| (c) |
|
For the three months ended March 31, 2006, includes a $20 million gain on the sale
of two aircraft and $29 million in net expenses related to securities litigation and
government investigations. For the three months ended March 31, 2005, includes $6 million in
net expenses related to securities litigation and government investigations. |
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
Depreciation of Property, Plant and Equipment |
|
|
|
|
|
|
|
|
AOL |
|
$ |
135 |
|
|
$ |
147 |
|
Cable |
|
|
411 |
|
|
|
376 |
|
Filmed Entertainment |
|
|
34 |
|
|
|
30 |
|
Networks |
|
|
66 |
|
|
|
55 |
|
Publishing |
|
|
30 |
|
|
|
33 |
|
Corporate |
|
|
13 |
|
|
|
9 |
|
|
|
|
|
|
|
|
Total depreciation of property, plant and equipment |
|
$ |
689 |
|
|
$ |
650 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
Amortization of Intangible Assets |
|
|
|
|
|
|
|
|
AOL |
|
$ |
40 |
|
|
$ |
47 |
|
Cable |
|
|
20 |
|
|
|
20 |
|
Filmed Entertainment |
|
|
55 |
|
|
|
52 |
|
Networks |
|
|
3 |
|
|
|
4 |
|
Publishing |
|
|
15 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Total amortization of intangible assets |
|
$ |
133 |
|
|
$ |
148 |
|
|
|
|
|
|
|
|
51
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
Operating Income |
|
|
|
|
|
|
|
|
AOL(a) |
|
$ |
269 |
|
|
$ |
314 |
|
Cable |
|
|
501 |
|
|
|
400 |
|
Filmed Entertainment |
|
|
368 |
|
|
|
301 |
|
Networks |
|
|
788 |
|
|
|
735 |
|
Publishing(b) |
|
|
71 |
|
|
|
82 |
|
Corporate(c) |
|
|
(139 |
) |
|
|
(128 |
) |
Intersegment elimination |
|
|
8 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
Total operating income |
|
$ |
1,866 |
|
|
$ |
1,682 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
For the three months ended March 31, 2006, includes a $2 million gain from the
resolution of a previously contingent gain related to the 2004 sale of NSS. For the three
months ended March 31, 2005, includes a $24 million noncash goodwill impairment charge related
to AOLA and a $2 million gain from the resolution of a previously contingent gain related to
the 2004 sale of NSS. |
| |
| (b) |
|
For the three months ended March 31, 2005, includes an $8 million gain related to
the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life which
was previously fully reserved due to concerns about recoverability. |
| |
| (c) |
|
For the three months ended March 31, 2006, includes a $20 million gain on the sale
of two aircraft and $29 million in net expenses related to securities litigation and
government investigations. For the three months ended March 31, 2005, includes $6 million in
net expenses related to securities litigation and government investigations. |
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
Assets |
|
|
|
|
|
|
|
|
AOL |
|
$ |
5,821 |
|
|
$ |
5,846 |
|
Cable |
|
|
43,710 |
|
|
|
43,702 |
|
Filmed Entertainment |
|
|
17,409 |
|
|
|
17,796 |
|
Networks |
|
|
34,508 |
|
|
|
34,425 |
|
Publishing |
|
|
14,338 |
|
|
|
14,682 |
|
Corporate |
|
|
3,996 |
|
|
|
6,340 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
119,782 |
|
|
$ |
122,791 |
|
|
|
|
|
|
|
|
13. COMMITMENTS AND CONTINGENCIES
Securities Matters
Consolidated Securities Class Action
As of May 1, 2006, 30 shareholder class action lawsuits have been filed naming as defendants
the Company, certain current and former executives of the Company and, in several instances, AOL.
These lawsuits were filed in U.S. District Courts for the Southern District of New York, the
Eastern District of Virginia and the Eastern District of Texas. The complaints purport to be made
on behalf of certain shareholders of the Company and allege that the Company made material
misrepresentations and/or omissions of material fact in violation of Section 10(b) of the
Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 promulgated thereunder, and
Section 20(a) of the Exchange Act. Plaintiffs claim that the Company failed to disclose AOL’s
declining advertising revenues and that the Company and AOL inappropriately inflated advertising
revenues in a series of transactions. Certain of the lawsuits also allege that certain of the
individual defendants and other insiders at the Company improperly sold their personal holdings of
Time Warner stock, that the Company failed to disclose that the AOL-Historic TW Merger was not
generating the synergies anticipated at the time of the announcement of the merger and, further,
that the Company inappropriately delayed writing down more than $50 billion of goodwill. The
lawsuits seek an unspecified amount in compensatory damages. All of these lawsuits have been
centralized in the U.S. District Court for the Southern District of New York for coordinated or
consolidated pretrial proceedings (along with the federal derivative lawsuits and certain lawsuits
brought under ERISA described below) under the caption In re AOL Time Warner Inc. Securities and
“ERISA” Litigation. Additional lawsuits brought by individual shareholders have also been filed,
and the federal actions have been (or are in the process of being) transferred and/or consolidated
for pretrial proceedings.
52
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Minnesota State Board of Investment (“MSBI”) was designated lead plaintiff for the
consolidated securities actions and filed a consolidated amended complaint on April 15, 2003,
adding additional defendants including additional officers and directors of the Company, Morgan
Stanley & Co., Salomon Smith Barney Inc., Citigroup Inc., Banc of America Securities LLC and JP
Morgan Chase & Co. Plaintiffs also added additional allegations, including that the Company made
material misrepresentations in its registration statements and joint proxy statement-prospectus
related to the AOL-Historic TW Merger and in its registration statements pursuant to which debt
securities were issued in April 2001 and April 2002, allegedly in violation of Section 11 and
Section 12 of the Securities Act of 1933. On July 14, 2003, the defendants filed a motion to
dismiss the consolidated amended complaint. On May 5, 2004, the district court granted in part the
defendants’ motion, dismissing all claims with respect to the registration statements pursuant to
which debt securities were issued in April 2001 and April 2002 and certain other claims against
other defendants, but otherwise allowing the remaining claims against the Company and certain other
defendants to proceed. On August 11, 2004, the court granted MSBI’s motion to file a second amended
complaint. On July 30, 2004, defendants filed a motion for summary judgment on the basis that
plaintiffs cannot establish loss causation for any of their claims, and thus plaintiffs do not have
any recoverable damages. On April 8, 2005, MSBI moved for leave to file a third amended complaint
to add certain new factual allegations and four additional individual defendants.
In July 2005, the Company reached an agreement in principle with MSBI for the settlement of
the consolidated securities actions. The settlement is reflected in a written agreement between the
lead plaintiff and the Company. On September 30, 2005, the court issued an order granting
preliminary approval of the settlement and certified the settlement class. The court held a final
approval hearing on February 22, 2006, and granted final approval of the settlement in a written
opinion dated April 6, 2006. In connection with reaching the agreement in principle on the
securities class action, the Company established a reserve of $2.4 billion during the second
quarter of 2005. Ernst & Young LLP also has agreed to a settlement in this litigation matter and
will pay $100 million. Pursuant to the settlement, in October 2005, Time Warner paid $2.4 billion
into a settlement fund (the “MSBI Settlement Fund”) for the members of the class represented in the
action. In addition, the $150 million previously paid by Time Warner into a fund in connection with
the settlement of the investigation by the DOJ was transferred to the MSBI Settlement Fund, and
Time Warner is using its best efforts to have the $300 million it previously paid in connection
with the settlement of its SEC investigation, or at least a substantial portion thereof,
transferred to the MSBI Settlement Fund.
Other Related Securities Litigation Matters
As of
May 1, 2006, three putative class action lawsuits have been filed alleging violations
of ERISA in the U.S. District Court for the Southern District of New York on behalf of current and
former participants in the Time Warner Savings Plan, the Time Warner Thrift Plan and/or the TWC
Savings Plan (the “Plans”). Collectively, these lawsuits name as defendants the Company, certain
current and former directors and officers of the Company and members of the Administrative
Committees of the Plans. The lawsuits allege that the Company and other defendants breached certain
fiduciary duties to plan participants by, inter alia, continuing to offer Time Warner stock as an
investment under the Plans, and by failing to disclose, among other things, that the Company was
experiencing declining advertising revenues and that the Company was inappropriately inflating
advertising revenues through various transactions. The complaints seek unspecified damages and
unspecified equitable relief. The ERISA actions have been consolidated as part of the In re AOL
Time Warner Inc. Securities and “ERISA” Litigation described above. On July 3, 2003, plaintiffs
filed a consolidated amended complaint naming additional defendants, including TWE, certain current
and former officers, directors and employees of the Company and Fidelity Management Trust Company.
On September 12, 2003, the Company filed a motion to dismiss the consolidated ERISA complaint. On
March 9, 2005, the court granted in part and denied in part the Company’s motion to dismiss. The
court dismissed two individual defendants and TWE for all purposes, dismissed other individuals
with respect to claims plaintiffs had asserted involving the TWC Savings Plan, and dismissed all
individuals who were named in a claim asserting that their stock sales had constituted a breach of
fiduciary duty to the Plans. The Company filed an answer to the consolidated ERISA complaint on May
20, 2005. On January 17, 2006, plaintiffs filed a motion for class certification. On the same day,
defendants filed a motion for summary judgment on the basis that plaintiffs cannot establish loss
causation for any of their claims and therefore have no recoverable damages, as well as a motion
for judgment on the pleadings on the basis that plaintiffs do not have standing to bring their
claims. The parties have reached an agreement to resolve this matter, and have submitted their
settlement agreement and associated documentation to the court for approval. A preliminary
approval hearing was held on April 26, 2006 and the parties are now awaiting the court’s decision.
At this time, there can be no assurance that the settlement will receive either preliminary or
final court approval.
As of
May 1, 2006, 11 shareholder derivative lawsuits have been filed naming as defendants
certain current and former directors and officers of the Company, as well as the Company as a
nominal defendant. Three have been filed in New York State Supreme Court for the County of New
York, four have been filed in the U.S. District Court for the Southern District of New York and
four have been filed in the Court of Chancery of the State of Delaware for New Castle County. The
complaints allege that defendants breached
53
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
their fiduciary duties by causing the Company to issue corporate statements that did not
accurately represent that AOL had declining advertising revenues and by failing to conduct adequate
due diligence in connection with the AOL-Historic TW Merger, that the AOL-Historic TW Merger was
not generating the synergies anticipated at the time of the announcement of the merger, and that
the Company inappropriately delayed writing down more than $50 billion of goodwill, thereby
exposing the Company to potential liability for alleged violations of federal securities laws. The
lawsuits further allege that certain of the defendants improperly sold their personal holdings of
Time Warner securities. The lawsuits request that (i) all proceeds from defendants’ sales of Time
Warner common stock, (ii) all expenses incurred by the Company as a result of the defense of the
shareholder class actions discussed above and (iii) any improper salaries or payments, be returned
to the Company. The four lawsuits filed in the Court of Chancery for the State of Delaware for New
Castle County have been consolidated under the caption, In re AOL Time Warner Inc. Derivative
Litigation. A consolidated complaint was filed on March 7, 2003 in that action, and on June 9,
2003, the Company filed a notice of motion to dismiss the consolidated complaint. On September 16,
2005, plaintiffs in that action filed a motion for leave to file a second amended complaint. On May
2, 2003, the three lawsuits filed in New York State Supreme Court for the County of New York were
dismissed on forum non conveniens grounds and plaintiffs’ time to appeal has expired. The four
lawsuits pending in the U.S. District Court for the Southern District of New York have been
centralized for coordinated or consolidated pre-trial proceedings with the securities and ERISA
lawsuits described above under the caption In re AOL Time Warner Inc. Securities and “ERISA”
Litigation. On October 6, 2004, plaintiffs filed an amended consolidated complaint in three of
these four cases. On April 20, 2006, plaintiffs in the four lawsuits filed in the Court of Chancery
of the State of Delaware for New Castle County filed a new complaint in the U.S. District Court for
the Southern District of New York. The parties to all of these actions have reached an agreement
to resolve all remaining matters, and have submitted their settlement agreement and associated
documentation to the federal district court in New York for approval. A preliminary approval
hearing was held on April 26, 2006 and the parties are now awaiting the court’s decision. At this
time, there can be no assurance that the settlement will receive either preliminary or final court
approval.
On July 1, 2003, Stichting Pensioenfonds ABP v. AOL Time Warner Inc. et al. was filed in the
U.S. District Court for the Southern District of New York against the Company, current and former
officers, directors and employees of the Company and Ernst & Young LLP. Plaintiff alleges that the
Company made material misrepresentations and/or omissions of material fact in violation of Section
10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, Section 11, Section 12, Section
14(a) and Rule 14a-9 promulgated thereunder, Section 18 and Section 20(a) of the Exchange Act. The
complaint also alleges common law fraud and negligent misrepresentation. The plaintiff seeks an
unspecified amount of compensatory and punitive damages. This lawsuit has been consolidated for
coordinated pretrial proceedings under the caption In re AOL Time Warner Inc. Securities and
“ERISA” Litigation described above. On July 16, 2004, plaintiff filed an amended complaint adding
certain institutional defendants, including Historic TW, and certain current directors of the
Company. On November 22, 2004, the Company filed a motion to dismiss the complaint. This lawsuit
has been settled. The aggregate amount for which the Company has settled this as well as related
lawsuits is described below.
In late 2005
and early 2006, additional shareholders determined to “opt-out” of the settlement
reached in the consolidated federal securities class action, and some have since filed lawsuits in
various federal jurisdictions. As of May 1, 2006, these lawsuits included: DEKA Investment GMBH
et al. v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the Southern District
of New York on December 30, 2005; Nw. Mut. Life Found., Inc. et al. v. AOL Time Warner Inc. et al.,
filed in the U.S. District Court for the Eastern District of Wisconsin on January 30, 2006; Cement
Masons’ Pension Trust for N. Cal., Inc. et al. v. AOL Time Warner Inc. et al., filed in the U.S.
District Court for the Eastern District of California on January 30, 2006; 1199 SEIU Greater New
York Pension Fund et al. v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the
Southern District of New York on January 30, 2006; Capstone Asset Management Co. v. AOL Time Warner
Inc. et al., filed in the U.S. District Court for the Southern District of Texas on January 30,
2006; Beaver County Ret. Bd. et al. v. AOL Time Warner Inc. et al., filed in the U.S. District
Court for the Western District of Pennsylvania on January 30, 2006; Carpenters’ Pension Fund of
Ill. et al. v. AOL Time Warner Inc. et al., filed in the U.S. District Court of the Northern
District of Illinois on January 31, 2006; Teachers’ Ret. Sys. of the State of Ill. v. AOL Time
Warner Inc. et al., filed in the U.S. District Court for the Northern District of Illinois on
January 31, 2006; S. Cal. Lathing Indus. Pension Fund et al. v. AOL Time Warner Inc. et al., filed
in the U.S. District Court for the Central District of California on January 31, 2006; Wayne County
Emps.’ Ret. Sys. v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the Eastern
District of Michigan on January 31, 2006; Carpenters Ret. Trust of Western Washington et al. v. AOL
Time Warner Inc. et al., filed in the U.S. District Court for the Western District of Washington on
February 1, 2006; Alaska Elec. Pension Fund et al. v. AOL Time Warner Inc. et al., filed in the
U.S. District Court for the District of Alaska on February 1, 2006; I.A.M. Nat’l Pension Fund et
al. v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the District of the
District of Columbia on February 1, 2006; Municipal Employers’ Ret. Sys. of Mich. v. AOL Time
Warner Inc. et al., filed in the U.S. District Court for the Eastern District of Michigan on
February 1, 2006; Charter Twp. of Clinton Police & Fire Ret. Sys. et al. v. AOL Time Warner Inc. et
al., filed in the U.S. District Court for the Eastern District of Michigan on February 1, 2006;
United Food and Commercial Workers Union Local 880 — Retail Food Employers Joint Pension Fund et
al. v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the Northern District of
Ohio on February 2, 2006; Vermont State Emps.’ Ret. Sys. et al. v. AOL Time Warner Inc. et al.,
filed in the U.S. District Court for the District of Vermont
54
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
on February 2, 2006; Nat’l Asbestos Workers Pension Fund et al. v. AOL Time Warner Inc. et
al., filed in the U.S. District Court for the District of Maryland on February 2, 2006; Nat’l
Elevator Indus. Pension Fund v. AOL Time Warner Inc. et al., filed in the U.S. District Court for
the Eastern District of Pennsylvania on February 3, 2006; Emps.’ Ret. Sys. of the State of Hawaii
v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the District of Hawaii on
February 3, 2006; Laborers’ Nat’l Pension Fund v. AOL Time Warner Inc. et al., filed in the U.S.
District Court for the Northern District of Texas on February 3, 2006; Robeco Groep N.V. for Robeco
N.V. et al. v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the District of
the District of Columbia on February 3, 2006; Employer-Teamsters Local Nos. 175 & 505 Pension Trust
Fund et al. v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the Southern
District of West Virginia on February 3, 2006; Norges Bank v. AOL Time Warner Inc. et al., filed in
the U.S. District Court for the District of the District of Columbia on February 3, 2006; Hawaii
Electricians’ Annuity Fund et al. v. AOL Time Warner Inc. et al., filed in the U.S. District Court
for the District of the District of Columbia on February 7, 2006; Frost Nat’l Bank et al. v. AOL
Time Warner Inc. et al. filed in the U.S. District Court for the Southern District of Texas on
February 7, 2006; Heavy & General Laborers’ Locals 472 & 172 Pension and Annuity Funds et al. v.
AOL Time Warner Inc. et al., filed in the U.S. District Court for the District of New Jersey on
February 8, 2006; B.S. Pension Fund Trustee Ltd. et al. v. AOL Time Warner Inc. et al., filed in
the U.S. District Court for the District of the District of Columbia on February 9, 2006; CSS Board
ABN 19415 776861 et al. v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the
District of the District of Columbia on February 9, 2006; Carpenters’ Pension Trust Fund of St.
Louis v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the Eastern District of
Missouri on February 9, 2006; The West Virginia Laborers’ Trust Fund et al. v. AOL Time Warner Inc.
et al., filed in the U.S. District Court for the Southern District of West Virginia on February 9,
2006; Boilermakers Nat’l Health & Welfare Fund et al. v. AOL Time Warner Inc. et al., filed in the
U.S. District Court for the District of Kansas on February 10, 2006; Plumbers & Pipefitters Local
152 Pension Fund et al. v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the
Northern District of West Virginia on February 13, 2006; New Mexico Education et al. v. AOL Time
Warner Inc. et al., filed in the U.S. District Court for the District of New Mexico on February 14,
2006; Hibernia Nat’l Bank v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the
Southern District of Texas on February 16, 2006; and New England Health Care Employees Pension Fund
et al. v. AOL Time Warner Inc. et al., filed in the U.S. District Court for the District of
Massachusetts on February 16, 2006. The claims alleged in these actions are substantially identical
to the claims alleged in the consolidated federal securities class action described above, and all
of these cases have been transferred to the U.S. District Court for the Southern District of New
York for coordinated or consolidated pre-trial proceedings. Additional cases filed by opt-out
shareholders in state courts are described below. The Company intends to defend against these
lawsuits vigorously.
On November 11, 2002, Staro Asset Management, LLC filed a putative class action complaint in
the U.S. District Court for the Southern District of New York on behalf of certain purchasers of
Reliant 2.0% Zero-Premium Exchangeable Subordinated Notes for alleged violations of the federal
securities laws. Plaintiff is a purchaser of subordinated notes, the price of which was purportedly
tied to the market value of Time Warner stock. Plaintiff alleges that the Company made
misstatements and/or omissions of material fact that artificially inflated the value of Time Warner
stock and directly affected the price of the notes. Plaintiff seeks compensatory damages and/or
rescission. This lawsuit has been consolidated for coordinated pretrial proceedings under the
caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation described above. The Company
intends to defend against this lawsuit vigorously.
On April 14, 2003, Regents of the University of California et al. v. Parsons et al., was filed
in California Superior Court, County of Los Angeles, naming as defendants the Company, certain
current and former officers, directors and employees of the Company, Ernst & Young LLP, Citigroup
Inc., Salomon Smith Barney Inc. and Morgan Stanley & Co. Plaintiffs allege that the Company made
material misrepresentations in its registration statements related to the AOL-Historic TW Merger
and stock option plans in violation of Sections 11 and 12 of the Securities Act of 1933. The
complaint also alleges common law fraud and breach of fiduciary duties under California state law.
Plaintiffs seek disgorgement of alleged insider trading proceeds and restitution for their stock
losses. Three related cases have been filed in California Supreme Court and have been coordinated
in the County of Los Angeles. On January 26, 2004, certain individuals filed motions to dismiss for
lack of personal jurisdiction. On September 10, 2004, the Company filed a motion to dismiss
plaintiffs’ complaints and certain individual defendants (who had not previously moved to dismiss
plaintiffs’ complaints for lack of personal jurisdiction) filed a motion to dismiss plaintiffs’
complaints. On April 22, 2005, the court granted certain motions to dismiss for lack of personal
jurisdiction and denied certain motions to dismiss for lack of personal jurisdiction. The court
issued a series of rulings on threshold issues presented by the motions to dismiss on May 12, July
22 and August 2, 2005. These rulings granted in part and denied in part the relief sought by
defendants, subject to plaintiffs’ right to make a prima facie evidentiary showing to support
certain dismissed claims. In January 2006, the Los Angeles County Employees Retirement Agency,
which had filed one of the three related cases described above, voluntarily dismissed its lawsuit;
an order of dismissal was entered on January 17, 2006. Also in January 2006, two additional
individual actions were filed in California Superior Court against the Company and, in one
instance, Ernst & Young LLP and certain former officers, directors and executives of the Company.
Both of these newly-filed actions assert claims substantially identical to those asserted in the
four actions already coordinated in California Superior Court, and the
55
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company will seek to have these additional cases included within the coordinated proceedings.
The Company intends to defend against these lawsuits vigorously.
On May 23, 2003, Treasurer of New Jersey v. AOL Time Warner Inc. et al., was filed in the
Superior Court of New Jersey, Mercer County, naming as defendants the Company, certain current and
former officers, directors and employees of the Company, Ernst & Young LLP, Citigroup Inc., Salomon
Smith Barney, Morgan Stanley, JP Morgan Chase and Banc of America Securities. The complaint is
brought by the Treasurer of New Jersey and purports to be made on behalf of the State of New
Jersey, Department of Treasury, Division of Investments (the “Division”) and certain funds
administered by the Division. Plaintiff alleges that the Company made material misrepresentations
in its registration statements in violation of Sections 11 and 12 of the Securities Act of 1933.
Plaintiff also alleges violations of New Jersey state law for fraud and negligent
misrepresentation. Plaintiffs seek an unspecified amount of damages. On October 29, 2003, the
Company moved to stay the proceedings or, in the alternative, dismiss the complaint. Also on
October 29, 2003, all named individual defendants moved to dismiss the complaint for lack of
personal jurisdiction. This lawsuit has been settled. The aggregate amount for which the Company
has settled this as well as related lawsuits is described below.
On July 18, 2003, Ohio Public Employees Retirement System et al. v. Parsons et al. was filed
in Ohio, Court of Common Pleas, Franklin County, naming as defendants the Company, certain current
and former officers, directors and employees of the Company, Citigroup Inc., Salomon Smith Barney
Inc., Morgan Stanley & Co. and Ernst & Young LLP. Plaintiffs allege that the Company made material
misrepresentations in its registration statements in violation of Sections 11 and 12 of the
Securities Act of 1933. Plaintiffs also allege violations of Ohio law, breach of fiduciary duty and
common law fraud. Plaintiffs seek disgorgement of alleged insider trading proceeds, restitution and
unspecified compensatory damages. On October 29, 2003, the Company moved to stay the proceedings
or, in the alternative, dismiss the complaint. Also on October 29, 2003, all named individual
defendants moved to dismiss the complaint for lack of personal jurisdiction. On October 8, 2004,
the court granted in part the Company’s motion to dismiss plaintiffs’ complaint; specifically, the
court dismissed plaintiffs’ common law claims but otherwise allowed plaintiffs’ remaining statutory
claims against the Company and certain other defendants to proceed. The Company answered the
complaint on February 22, 2005. On November 17, 2005, the court granted the jurisdictional motions
of twenty-five of the individual defendants, and dismissed them from the case. The Company intends
to defend against this lawsuit vigorously.
On July 18, 2003, West Virginia Investment Management Board v. Parsons et al. was filed in
West Virginia, Circuit Court, Kanawha County, naming as defendants the Company, certain current and
former officers, directors and employees of the Company, Citigroup Inc., Salomon Smith Barney Inc.,
Morgan Stanley & Co., and Ernst & Young LLP. Plaintiff alleges the Company made material
misrepresentations in its registration statements in violation of Sections 11 and 12 of the
Securities Act of 1933. Plaintiff also alleges violations of West Virginia law, breach of fiduciary
duty and common law fraud. Plaintiff seeks disgorgement of alleged insider trading proceeds,
restitution and unspecified compensatory damages. On May 27, 2004, the Company filed a motion to
dismiss the complaint. Also on May 27, 2004, all named individual defendants moved to dismiss the
complaint for lack of personal jurisdiction. The Company intends to defend against this lawsuit
vigorously.
On January 28, 2004, McClure et al. v. AOL Time Warner Inc. et al. was filed in the District
Court of Cass County, Texas (purportedly on behalf of several purchasers of Company stock) naming
as defendants the Company and certain current and former officers, directors and employees of the
Company. Plaintiffs allege that the Company made material misrepresentations in its registration
statements in violation of Sections 11 and 12 of the Securities Act of 1933. Plaintiffs also allege
breach of fiduciary duty and common law fraud. Plaintiffs seek unspecified compensatory damages. On
May 8, 2004, the Company filed a general denial and a motion to dismiss for improper venue. Also on
May 8, 2004, all named individual defendants moved to dismiss the complaint for lack of personal
jurisdiction. The Company intends to defend against this lawsuit vigorously.
On February 24, 2004, Commonwealth of Pennsylvania Public School Employees’ Retirement System
et al. v. Time Warner Inc. et al. was filed in the Court of Common Pleas of Philadelphia County
naming as defendants the Company, certain current and former officers, directors and employees of
the Company, AOL, Historic TW, Morgan Stanley & Co., Inc., Citigroup Global Markets Inc., Banc of
America Securities LLC, J.P. Morgan Chase & Co and Ernst & Young LLP. Plaintiffs had previously
filed a request for a writ of summons notifying defendants of commencement of an action. Plaintiffs
allege that the Company made material misrepresentations in its registration statements in
violation of Sections 11 and 12 of the Securities Act of 1933. Plaintiffs also allege violations of
Pennsylvania law, breach of fiduciary duty and common law fraud. The plaintiffs seek unspecified
compensatory and punitive damages. Plaintiffs dismissed the four investment banks from the
complaint in exchange for a tolling agreement. The remaining parties have agreed to stay this
action and to coordinate discovery proceedings with the securities and ERISA lawsuits described
above under the caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation. Plaintiffs
filed an amended complaint on June 14, 2005. The parties to this lawsuit have reached an
understanding to settle this matter, subject to definitive documentation. The aggregate amount for
which the Company has agreed to settle this as well as related lawsuits is described below.
56
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On April 1,
2004, Alaska State Department of Revenue et al. v. America Online, Inc. et al. was
filed in Superior Court in Juneau County, Alaska, naming as defendants the Company, certain current
and former officers, directors and employees of the Company, AOL, Historic TW, Morgan Stanley &
Co., Inc., and Ernst & Young LLP. Plaintiffs allege that the Company made material
misrepresentations in its registration statements in violation of Alaska law and common law fraud.
The plaintiffs seek unspecified compensatory and punitive damages. On July 26, 2004, all named
individual defendants moved to dismiss the complaint for lack of personal jurisdiction. On August
13, 2004, the Company filed a motion to dismiss plaintiffs’ complaint. On August 10, 2005, the
court issued an order granting in part and denying in part the motions to dismiss for failure to
state a claim. With respect to the jurisdictional motions, the court delayed its ruling 90 days to
permit plaintiffs to conduct additional discovery and supplement the allegations in the complaint.
On September 9, 2005, plaintiffs moved for leave to amend their complaint. That motion was granted
by the court on October 10, 2005. The Company intends to defend against this lawsuit vigorously.
On November 15,
2002, the California State Teachers’ Retirement System filed an amended
consolidated complaint in the U.S. District Court for the Central District of California on behalf
of a putative class of purchasers of stock in Homestore.com, Inc. (“Homestore”). Plaintiff alleges
that Homestore engaged in a scheme to defraud its shareholders in violation of Section 10(b) of the
Exchange Act. The Company and two former employees of its AOL division were named as defendants in
the amended consolidated complaint because of their alleged participation in the scheme through
certain advertising transactions entered into with Homestore. Motions to dismiss filed by the
Company and the two former employees were granted on March 7, 2003, and a final judgment of
dismissal was entered on March 8, 2004. On April 7, 2004, plaintiff filed a notice of appeal in the
Ninth Circuit Court of Appeals. The Ninth Circuit heard oral argument on this appeal on February 6,
2006. The Company intends to defend against this lawsuit vigorously.
On April 30,
2004, a second amended complaint was filed in the U.S. District Court for the
District of Nevada on behalf of a putative class of purchasers of stock in PurchasePro.com, Inc.
(“PurchasePro”). Plaintiffs allege that PurchasePro engaged in a scheme to defraud its shareholders
in violation of Section 10(b) of the Exchange Act. The Company and four former officers and
employees were added as defendants in the second amended complaint and are alleged to have
participated in the scheme through certain advertising transactions entered into with PurchasePro.
Three similar putative class actions had previously been filed against the Company, AOL and certain
former officers and employees, and have been consolidated with the Nevada action. On February 17,
2005, the Judge in the consolidated action granted the Company’s motion to dismiss the second
amended complaint with prejudice. The parties have since reached an oral agreement to settle this
dispute, and are in the process of preparing a written settlement agreement. The aggregate amount
for which the Company has agreed to settle this as well as related lawsuits is described below.
That agreement will be subject to preliminary and final approval by the district court; however,
there can be no assurance that either preliminary or final approval will be granted.
In addition to
the $2.4 billion reserve established in connection with the agreement in
principle regarding the settlement of the MSBI consolidated securities class action, during the
second quarter of 2005, the Company established an additional reserve totaling $600 million in
connection with the other related securities litigation matters described in this section that were
pending against the Company, including the remaining individual shareholder suits (including suits
brought by individual shareholders who decided to “opt-out” of the settlement in the primary
securities class action), the derivative actions and the actions alleging violations of ERISA. Of
this amount, through May 1, 2006, the Company has paid, or has agreed to pay, approximately
$358 million, after considering probable insurance recoveries, to settle certain of these claims. As
described above, the Company has been successful in reaching settlements with respect to certain of
the securities actions brought by individual shareholders. The Company also has engaged in, or
expects to engage in, mediation in an attempt to resolve the additional cases brought by
shareholders who elected to “opt out” of the settlement in the consolidated securities action. Such
mediation efforts have not been fruitful to date in certain of these matters, in which trials are
possible and for which plaintiffs have claimed several billion dollars in aggregated damages. The
Company intends to defend these lawsuits vigorously. It is possible that the ultimate amount paid
to resolve these lawsuits may be greater than the remaining reserve.
Government Investigations
As previously
disclosed by the Company, the SEC and the DOJ had been conducting investigations
into accounting and disclosure practices of the Company. Those investigations focused on
advertising transactions, principally involving the Company’s AOL segment, the methods used by the
AOL segment to report its subscriber numbers and the accounting related to the Company’s interest
in AOL Europe prior to January 2002. During 2004, the Company established $510 million in legal
reserves related to the government investigations, the components of which are discussed in more
detail in the following paragraphs.
57
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company and its subsidiary, AOL, entered into a settlement with the DOJ in December 2004
that provided for a deferred prosecution arrangement for a two-year period. As part of the
settlement with the DOJ, in December 2004, the Company paid a penalty of $60 million and
established a $150 million fund, which the Company could use to settle related securities
litigation. The fund was reflected as restricted cash on the Company’s accompanying consolidated
balance sheet at December 31, 2004. During October 2005, the $150 million was transferred by the
Company into the MSBI Settlement Fund for the members of the class covered by the MSBI consolidated
securities class action described above.
In addition, on March 21, 2005, the Company announced that the SEC had approved the Company’s
proposed settlement, which resolved the SEC’s investigation of the Company.
Under the terms of the settlement with the SEC, the Company agreed, without admitting or
denying the SEC’s allegations, to be enjoined from future violations of certain provisions of the
securities laws and to comply with the cease-and-desist order issued by the SEC to AOL in May 2000.
The settlement also required the Company to:
| |
• |
|
Pay a $300 million penalty, which will be used for a Fair Fund, as authorized under the
Sarbanes-Oxley Act; |
| |
| |
• |
|
Adjust its historical accounting for Advertising revenues in certain transactions with
Bertelsmann, A.G. that were improperly or prematurely recognized, primarily in the second
half of 2000, during 2001 and during 2002; as well as adjust its historical accounting for
transactions involving three other AOL customers where there were Advertising revenues
recognized in the second half of 2000 and during 2001; |
| |
| |
• |
|
Adjust its historical accounting for its investment in and consolidation of AOL Europe;
and |
| |
| |
• |
|
Agree to the appointment of an independent examiner, who will either be or hire a
certified public accountant. The independent examiner will review whether the Company’s
historical accounting for transactions with 17 counterparties identified by the SEC staff,
principally involving online advertising revenues and including three cable programming
affiliation agreements with related advertising elements, was in conformity with GAAP, and
provide a report to the Company’s audit and finance committee of its conclusions, originally
within 180 days of being engaged. The transactions that would be reviewed were entered into
between June 1, 2000 and December 31, 2001, including subsequent amendments thereto, and
involved online advertising and related transactions for which revenue was principally
recognized before January 1, 2002. |
The Company paid the $300 million penalty in March 2005; however, it is unable to deduct the
penalty for income tax purposes, be reimbursed or indemnified for such payment through insurance or
any other source, or use such payment to setoff or reduce any award of compensatory damages to
plaintiffs in related securities litigation pending against the Company. As described above, in
connection with the pending settlement of the consolidated securities class action, the Company is
using its best efforts to have the $300 million, or a substantial portion thereof, transferred to
the MSBI Settlement Fund for the members of the class represented in the action. The historical
accounting adjustments were reflected in the restatement of the Company’s financial results for
each of the years ended December 31, 2000 through December 31, 2003, which were included in the
Company’s 2004 Form 10-K.
The independent examiner has begun its review, which has been extended and is expected to be
completed in the second quarter of 2006. At present, the Company is not aware of any conclusions
yet reached by the independent examiner. Depending on the independent examiner’s conclusions, a
further restatement might be necessary. It is also possible that, so long as there are unresolved
issues associated with the Company’s financial statements, the effectiveness of any registration
statement of the Company or its affiliates may be delayed.
Other Matters
Warner Bros. (South) Inc. (“WBS”), a wholly-owned subsidiary of the Company, is litigating
numerous tax cases in Brazil. WBS currently is the theatrical distribution licensee for Warner
Bros. Entertainment Nederlands (“Warner Bros.”) in Brazil and acts as a service provider to the
Warner Bros. home video licensee. All of the ongoing tax litigation involves WBS’ distribution
activities prior to January 2004, when WBS conducted both theatrical and home video distribution.
Much of the tax litigation stems from WBS’ position that in distributing videos to rental
retailers, it was conducting a distribution service, subject to a municipal service tax, and not
the “industrialization” or sale of videos, subject to Brazilian federal and state VAT-like taxes.
Both the federal tax authorities and the State of Sao Paulo, where WBS is based, have challenged
this position. In some additional tax cases, WBS, often together with
58
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
other film distributors, is challenging the imposition of taxes on royalties remitted outside
of Brazil and the constitutionality of certain taxes. The Company intends to defend all of these
various tax cases vigorously, but is unable to predict the outcome of these suits.
On October 8, 2004, certain heirs of Jerome Siegel, one of the creators of the “Superman”
character, filed suit against the Company, DC Comics and Warner Bros. Entertainment Inc. in the
U.S. District Court for the Central District of California. Plaintiffs’ complaint seeks an
accounting and demands up to one-half of the profits made on Superman since the alleged April 16,
1999 termination by plaintiffs of Siegel’s grants of one-half of the rights to the Superman
character to DC Comics’ predecessor-in-interest. Plaintiffs have also asserted various Lanham Act
and unfair competition claims, alleging “wasting” of the Superman property by DC Comics and failure
to accord credit to Siegel. The Company answered the complaint and filed counterclaims on November
11, 2004, to which plaintiffs replied on January 7, 2005. This case has been consolidated for
discovery purposes with the “Superboy” litigation described immediately below. The Company intends
to defend against this lawsuit vigorously, but is unable to predict its outcome.
On October 22, 2004, the same Siegel heirs filed a second lawsuit against the Company, DC
Comics, Warner Bros. Entertainment Inc., Warner Communications Inc. and Warner Bros. Television
Production Inc. in the U.S. District Court for the Central District of California. Plaintiffs
claim that Jerome Siegel was the sole creator of the character Superboy and, as such, DC Comics has
had no right to create new Superboy works since the alleged October 17, 2004 termination by
plaintiffs of Siegel’s grants of rights to the Superboy character to DC Comics’
predecessor-in-interest. This lawsuit seeks a declaration regarding the validity of the alleged
termination and an injunction against future use of the Superboy character. Plaintiffs have also
asserted Lanham Act and unfair competition claims alleging false statements by DC Comics regarding
the creation of the Superboy character. The Company answered the complaint and filed counterclaims
on December 21, 2004, to which plaintiffs replied on January 7, 2005. The case was consolidated
for discovery purposes with the “Superman” action described immediately above. The parties filed
cross-motions for summary judgment or partial summary judgment on February 15, 2006. In its ruling
dated March 23, 2006, the Court denied the Company’s motion
for summary judgment, granted plaintiffs’ motion for partial
summary judgment on termination and held that further proceedings are
necessary to determine whether the Company’s
“Smallville” television series may infringe on
plaintiffs’ rights to the Superboy character. The Company intends to defend against this lawsuit
vigorously, but is unable to predict its outcome.
On May 24, 1999, two former AOL Community Leader volunteers filed Hallissey et al. v. America
Online, Inc. in the U.S. District Court for the Southern District of New York. This lawsuit was
brought as a collective action under the Fair Labor Standards Act (“FLSA”) and as a class action
under New York state law against AOL and AOL Community, Inc. The plaintiffs allege that, in serving
as Community Leader volunteers, they were acting as employees rather than volunteers for purposes
of the FLSA and New York state law and are entitled to minimum wages. On December 8, 2000,
defendants filed a motion to dismiss on the ground that the plaintiffs were volunteers and not
employees covered by the FLSA. On March 10, 2006, the court denied defendants’ motion to dismiss. A
related case was filed by several of the Hallissey plaintiffs in the U.S. District Court for the
Southern District of New York alleging violations of the retaliation provisions of the FLSA. This
case was stayed pending the outcome of the Hallissey motion to dismiss and has not yet been
activated. Three related class actions have been filed in state courts in New Jersey, California
and Ohio, alleging violations of the FLSA and/or the respective state laws. The New Jersey and Ohio
cases were removed to federal court and subsequently transferred to the U.S. District Court for the
Southern District of New York for consolidated pretrial proceedings with Hallissey. The California
action was remanded to California state court, and on January 6, 2004 the court denied plaintiffs’
motion for class certification. Plaintiffs appealed the trial court’s denial of their motion for
class certification to the California Court of Appeals. On May 26, 2005, a three-justice panel of
the California Court of Appeals unanimously affirmed the trial court’s order denying class
certification. The plaintiffs’ petition for review in the California Supreme Court was denied. The
Company has settled the remaining individual claims in the California action. The Company intends
to defend against the remaining lawsuits vigorously, but is unable to predict the outcome of these
suits.
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, but is
unable to predict the outcome of these suits.
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 if its shareholders, asserts violations of Section 16(b) of
the Securities Exchange Act of 1934. 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
59
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
that AOL and Mr. Jain constituted a “group” that held more than 10% of Infospace’s stock and,
as a result, AOL violated the short-swing trading prohibition of Section 16(b) in connection with
sales of shares received from the exercise of those warrants. The complaint seeks disgorgement of
profits, interest and attorneys fees. On September 26, 2005, AOL filed a motion to dismiss the
complaint for failure to state a claim, which was denied by the Court on December 5, 2005. The
Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of
this suit or reasonably estimate the range of possible loss.
On June 16, 1998, plaintiffs in Andrew Parker and Eric DeBrauwere, et al. v. Time Warner
Entertainment Company, L.P. and Time Warner Cable filed a purported nationwide class action in U.S.
District Court for the Eastern District of New York claiming that TWE sold its subscribers’
personally identifiable information and failed to inform subscribers of their privacy rights in
violation of the Cable Communications Policy Act of 1984 and common law. The plaintiffs are seeking
damages and declaratory and injunctive relief. On August 6, 1998, TWE filed a motion to dismiss,
which was denied on September 7, 1999. On December 8, 1999, TWE filed a motion to deny class
certification, which was granted on January 9, 2001 with respect to monetary damages, but denied
with respect to injunctive relief. On June 2, 2003, the U.S. Court of Appeals for the Second
Circuit vacated the District Court’s decision denying class certification as a matter of law and
remanded the case for further proceedings on class certification and other matters. On May 4, 2004,
plaintiffs filed a motion for class certification, which the Company has opposed. This lawsuit has
been settled on terms that are not material to the Company. The court granted preliminary approval
of the class settlement on October 25, 2005 and has scheduled a final approval hearing for May 19,
2006.
On October 20, 2005, a group of syndicate participants, including BNZ Investments Limited,
filed three related actions in the High Court of New Zealand, Auckland Registry, against New Line
Cinema Corporation, a wholly-owned subsidiary of the Company, and its subsidiary, New Line
Productions Inc. (collectively, “New Line”). The complaints allege breach of contract, breach of
duties of good faith and fair dealing, and other common law and statutory claims under California
and New Zealand law. Plaintiffs contend, among other things, they have not received proceeds from
certain financing transactions they entered into with New Line relating to three motion pictures:
The Lord of the Rings: The Fellowship of the Ring; The Lord of the Rings: The Two Towers; and The
Lord of the Rings: The Return of the King. The parties to these actions have agreed that all claims
will be heard before a single arbitrator before the International Court for Arbitration and that
the proceedings before the High Court of New Zealand will be dismissed without prejudice. The
Company intends to defend against these proceedings vigorously, but is unable to predict the
outcome of the proceedings.
As previously disclosed, Time Inc. has received a grand jury subpoena from the United States
Attorney’s Office for the Eastern District of New York in connection with an investigation of
certain magazine circulation-related practices. Time Inc. is responding to the subpoena and is
cooperating with the investigation. Following discussions with the Audit Bureau of Circulations
(“ABC”) concerning Time Inc.’s reporting of sponsored sales subscriptions, ABC has confirmed that
the vast majority of Time Inc.’s sponsored subscriptions for the first half of 2005 were properly
classified. Time Inc. has informed its advertisers of such conclusion.
In the normal course of business, the Company’s tax returns are subject to examination by
various domestic and foreign taxing authorities. Such examinations may result in future tax and
interest assessments on the Company. In instances where the Company believes that it is probable
that it will be assessed and the amount will ultimately be paid under the assessment is reasonably
estimatable, it has accrued a liability. The Company does not believe that these liabilities are
material, individually or in the aggregate, to its financial condition or liquidity. Similarly, the
Company does not expect the final resolution of tax examinations to have a material impact on the
Company’s financial results.
From time to time, the Company receives notices from third parties claiming that it infringes
their intellectual property rights. Claims of intellectual property infringement could require Time
Warner to enter into royalty or licensing agreements on unfavorable terms, incur substantial
monetary liability or be enjoined preliminarily or permanently from further use of the intellectual
property in question. In addition, certain agreements entered into by the Company may require the
Company to indemnify the other party for certain third-party intellectual property infringement
claims, which could increase the Company’s damages and its costs of defending against such claims.
Even if the claims are without merit, defending against the claims can be time-consuming and
costly.
The costs and other effects of pending or future litigation, governmental investigations,
legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments
and investigations, claims and changes in those matters (including those matters described above),
and developments or assertions by or against the Company relating to intellectual property rights
and intellectual property licenses, could have a material adverse effect on the Company’s business,
financial condition and operating results.
60
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
Additional financial information with respect to cash (payments) and receipts is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(millions) |
|
Cash payments made for interest |
|
$ |
(305 |
) |
|
$ |
(313 |
) |
Interest income received |
|
|
45 |
|
|
|
45 |
|
|
|
|
|
|
|
|
Cash interest payments, net |
|
$ |
(260 |
) |
|
$ |
(268 |
) |
|
|
|
|
|
|
|
Cash payments made for income taxes |
|
$ |
(76 |
) |
|
$ |
(82 |
) |
Income tax refunds received |
|
|
16 |
|
|
|
13 |
|
|
|
|
|
|
|
|
Cash tax payments, net |
|
$ |
(60 |
) |
|
$ |
(69 |
) |
|
|
|
|
|
|
|
The consolidated statement of cash flows does not reflect an approximate $115 million capital
expenditure included in other current liabilities, as this amount had not been paid as of March 31,
2006.
The
consolidated statement of cash flows reflects approximately
$109 million of common stock repurchases that were included in
other current liabilities at December 31, 2005 but were not paid
until the first quarter of 2006. Additionally, the consolidated
statement of cash flows does not reflect an approximate
$246 million of common stock repurchases included in other
current liabilities, as this amount had not been paid as of
March 31, 2006.
Interest Expense, Net
Interest expense, net, consists of:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(millions) |
|
Interest income |
|
$ |
93 |
|
|
$ |
74 |
|
Interest expense |
|
|
(392 |
) |
|
|
(420 |
) |
|
|
|
|
|
|
|
Total interest expense, net |
|
$ |
(299 |
) |
|
$ |
(346 |
) |
|
|
|
|
|
|
|
Other Income, Net
Other income, net, consists of:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(millions) |
|
Investment gains, net |
|
$ |
295 |
|
|
$ |
23 |
|
Net gain on WMG option |
|
|
— |
|
|
|
80 |
|
Income on equity method investees |
|
|
22 |
|
|
|
11 |
|
Losses on accounts receivable securitization programs |
|
|
(13 |
) |
|
|
(7 |
) |
Other |
|
|
14 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Total other income, net |
|
$ |
318 |
|
|
$ |
111 |
|
|
|
|
|
|
|
|
Other Current Liabilities
Other current liabilities consist of:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
(recast) |
|
| |
|
(millions) |
|
Accrued expenses |
|
$ |
4,199 |
|
|
$ |
4,515 |
|
Accrued compensation |
|
|
820 |
|
|
|
1,316 |
|
Accrued income taxes |
|
|
177 |
|
|
|
157 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
5,196 |
|
|
$ |
5,988 |
|
|
|
|
|
|
|
|
61
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(Unaudited)
AOL LLC (“AOL”), Historic TW Inc. (“Historic TW”), Time Warner Companies, Inc. (“TW
Companies”) and Turner Broadcasting System, Inc. (“TBS” and, together with AOL, Historic TW and TW
Companies, the “Guarantor Subsidiaries”) are wholly-owned subsidiaries of Time Warner Inc. (“Time
Warner”). Time Warner, AOL, Historic TW, TW Companies and TBS have fully and unconditionally,
jointly and severally, and directly or indirectly, guaranteed all of the outstanding publicly
traded indebtedness of each other. Set forth below are condensed consolidating financial statements
of Time Warner, including each of the Guarantor Subsidiaries, presented for the information of each
company’s public debtholders. The following condensed consolidating financial statements present
the results of operations, financial position and cash flows of (i) AOL, Historic TW, TW Companies
and TBS (in each case, the financial information of the guarantor companies (i.e. AOL, Historic TW,
TW Companies and TBS) reflect the legal entity guarantor on a detail basis and their non-guarantor
consolidated subsidiaries using the single line equity method of accounting), (ii) the direct and
indirect non-guarantor subsidiaries of Time Warner and (iii) the eliminations necessary to arrive
at the information for Time Warner on a consolidated basis. There are no restrictions on the
Company’s ability to obtain funds from any of its wholly-owned subsidiaries through dividends,
loans or advances. These condensed consolidating financial statements should be read in conjunction
with the accompanying consolidated financial statements of Time Warner.
The
2005 condensed consolidating financial statements have been recast so
that the basis of presentation is consistent with that of 2006.
Specifically, the amounts have been recast for the adoption of
Financial Accounting Standards Board (“FASB”) Statement
No. 123 (revised 2004), “Share-Based Payment”
(“FAS 123R”), a change in accounting principle for
recognizing programming inventory costs at HBO and certain
discontinued operations.
Consolidating Statement of Operations
For The Three Months Ended March 31, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
|
|
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Non-Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
AOL |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
Revenues |
|
$ |
— |
|
|
$ |
1,278 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
282 |
|
|
$ |
8,933 |
|
|
$ |
(38 |
) |
|
$ |
10,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(597 |
) |
|
|
— |
|
|
|
— |
|
|
|
(99 |
) |
|
|
(5,157 |
) |
|
|
34 |
|
|
|
(5,819 |
) |
Selling, general and
administrative |
|
|
(32 |
) |
|
|
(435 |
) |
|
|
(11 |
) |
|
|
(5 |
) |
|
|
(55 |
) |
|
|
(2,065 |
) |
|
|
3 |
|
|
|
(2,600 |
) |
Amortization of intangible
assets |
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(128 |
) |
|
|
— |
|
|
|
(133 |
) |
Amounts related to securities
litigation and government
investigations |
|
|
(29 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(29 |
) |
Merger-related and
restructuring costs |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
|
|
— |
|
|
|
(30 |
) |
| |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Gains on disposal of assets,
net |
|
|
20 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating income (loss) |
|
|
(46 |
) |
|
|
242 |
|
|
|
(11 |
) |
|
|
(5 |
) |
|
|
128 |
|
|
|
1,559 |
|
|
|
(1 |
) |
|
|
1,866 |
|
Equity in pretax income
(loss) of consolidated
subsidiaries |
|
|
1,978 |
|
|
|
11 |
|
|
|
1,754 |
|
|
|
1,503 |
|
|
|
423 |
|
|
|
— |
|
|
|
(5,669 |
) |
|
|
— |
|
| |
Interest income (expense), net |
|
|
(124 |
) |
|
|
(1 |
) |
|
|
(28 |
) |
|
|
(243 |
) |
|
|
(6 |
) |
|
|
103 |
|
|
|
— |
|
|
|
(299 |
) |
| |
Other income (expense), net |
|
|
(2 |
) |
|
|
14 |
|
|
|
(2 |
) |
|
|
22 |
|
|
|
49 |
|
|
|
399 |
|
|
|
(162 |
) |
|
|
318 |
|
| |
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(79 |
) |
|
|
— |
|
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes, discontinued
operations and cumulative
effect of accounting change |
|
|
1,806 |
|
|
|
266 |
|
|
|
1,713 |
|
|
|
1,277 |
|
|
|
594 |
|
|
|
1,982 |
|
|
|
(5,832 |
) |
|
|
1,806 |
|
Income tax benefit (provision) |
|
|
(608 |
) |
|
|
(102 |
) |
|
|
(572 |
) |
|
|
(403 |
) |
|
|
(230 |
) |
|
|
(675 |
) |
|
|
1,982 |
|
|
|
(608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
discontinued operations and
cumulative effect of
accounting change |
|
|
1,198 |
|
|
|
164 |
|
|
|
1,141 |
|
|
|
874 |
|
|
|
364 |
|
|
|
1,307 |
|
|
|
(3,850 |
) |
|
|
1,198 |
|
Discontinued operations, net
of tax |
|
|
232 |
|
|
|
— |
|
|
|
232 |
|
|
|
231 |
|
|
|
1 |
|
|
|
231 |
|
|
|
(695 |
) |
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
cumulative effect of
accounting change |
|
|
1,430 |
|
|
|
164 |
|
|
|
1,373 |
|
|
|
1,105 |
|
|
|
365 |
|
|
|
1,538 |
|
|
|
(4,545 |
) |
|
|
1,430 |
|
Cumulative effect of
accounting change, net of tax |
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,455 |
|
|
$ |
164 |
|
|
$ |
1,373 |
|
|
$ |
1,105 |
|
|
$ |
365 |
|
|
$ |
1,538 |
|
|
$ |
(4,545 |
) |
|
$ |
1,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED
CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Three Months Ended March 31, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
|
|
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
AOL |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(recast, millions) |
|
Revenues |
|
$ |
— |
|
|
$ |
1,422 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
261 |
|
|
$ |
8,710 |
|
|
$ |
(30 |
) |
|
$ |
10,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
— |
|
|
|
(656 |
) |
|
|
— |
|
|
|
— |
|
|
|
(98 |
) |
|
|
(5,186 |
) |
|
|
26 |
|
|
|
(5,914 |
) |
Selling, general and
administrative |
|
|
(22 |
) |
|
|
(485 |
) |
|
|
(11 |
) |
|
|
(5 |
) |
|
|
(48 |
) |
|
|
(2,024 |
) |
|
|
8 |
|
|
|
(2,587 |
) |
Amortization of intangible assets |
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(140 |
) |
|
|
— |
|
|
|
(148 |
) |
Amounts related to securities
litigation and government
investigations |
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
Merger-related and restructuring
costs |
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19 |
) |
|
|
— |
|
|
|
(12 |
) |
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
|
|
— |
|
|
|
(24 |
) |
Gains (losses) on disposal of
assets, net |
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
11 |
|
|
|
— |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(28 |
) |
|
|
278 |
|
|
|
(11 |
) |
|
|
(5 |
) |
|
|
116 |
|
|
|
1,328 |
|
|
|
4 |
|
|
|
1,682 |
|
Equity in pretax income (loss)
of consolidated subsidiaries |
|
|
1,541 |
|
|
|
7 |
|
|
|
1,203 |
|
|
|
1,014 |
|
|
|
351 |
|
|
|
— |
|
|
|
(4,116 |
) |
|
|
— |
|
Interest income (expense), net |
|
|
(132 |
) |
|
|
(5 |
) |
|
|
(22 |
) |
|
|
(171 |
) |
|
|
(19 |
) |
|
|
3 |
|
|
|
— |
|
|
|
(346 |
) |
Other income (expense), net |
|
|
12 |
|
|
|
8 |
|
|
|
80 |
|
|
|
— |
|
|
|
41 |
|
|
|
103 |
|
|
|
(133 |
) |
|
|
111 |
|
Minority interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(54 |
) |
|
|
— |
|
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes and discontinued
operations |
|
|
1,393 |
|
|
|
288 |
|
|
|
1,250 |
|
|
|
838 |
|
|
|
489 |
|
|
|
1,380 |
|
|
|
(4,245 |
) |
|
|
1,393 |
|
Income tax benefit (provision) |
|
|
(485 |
) |
|
|
(75 |
) |
|
|
(466 |
) |
|
|
(301 |
) |
|
|
(196 |
) |
|
|
(516 |
) |
|
|
1,554 |
|
|
|
(485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
discontinued operations |
|
|
908 |
|
|
|
213 |
|
|
|
784 |
|
|
|
537 |
|
|
|
293 |
|
|
|
864 |
|
|
|
(2,691 |
) |
|
|
908 |
|
Discontinued operations, net of
tax |
|
|
7 |
|
|
|
— |
|
|
|
7 |
|
|
|
6 |
|
|
|
— |
|
|
|
7 |
|
|
|
(20 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
915 |
|
|
$ |
213 |
|
|
$ |
791 |
|
|
$ |
543 |
|
|
$ |
293 |
|
|
$ |
871 |
|
|
$ |
(2,711 |
) |
|
$ |
915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED
CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Balance Sheet
March 31, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
|
|
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
AOL |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
1,821 |
|
|
$ |
16 |
|
|
$ |
— |
|
|
$ |
25 |
|
|
$ |
32 |
|
|
$ |
401 |
|
|
$ |
— |
|
|
$ |
2,295 |
|
Receivables, net |
|
|
86 |
|
|
|
265 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
5,061 |
|
|
|
— |
|
|
|
5,413 |
|
Inventories |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,133 |
|
|
|
— |
|
|
|
2,134 |
|
Prepaid expenses and other
current assets |
|
|
77 |
|
|
|
75 |
|
|
|
23 |
|
|
|
— |
|
|
|
13 |
|
|
|
792 |
|
|
|
— |
|
|
|
980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,984 |
|
|
|
357 |
|
|
|
23 |
|
|
|
25 |
|
|
|
46 |
|
|
|
8,387 |
|
|
|
— |
|
|
|
10,822 |
|
Noncurrent inventories and
film costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,678 |
|
|
|
— |
|
|
|
4,678 |
|
Investments in amounts due
to and from consolidated
subsidiaries |
|
|
83,808 |
|
|
|
1,806 |
|
|
|
77,826 |
|
|
|
65,263 |
|
|
|
17,671 |
|
|
|
— |
|
|
|
(246,374 |
) |
|
|
— |
|
Investments, including
available-for-sale
securities |
|
|
24 |
|
|
|
194 |
|
|
|
299 |
|
|
|
— |
|
|
|
522 |
|
|
|
4,400 |
|
|
|
(1,865 |
) |
|
|
3,574 |
|
Property, plant and
equipment, net |
|
|
506 |
|
|
|
885 |
|
|
|
— |
|
|
|
— |
|
|
|
179 |
|
|
|
12,365 |
|
|
|
— |
|
|
|
13,935 |
|
Intangible assets subject to
amortization, net |
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,636 |
|
|
|
— |
|
|
|
4,658 |
|
Intangible assets not
subject to amortization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
641 |
|
|
|
37,784 |
|
|
|
— |
|
|
|
38,425 |
|
Goodwill |
|
|
— |
|
|
|
1,492 |
|
|
|
— |
|
|
|
— |
|
|
|
2,651 |
|
|
|
36,238 |
|
|
|
— |
|
|
|
40,381 |
|
Other assets |
|
|
104 |
|
|
|
201 |
|
|
|
635 |
|
|
|
— |
|
|
|
22 |
|
|
|
2,115 |
|
|
|
— |
|
|
|
3,077 |
|
Noncurrent assets of
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
232 |
|
|
|
— |
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
86,426 |
|
|
$ |
4,957 |
|
|
$ |
78,783 |
|
|
$ |
65,288 |
|
|
$ |
21,732 |
|
|
$ |
110,835 |
|
|
$ |
(248,239 |
) |
|
$ |
119,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6 |
|
|
$ |
73 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10 |
|
|
$ |
1,164 |
|
|
$ |
— |
|
|
$ |
1,253 |
|
Participations payable |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,443 |
|
|
|
— |
|
|
|
2,443 |
|
Royalties and programming
costs payable |
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
927 |
|
|
|
— |
|
|
|
936 |
|
Deferred revenue |
|
|
— |
|
|
|
303 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,355 |
|
|
|
— |
|
|
|
1,658 |
|
Debt due within one year |
|
|
— |
|
|
|
57 |
|
|
|
— |
|
|
|
2 |
|
|
|
3 |
|
|
|
22 |
|
|
|
— |
|
|
|
84 |
|
Other current liabilities |
|
|
1,310 |
|
|
|
1,122 |
|
|
|
87 |
|
|
|
82 |
|
|
|
52 |
|
|
|
2,628 |
|
|
|
(85 |
) |
|
|
5,196 |
|
Current liabilities of
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
66 |
|
|
|
— |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,316 |
|
|
|
1,561 |
|
|
|
87 |
|
|
|
84 |
|
|
|
68 |
|
|
|
8,605 |
|
|
|
(85 |
) |
|
|
11,636 |
|
Long-term debt |
|
|
8,972 |
|
|
|
109 |
|
|
|
1,491 |
|
|
|
4,724 |
|
|
|
332 |
|
|
|
4,403 |
|
|
|
— |
|
|
|
20,031 |
|
Debt due (from) to affiliates |
|
|
(960 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
960 |
|
|
|
— |
|
|
|
— |
|
Deferred income taxes |
|
|
13,815 |
|
|
|
791 |
|
|
|
13,024 |
|
|
|
11,617 |
|
|
|
1,487 |
|
|
|
13,104 |
|
|
|
(40,023 |
) |
|
|
13,815 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
637 |
|
|
|
— |
|
|
|
637 |
|
Other liabilities |
|
|
762 |
|
|
|
46 |
|
|
|
1,276 |
|
|
|
374 |
|
|
|
282 |
|
|
|
4,059 |
|
|
|
(1,460 |
) |
|
|
5,339 |
|
Noncurrent liabilities of
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
7 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,134 |
|
|
|
(1,338 |
) |
|
|
5,796 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due (to) from Time Warner
and subsidiaries |
|
|
— |
|
|
|
(3,507 |
) |
|
|
(5,907 |
) |
|
|
(7,401 |
) |
|
|
(3,493 |
) |
|
|
(15,849 |
) |
|
|
36,157 |
|
|
|
— |
|
Other shareholders’ equity |
|
|
62,521 |
|
|
|
5,957 |
|
|
|
68,812 |
|
|
|
55,890 |
|
|
|
23,056 |
|
|
|
87,775 |
|
|
|
(241,490 |
) |
|
|
62,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
62,521 |
|
|
|
2,450 |
|
|
|
62,905 |
|
|
|
48,489 |
|
|
|
19,563 |
|
|
|
71,926 |
|
|
|
(205,333 |
) |
|
|
62,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders’ equity |
|
$ |
86,426 |
|
|
$ |
4,957 |
|
|
$ |
78,783 |
|
|
$ |
65,288 |
|
|
$ |
21,732 |
|
|
$ |
110,835 |
|
|
$ |
(248,239 |
) |
|
$ |
119,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED
CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Balance Sheet
December 31, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
|
|
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
AOL |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(recast, millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
3,798 |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
59 |
|
|
$ |
36 |
|
|
$ |
308 |
|
|
$ |
— |
|
|
$ |
4,220 |
|
Receivables, net |
|
|
291 |
|
|
|
221 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
6,033 |
|
|
|
— |
|
|
|
6,546 |
|
Inventories |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
2,039 |
|
|
|
— |
|
|
|
2,041 |
|
Prepaid expenses and other
current assets |
|
|
121 |
|
|
|
93 |
|
|
|
22 |
|
|
|
— |
|
|
|
13 |
|
|
|
636 |
|
|
|
7 |
|
|
|
892 |
|
Current assets of
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
351 |
|
|
|
— |
|
|
|
351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
4,210 |
|
|
|
334 |
|
|
|
22 |
|
|
|
59 |
|
|
|
51 |
|
|
|
9,367 |
|
|
|
7 |
|
|
|
14,050 |
|
Noncurrent inventories and
film costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,645 |
|
|
|
— |
|
|
|
4,645 |
|
Investments in amounts due
to and from consolidated
subsidiaries |
|
|
83,428 |
|
|
|
1,669 |
|
|
|
79,629 |
|
|
|
67,117 |
|
|
|
17,566 |
|
|
|
— |
|
|
|
(249,409 |
) |
|
|
— |
|
Investments, including
available-for-sale
securities |
|
|
27 |
|
|
|
161 |
|
|
|
284 |
|
|
|
— |
|
|
|
475 |
|
|
|
4,334 |
|
|
|
(1,763 |
) |
|
|
3,518 |
|
Property, plant and
equipment, net |
|
|
513 |
|
|
|
908 |
|
|
|
— |
|
|
|
— |
|
|
|
175 |
|
|
|
12,068 |
|
|
|
— |
|
|
|
13,664 |
|
Intangible assets subject to
amortization, net |
|
|
— |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,479 |
|
|
|
— |
|
|
|
3,492 |
|
Intangible assets not
subject to amortization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
641 |
|
|
|
39,044 |
|
|
|
— |
|
|
|
39,685 |
|
Goodwill |
|
|
— |
|
|
|
1,492 |
|
|
|
— |
|
|
|
— |
|
|
|
2,625 |
|
|
|
36,117 |
|
|
|
— |
|
|
|
40,234 |
|
Other assets |
|
|
89 |
|
|
|
227 |
|
|
|
659 |
|
|
|
— |
|
|
|
22 |
|
|
|
2,123 |
|
|
|
— |
|
|
|
3,120 |
|
Noncurrent assets of
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
383 |
|
|
|
— |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
88,267 |
|
|
$ |
4,804 |
|
|
$ |
80,594 |
|
|
$ |
67,176 |
|
|
$ |
21,555 |
|
|
$ |
111,560 |
|
|
$ |
(251,165 |
) |
|
$ |
122,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
5 |
|
|
$ |
61 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
18 |
|
|
$ |
1,251 |
|
|
$ |
— |
|
|
$ |
1,335 |
|
Participations payable |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,401 |
|
|
|
— |
|
|
|
2,401 |
|
Royalties and programming
costs payable |
|
|
— |
|
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
958 |
|
|
|
— |
|
|
|
988 |
|
Deferred revenue |
|
|
— |
|
|
|
296 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,177 |
|
|
|
— |
|
|
|
1,473 |
|
Debt due within one year |
|
|
— |
|
|
|
67 |
|
|
|
— |
|
|
|
4 |
|
|
|
3 |
|
|
|
18 |
|
|
|
— |
|
|
|
92 |
|
Other current liabilities |
|
|
1,244 |
|
|
|
724 |
|
|
|
58 |
|
|
|
150 |
|
|
|
7 |
|
|
|
3,889 |
|
|
|
(84 |
) |
|
|
5,988 |
|
Current liabilities of
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
230 |
|
|
|
— |
|
|
|
230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,249 |
|
|
|
1,174 |
|
|
|
58 |
|
|
|
154 |
|
|
|
32 |
|
|
|
9,924 |
|
|
|
(84 |
) |
|
|
12,507 |
|
Long-term debt |
|
|
8,971 |
|
|
|
110 |
|
|
|
1,489 |
|
|
|
4,729 |
|
|
|
333 |
|
|
|
4,606 |
|
|
|
— |
|
|
|
20,238 |
|
Debt due (from) to affiliates |
|
|
(942 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
942 |
|
|
|
— |
|
|
|
— |
|
Deferred income taxes |
|
|
13,063 |
|
|
|
451 |
|
|
|
14,818 |
|
|
|
13,425 |
|
|
|
1,472 |
|
|
|
14,898 |
|
|
|
(45,064 |
) |
|
|
13,063 |
|
Deferred revenue |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
681 |
|
|
|
— |
|
|
|
681 |
|
Other liabilities |
|
|
756 |
|
|
|
52 |
|
|
|
1,253 |
|
|
|
370 |
|
|
|
271 |
|
|
|
4,120 |
|
|
|
(1,452 |
) |
|
|
5,370 |
|
Noncurrent liabilities of
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
|
— |
|
|
|
15 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,085 |
|
|
|
(1,338 |
) |
|
|
5,747 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due (to) from Time Warner
and subsidiaries |
|
|
— |
|
|
|
(2,746 |
) |
|
|
(4,297 |
) |
|
|
(6,137 |
) |
|
|
(3,227 |
) |
|
|
(16,777 |
) |
|
|
33,184 |
|
|
|
— |
|
Other shareholders’ equity |
|
|
65,170 |
|
|
|
5,763 |
|
|
|
67,273 |
|
|
|
54,635 |
|
|
|
22,674 |
|
|
|
86,066 |
|
|
|
(236,411 |
) |
|
|
65,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
65,170 |
|
|
|
3,017 |
|
|
|
62,976 |
|
|
|
48,498 |
|
|
|
19,447 |
|
|
|
69,289 |
|
|
|
(203,227 |
) |
|
|
65,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders’ equity |
|
$ |
88,267 |
|
|
$ |
4,804 |
|
|
$ |
80,594 |
|
|
$ |
67,176 |
|
|
$ |
21,555 |
|
|
$ |
111,560 |
|
|
$ |
(251,165 |
) |
|
$ |
122,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED
CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Three Months Ended March 31, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
|
|
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
AOL |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
(millions) |
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,455 |
|
|
$ |
164 |
|
|
$ |
1,373 |
|
|
$ |
1,105 |
|
|
$ |
365 |
|
|
$ |
1,538 |
|
|
$ |
(4,545 |
) |
|
$ |
1,455 |
|
Adjustments for noncash and
nonoperating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of
accounting change, net of
tax |
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(25 |
) |
Depreciation and amortization |
|
|
12 |
|
|
|
118 |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
679 |
|
|
|
— |
|
|
|
822 |
|
Amortization of film costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
822 |
|
|
|
— |
|
|
|
822 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Loss (gain) on investments
and other assets, net |
|
|
2 |
|
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(308 |
) |
|
|
— |
|
|
|
(309 |
) |
Excess (deficiency) of
distributions over equity in
pretax income of
consolidated subsidiaries |
|
|
(1,978 |
) |
|
|
(11 |
) |
|
|
(1,754 |
) |
|
|
(1,503 |
) |
|
|
(423 |
) |
|
|
— |
|
|
|
5,669 |
|
|
|
— |
|
Equity in (income) losses of
investee companies, net of
cash distributions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
|
(12 |
) |
Equity-based compensation |
|
|
108 |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
62 |
|
|
|
(89 |
) |
|
|
108 |
|
Amounts related to securities
litigation and government
investigations |
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
Changes in operating assets
and liabilities, net of
acquisitions |
|
|
2,321 |
|
|
|
18 |
|
|
|
1,991 |
|
|
|
1,802 |
|
|
|
316 |
|
|
|
(694 |
) |
|
|
(6,064 |
) |
|
|
(310 |
) |
Adjustments relating to
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(226 |
) |
|
|
— |
|
|
|
(226 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by
operations |
|
|
1,900 |
|
|
|
299 |
|
|
|
1,610 |
|
|
|
1,404 |
|
|
|
285 |
|
|
|
1,861 |
|
|
|
(5,029 |
) |
|
|
2,330 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and acquisitions,
net of cash acquired |
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
|
|
(110 |
) |
|
|
— |
|
|
|
(126 |
) |
Advances to parents and
consolidated subsidiaries |
|
|
— |
|
|
|
(99 |
) |
|
|
— |
|
|
|
(173 |
) |
|
|
— |
|
|
|
— |
|
|
|
272 |
|
|
|
— |
|
Capital expenditures and
product development costs |
|
|
(8 |
) |
|
|
(58 |
) |
|
|
— |
|
|
|
— |
|
|
|
(20 |
) |
|
|
(695 |
) |
|
|
— |
|
|
|
(781 |
) |
Investment proceeds from
available-for-sale securities |
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
4 |
|
Other investment proceeds |
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
804 |
|
|
|
— |
|
|
|
807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by
investing activities |
|
|
(8 |
) |
|
|
(163 |
) |
|
|
— |
|
|
|
(173 |
) |
|
|
(24 |
) |
|
|
— |
|
|
|
272 |
|
|
|
(96 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Debt repayments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(226 |
) |
|
|
— |
|
|
|
(226 |
) |
Change due to/from parent |
|
|
18 |
|
|
|
(119 |
) |
|
|
(1,610 |
) |
|
|
(1,265 |
) |
|
|
(264 |
) |
|
|
(1,517 |
) |
|
|
4,757 |
|
|
|
— |
|
Proceeds from exercise of
stock options |
|
|
242 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
242 |
|
Excess tax benefit on stock
options |
|
|
32 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
32 |
|
Principal payments on capital
leases |
|
|
— |
|
|
|
(20 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
— |
|
|
|
(23 |
) |
Repurchases of common stock |
|
|
(3,936 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,936 |
) |
Dividends paid |
|
|
(225 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(225 |
) |
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
|
|
— |
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by
financing activities |
|
|
(3,869 |
) |
|
|
(139 |
) |
|
|
(1,610 |
) |
|
|
(1,265 |
) |
|
|
(265 |
) |
|
|
(1,768 |
) |
|
|
4,757 |
|
|
|
(4,159 |
) |
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS |
|
|
(1,977 |
) |
|
|
(3 |
) |
|
|
— |
|
|
|
(34 |
) |
|
|
(4 |
) |
|
|
93 |
|
|
|
— |
|
|
|
(1,925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD |
|
|
3,798 |
|
|
|
19 |
|
|
|
— |
|
|
|
59 |
|
|
|
36 |
|
|
|
308 |
|
|
|
— |
|
|
|
4,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END
OF PERIOD |
|
$ |
1,821 |
|
|
$ |
16 |
|
|
$ |
— |
|
|
$ |
25 |
|
|
$ |
32 |
|
|
$ |
401 |
|
|
$ |
— |
|
|
$ |
2,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED
CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Three Months Ended March 31, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Time |
|
| |
|
Time |
|
|
|
|
|
|
Historic |
|
|
TW |
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
|
Warner |
|
| |
|
Warner |
|
|
AOL |
|
|
TW |
|
|
Companies |
|
|
TBS |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(recast, millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
915 |
|
|
$ |
213 |
|
|
$ |
791 |
|
|
$ |
543 |
|
|
$ |
293 |
|
|
$ |
871 |
|
|
$ |
(2,711 |
) |
|
$ |
915 |
|
Adjustments for noncash and
nonoperating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
10 |
|
|
|
135 |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
646 |
|
|
|
— |
|
|
|
798 |
|
Amortization of film costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
911 |
|
|
|
— |
|
|
|
911 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24 |
|
|
|
— |
|
|
|
24 |
|
Gain on investments and
other assets, net |
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(30 |
) |
|
|
— |
|
|
|
(32 |
) |
Excess (deficiency) of
distributions over equity in
pretax income of
consolidated subsidiaries |
|
|
(1,542 |
) |
|
|
(7 |
) |
|
|
(1,203 |
) |
|
|
(1,014 |
) |
|
|
(351 |
) |
|
|
— |
|
|
|
4,117 |
|
|
|
— |
|
Equity in (income) losses of
investee companies, net of
cash distributions |
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
— |
|
|
|
(7 |
) |
Equity-based compensation |
|
|
134 |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
|
|
114 |
|
|
|
(147 |
) |
|
|
134 |
|
Amounts related to securities
litigation and government
investigations |
|
|
(300 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(300 |
) |
Changes in operating assets
and liabilities, net of
acquisitions |
|
|
1,660 |
|
|
|
(44 |
) |
|
|
1,353 |
|
|
|
875 |
|
|
|
254 |
|
|
|
(343 |
) |
|
|
(4,380 |
) |
|
|
(625 |
) |
Adjustments relating to
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
— |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by
operations |
|
|
877 |
|
|
|
304 |
|
|
|
941 |
|
|
|
404 |
|
|
|
224 |
|
|
|
2,203 |
|
|
|
(3,121 |
) |
|
|
1,832 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and acquisitions,
net of cash acquired |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
(230 |
) |
|
|
— |
|
|
|
(224 |
) |
Advances to parents and
consolidated subsidiaries |
|
|
(28 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(42 |
) |
|
|
— |
|
|
|
70 |
|
|
|
— |
|
Capital expenditures and
product development costs |
|
|
(23 |
) |
|
|
(82 |
) |
|
|
— |
|
|
|
— |
|
|
|
(18 |
) |
|
|
(527 |
) |
|
|
— |
|
|
|
(650 |
) |
Capital expenditures from
discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Investment proceeds from
available-for-sale securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
— |
|
|
|
13 |
|
Other investment proceeds |
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
71 |
|
|
|
— |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by
investing activities |
|
|
(51 |
) |
|
|
(81 |
) |
|
|
— |
|
|
|
— |
|
|
|
(53 |
) |
|
|
(674 |
) |
|
|
70 |
|
|
|
(789 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt repayments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(247 |
) |
|
|
— |
|
|
|
(247 |
) |
Change due to/from parent |
|
|
(27 |
) |
|
|
(186 |
) |
|
|
(942 |
) |
|
|
(436 |
) |
|
|
(169 |
) |
|
|
(1,291 |
) |
|
|
3,051 |
|
|
|
— |
|
Proceeds from exercise of
stock options |
|
|
99 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
99 |
|
Excess tax benefit on stock
options |
|
|
22 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
Principal payments on capital
leases |
|
|
— |
|
|
|
(34 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(37 |
) |
Other |
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by
financing activities |
|
|
87 |
|
|
|
(220 |
) |
|
|
(942 |
) |
|
|
(436 |
) |
|
|
(169 |
) |
|
|
(1,541 |
) |
|
|
3,051 |
|
|
|
(170 |
) |
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS |
|
|
913 |
|
|
|
3 |
|
|
|
(1 |
) |
|
|
(32 |
) |
|
|
2 |
|
|
|
(12 |
) |
|
|
— |
|
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD |
|
|
5,568 |
|
|
|
12 |
|
|
|
(1 |
) |
|
|
84 |
|
|
|
(15 |
) |
|
|
491 |
|
|
|
— |
|
|
|
6,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS AT END
OF PERIOD |
|
$ |
6,481 |
|
|
$ |
15 |
|
|
$ |
(2 |
) |
|
$ |
52 |
|
|
$ |
(13 |
) |
|
$ |
479 |
|
|
$ |
— |
|
|
$ |
7,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Part II. Other Information
Item 1. Legal Proceedings
Securities Matters
Consolidated Securities Class Action
Reference is made to the shareholder class action lawsuits described on pages 60-61 of the
Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”).
On February 22, 2006, the court held a final approval hearing for the settlement of the
consolidated securities actions between the Company and the lead plaintiff, the Minnesota State
Board of Investment, and granted final approval of the settlement in a written opinion dated April
6, 2006.
Other Related Securities Litigation Matters
Reference is made to the shareholder derivative, ERISA and individual securities matters
described on pages 61-66 of the 2005 Form 10-K. As previously disclosed, during the second quarter
of 2005, the Company established a reserve totaling $600 million in connection with these related
securities litigation matters. Of this $600 million reserve,
through May 1, 2006, the Company
has paid, or has agreed to pay, approximately $358 million, after considering probable insurance
recoveries, to settle certain of these claims. In addition, the Company reached an agreement with
the carriers on its directors and officers insurance policies in connection with the securities and
derivative action matters described on pages 60-66 of the 2005 Form 10-K (other than the actions
alleging violations of ERISA described on page 61 of the 2005 Form 10-K). As a result of this
agreement, in the fourth quarter of 2005, the Company recorded a recovery of approximately $185
million (bringing the total 2005 recoveries to $206 million), which were collected in the first
quarter of 2006.
Reference is made to the consolidated ERISA class action lawsuits described on page 61 of the
2005 Form 10-K. The parties have reached an agreement to resolve this matter and have submitted
their settlement agreement and associated documentation to the court for approval. A preliminary
approval hearing was held on April 26, 2006 and the parties are now awaiting the court’s decision.
At this time, there can be no assurance that the settlement will receive either preliminary or
final approval.
Reference is made to the shareholder derivative lawsuits described on pages 61-62 of the 2005
Form 10-K. On April 20, 2006, the plaintiffs in the four lawsuits filed in the Court of Chancery of
the State of Delaware for New Castle County filed a new complaint in the U.S. District Court for
the Southern District of New York. The parties to all of the shareholder derivative lawsuits have
reached an agreement to resolve all remaining matters and have submitted their settlement agreement
and associated documentation to the federal district court in New York for approval. A preliminary
approval hearing was held on April 26, 2006 and the parties are now awaiting the court’s decision.
At this time, there can be no assurance that the settlement will receive either preliminary or
final court approval.
Reference is made to the lawsuit filed by Stichting Pensioenfonds ABP described on page 62 of
the 2005 Form 10-K. This lawsuit has been settled. The aggregate amount for which the Company has
settled this as well as related lawsuits is described above.
Reference is made to the lawsuits described on pages 62-63 of the 2005 Form 10-K filed by
shareholders who determined to “opt-out” of the settlement reached in the consolidated federal
securities class action. An additional lawsuit, Plumbers & Pipefitters Local 152 Pension Fund et
al. v. AOL Time Warner Inc. et al., was filed in the U.S. District Court for the Northern District
of West Virginia on February 13, 2006. This lawsuit and the other lawsuits described on pages
62-63 of the 2005 Form 10-K have been transferred to the U.S. District Court for the Southern
District of New York for coordinated or consolidated pre-trial hearings.
Reference is made to the lawsuit filed by the Treasurer of New Jersey described on page 64 of
the 2005 Form 10-K. This lawsuit has been settled. The aggregate amount for which the Company has
settled this as well as related lawsuits is described above.
Reference is made to the lawsuit filed by the Commonwealth of Pennsylvania Public School
Employees’ Retirement System et al. described on page 65 of the 2005 Form 10-K. The parties to
this lawsuit have reached an understanding to settle this matter, subject to definitive
documentation. The aggregate amount for which the Company has agreed to settle this as well as
related lawsuits is described above.
68
Other Matters
On October 8, 2004, certain heirs of Jerome Siegel, one of the creators of the “Superman”
character, filed suit against the Company, DC Comics and Warner Bros. Entertainment Inc. in the
U.S. District Court for the Central District of California. Plaintiffs’ complaint seeks an
accounting and demands up to one-half of the profits made on Superman since the alleged April 16,
1999 termination by plaintiffs of Siegel’s grants of one-half of the rights to the Superman
character to DC Comics’ predecessor-in-interest. Plaintiffs have also asserted various Lanham Act
and unfair competition claims, alleging “wasting” of the Superman property by DC Comics and failure
to accord credit to Siegel. The Company answered the complaint and filed counterclaims on November
11, 2004, to which plaintiffs replied on January 7, 2005. This case has been consolidated for
discovery purposes with the “Superboy” litigation described immediately below. The Company intends
to defend against this lawsuit vigorously, but is unable to predict its outcome.
On October 22, 2004, the same Siegel heirs filed a second lawsuit against the Company, DC
Comics, Warner Bros. Entertainment Inc., Warner Communications Inc. and Warner Bros. Television
Production Inc. in the U.S. District Court for the Central District of California. Plaintiffs
claim that Jerome Siegel was the sole creator of the character Superboy and, as such, DC Comics has
had no right to create new Superboy works since the alleged October 17, 2004 termination by
plaintiffs of Siegel’s grants of rights to the Superboy character to DC Comics’
predecessor-in-interest. This lawsuit seeks a declaration regarding the validity of the alleged
termination and an injunction against future use of the Superboy character. Plaintiffs have also
asserted Lanham Act and unfair competition claims alleging false statements by DC Comics regarding
the creation of the Superboy character. The Company answered the complaint and filed counterclaims
on December 21, 2004, to which plaintiffs replied on January 7, 2005. The case was consolidated
for discovery purposes with the “Superman” action described immediately above. The parties filed
cross-motions for summary judgment or partial summary judgment on February 15, 2006. In its ruling
dated March 23, 2006, the Court denied the Company’s motion
for summary judgment, granted plaintiffs’ motion for partial
summary judgment on termination and held that further proceedings are
necessary to determine whether the Company’s
“Smallville” television series may infringe on
plaintiffs’ rights to the Superboy character. The Company intends to defend against this lawsuit
vigorously, but is unable to predict its outcome.
Reference is made to the lawsuit filed by Hallissey et al. described on pages 68-69 of the
2005 Form 10-K. On March 10, 2006, the court denied the defendants’ motion to dismiss. A related
case 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 Fair Labor Standards
Act had been stayed pending the outcome of the Hallissey motion to dismiss and has not yet been
activated.
Reference is made to the lawsuit filed by Andrew Parker and Eric DeBrauwere et al. described
on page 69 of the 2005 Form 10-K. The court has scheduled a final settlement approval hearing for
May 19, 2006.
Item 1A. Risk Factors.
As discussed above, on March 24, 2006, AOL and Google Inc. entered into definitive agreements
related to their expanded alliance. The following risk factor, which was included on page 46 in
the 2005 Form 10-K, has been updated in conjunction with entering into such agreements.
If the Company’s AOL business is unable to acquire or offer compelling search functionality,
content, features, services, applications and tools at reasonable costs, the size or value of its
audience may not increase as anticipated, which could adversely affect its subscription and
advertising revenue. AOL believes that it must offer compelling and differentiated search
functionality, content, features, services, applications and tools to attract and retain
subscribers and to attract Internet users to, and generate increased activity on, the AOL Network.
AOL also anticipates that subscribers and Internet users may demand an escalating quality of
offerings. If AOL is unable to provide offerings that are compelling to subscribers and Internet
users, the size and value of AOL’s audience may be adversely affected. With respect to search
functionality, AOL has agreed to use Google’s algorithmic search and sponsored links on an
exclusive basis through December 20, 2010. Although AOL retains the ability to differentiate its
search product from Google and other providers, competing search technologies may grow in
popularity, and the exclusivity in certain circumstances may limit AOL’s flexibility to change
providers of these products in the future. With respect to content, although AOL has access to
certain content provided by the Company’s other businesses, it also may be required to make
substantial payments to third parties from whom it licenses such content, and costs for such
content may continue to increase as a result of competition or for other reasons. Further, many of
AOL’s content arrangements with third parties are non-exclusive, so competitors may be able to
offer similar or identical content. If AOL is unable to acquire or develop compelling content at
reasonable prices or if other companies broadcast content that is similar to or the same as that
provided by AOL, the size and value of AOL’s audience may be adversely
69
affected. If the size and value of AOL’s audience does not grow significantly, AOL’s
subscription and advertising revenue could be adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Company Purchases of Equity Securities
The following table provides information about purchases by the Company during the quarter
ended March 31, 2006 of equity securities registered by the Company pursuant to Section 12 of the
Exchange Act.
Issuer Purchases of Equity Securities
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Total Number of |
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Approximate Dollar |
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|
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|
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Shares Purchased as |
|
Value of Shares that |
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Part of Publicly |
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May Yet Be |
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Total Number of |
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Average Price |
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Announced Plans or |
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Purchased Under the |
| Period |
|
Shares Purchased(1) |
|
Paid Per Share(2) |
|
Programs(3) |
|
Plans or Programs(4) |
January 1,
2006 —January 31,
2006 |
|
|
41,739,863 |
|
|
$ |
17.42 |
|
|
|
41,737,200 |
|
|
$ |
17,024,716,695 |
|
February 1, 2006
—February 28, 2006 |
|
|
81,637,017 |
|
|
$ |
17.95 |
|
|
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81,413,800 |
|
|
$ |
15,563,510,011 |
|
March 1, 2006
—March 31, 2006 |
|
|
109,928,526 |
|
|
$ |
17.12 |
|
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109,916,496 |
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$ |
13,682,169,903 |
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Total |
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233,305,406 |
|
|
$ |
17.46 |
|
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233,067,496 |
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| (1) |
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The total number of shares purchased includes (a) shares of Common Stock purchased by the
Company under the publicly announced stock repurchase program described in footnote (3) below,
and (b) shares of Common Stock that are tendered by employees to the Company to satisfy the
employees’ tax withholding obligations in connection with the vesting of awards of restricted
stock, which are repurchased by the Company based on their fair market value on the vesting
date. The number of shares of Common Stock purchased by the Company in connection with the
vesting of such awards totaled 2,663 shares, 223,217 shares and 12,030 shares, respectively,
for the months of January, February and March. |
| |
| (2) |
|
The calculation of the average price paid per share does not give effect to any fees,
commissions or other costs associated with the repurchase of such shares. |
| |
| (3) |
|
On August 3, 2005, the Company announced that its Board of Directors had authorized a Common
Stock repurchase program that allows the Company to repurchase, from time to time, up to $5
billion of Common Stock over a two-year period. On November 2, 2005, the Company announced
that its Board of Directors had authorized the increase of the amount that may be repurchased
under the Company’s publicly announced stock repurchase program to an aggregate of up to $12.5
billion of Common Stock. In addition, on February 17, 2006, the Company announced that it
would increase its stock repurchase program and extend the program’s ending date. Under the
extended program, the Company has authority to repurchase up to an aggregate of $20 billion of
Common Stock during the period from July 29, 2005 through December 31, 2007. Purchases under
the stock repurchase program may be made from time to time on the open market and in privately
negotiated transactions. The size and timing of these purchases will be based on a number of
factors including price and business and market conditions. In the past, the Company has
repurchased shares of Common Stock pursuant to trading programs under Rule 10b5-1 promulgated
under the Exchange Act, and it may repurchase shares of Common Stock under such trading
programs in the future. |
| |
| (4) |
|
The approximate dollar value of shares that may yet be purchased under the stock repurchase
program reflects the increase from $12.5 billion to $20 billion announced on February 17, 2006
as though the increase had occurred prior to January 1, 2006. |
Item 5. Other Information.
On
April 27, 2006, the Board of Directors of the Company approved certain changes to the Time Warner
Inc. 1988 Restricted Stock and Restricted Stock Unit Plan for Non-Employee Directors and to the
form of agreement used for stock option grants to non-employee directors. The changes, which will
apply to awards made after the date of approval, were made to include specific provisions
addressing the treatment of restricted stock or restricted stock units and stock options granted to
non-employee directors in the event a non-employee director receives more “withhold” votes than
“for” votes in an uncontested election of directors and, pursuant to recently-adopted provisions of
the Company’s By-laws, such director submits an offer to resign, which is accepted by the Board.
For a non-employee director leaving the Board under these circumstances, awards of restricted stock
units, restricted stock and stock options will vest at the date the individual ceases to serve as a
director and, for stock options, the individual will have three years to exercise vested options,
which is consistent with the treatment that would apply if a non-employee director is not
re-elected by the stockholders.
70
Item 6. Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference
as a part of this report and such Exhibit Index is incorporated herein by reference.
71
TIME WARNER INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
| |
|
|
|
|
| |
TIME WARNER INC.
(Registrant)
|
|
| Date: May 3, 2006 |
/s/ Wayne H. Pace |
|
| |
Wayne H. Pace |
|
| |
Executive Vice President and Chief Financial Officer |
|
| |
72
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
| |
|
|
| Exhibit No. |
|
Description of Exhibit |
10.1
|
|
Statement of Amendments to the Time Warner Inc. 2003 Stock
Incentive Plan approved March 22, 2006. |
|
|
|
10.2
|
|
Time Warner Inc. 1988 Restricted Stock and Restricted
Stock Unit Plan for Non-Employee Directors, as amended
through April 27, 2006. |
|
|
|
10.3
|
|
Form of Non-Qualified Stock Option Agreement, Directors
Version 5 (for awards of stock options to non-employee
directors under the Time Warner Inc. 1999 Stock Plan). |
|
|
|
10.4
|
|
$500 Million Three-Year Term Loan Credit Agreement, dated
as of April 13, 2006, among TW AOL Holdings Inc., AOL
Holdings LLC, AOL LLC, the Lenders from time to time party
thereto, and BNP Paribas and The Bank of Tokyo-Mitsubishi
UFJ, Ltd., New York Branch, as Co-Administrative Agents. |
|
|
|
18.1
|
|
Letter regarding change in accounting principle from Ernst
& Young LLP, dated May 3, 2006, to the Board of Directors
of Time Warner Inc. |
|
|
|
31.1
|
|
Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, with
respect to the Company’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2006. |
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, with
respect to the Company’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2006. |
|
|
|
32
|
|
Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, with respect to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March
31, 2006. † |
|
|
|
| † |
|
This certification will not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that
section. Such certification will not be deemed to be incorporated by reference into any filing
under the Securities Act or Securities Exchange Act, except to the extent that the Company
specifically incorporates it by reference. |
73