EXHIBIT 99.1
FOR IMMEDIATE RELEASE:
TIME WARNER INC. REPORTS RESULTS FOR
2005 FULL YEAR AND FOURTH QUARTER
NEW YORK, FEBRUARY 1, 2006 - Time Warner Inc. (NYSE:TWX) today reported
financial results for its fourth quarter and full year ended December 31, 2005.
Chairman and Chief Executive Officer Dick Parsons said: "I'm pleased with
our Company's 2005 financial performance that drew strength from across our
businesses -- led by double-digit gains at our Cable and Networks segments. We
achieved all of our full-year financial objectives, and each of our businesses
made significant progress against its respective operating and competitive
goals. In 2005, our film studios combined to top the domestic and global box
offices as well as U.S. home video sales; TNT and TBS continued to lead their
competitors in key audiences; and Time Inc. again ranked first in U.S. magazine
advertising. Time Warner Cable set new records in its video, data and voice
subscription growth for the year, while we made important strategic progress at
AOL. At the same time, we continued to allocate our capital to targeted
high-growth, strategic opportunities inside and outside the Company, including
our $12.5 billion stock repurchase plan."
Mr. Parsons continued: "Our scale and closely related, industry-leading
businesses give Time Warner significant competitive advantages and strategic
flexibility in today's rapidly changing environment. In the coming year, we'll
continue to derive real value from our unique opportunities and deliver on our
top priority for our shareholders: to provide a highly competitive near-term
return while building sustainable value."
FULL-YEAR RESULTS
Revenues rose 4% over 2004 to $43.7 billion, reflecting increases at the
Company's Cable, Networks, Publishing and Filmed Entertainment reporting
segments.
Adjusted Operating Income before Depreciation and Amortization climbed to $10.7
billion, up 8% from $9.9 billion in the prior year, driven by double-digit
growth at the Cable and Networks segments as well as gains at the AOL and
Publishing segments. Operating Income decreased to $4.5 billion in 2005 from
$6.2 billion in 2004 - reflecting primarily the costs associated with securities
litigation, offset partly by the growth in Adjusted Operating Income before
Depreciation and Amortization.
Cash Provided by Operations amounted to $5.0 billion, and Free Cash Flow grew to
$4.4 billion. As of December 31, Net Debt was $16.1 billion, essentially flat
compared to the beginning of 2005, reflecting payments made in connection with
securities litigation and government investigations, repurchases of common stock
and dividends.
Diluted Income per Common Share before Discontinued Operations and Cumulative
Effect of Accounting Change was $0.62 for the year ended December 31, 2005,
compared to $0.68 in 2004. The current and prior year amounts included certain
items affecting comparability that are described in detail in the Consolidated
Reported Net Income and Per Share Results section below. The net impact of such
items was to decrease the current year results by $0.18 and the prior year
results by $0.01 per diluted common share.
FOURTH-QUARTER RESULTS
Revenues climbed 7% over the same period in 2004 to $11.9 billion, driven by
increases at the Filmed Entertainment, Cable, Networks and Publishing segments.
Adjusted Operating Income before Depreciation and Amortization rose 18% to $2.9
billion, reflecting double-digit increases at the Networks, Filmed
Entertainment, Cable and Publishing segments. Operating Income improved 37% to
$2.2 billion.
Diluted Income per Common Share before Discontinued Operations and Cumulative
Effect of Accounting Change was $0.29 for the three months ended December 31,
2005, compared to $0.24 in last year's fourth quarter. The current and prior
year amounts included certain items affecting comparability that are described
in detail in the Consolidated Reported Net Income and Per Share Results section
below. The net impact of such items was to increase both the current and prior
year results by $0.04 per diluted common share.
UPDATE ON $12.5 BILLION STOCK REPURCHASE PROGRAM
The Board of Directors last year authorized a $12.5 billion stock repurchase
program that is scheduled to run to August 2007.
From inception through January 31, 2006, the Company has repurchased
approximately 167 million shares of common stock for approximately $3.0 billion.
Purchases for 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 such factors as price and business and market
conditions.
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PERFORMANCE OF SEGMENTS
The schedules below reflect Time Warner's performance for the three months and
full year ended December 31, by line of business (in millions):
THREE AND TWELVE MONTHS ENDED DECEMBER 31:
THREE MONTHS ENDED DECEMBER 31, TWELVE MONTHS ENDED DECEMBER 31,
2005 2004 2005 2004
--------- -------- -------- --------
REVENUES:
AOL $ 2,012 $ 2,183 $ 8,283 $ 8,692
Cable 2,500 2,204 9,498 8,484
Filmed Entertainment 3,624 3,272 11,924 11,853
Networks 2,439 2,293 9,611 9,054
Publishing 1,727 1,638 5,846 5,565
Intersegment Eliminations (415) (481) (1,510) (1,559)
--------- -------- -------- --------
TOTAL REVENUES $ 11,887 $ 11,109 $ 43,652 $ 42,089
========= ======== ======== ========
ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND
AMORTIZATION (a):
AOL (b) $ 342 $ 326 $ 1,913 $ 1,762
Cable 985 887 3,652 3,278
Filmed Entertainment (c) 402 284 1,284 1,474
Networks (d) 811 663 2,999 2,701
Publishing (e) 448 405 1,251 1,188
Corporate (f) (g) (136) (116) (430) (484)
Intersegment Eliminations 19 (18) (7) (22)
--------- -------- -------- --------
TOTAL ADJUSTED OPERATING INCOME BEFORE DEPRECIATION
AND AMORTIZATION (a) $ 2,871 $ 2,431 $ 10,662 $ 9,897
========= ======== ======== ========
OPERATING INCOME:
AOL (b) $ 174 $ 120 $ 1,168 $ 934
Cable 555 497 1,988 1,764
Filmed Entertainment (c) 307 201 943 1,157
Networks (d) 741 602 2,738 2,461
Publishing (e) 392 341 1,028 934
Corporate (f) (g) (148) (127) (474) (527)
Legal recoveries/(expenses) (h) 160 (13) (2,865) (536)
Intersegment Eliminations 19 (18) (7) (22)
--------- -------- -------- --------
TOTAL OPERATING INCOME $ 2,200 $ 1,603 $ 4,519 $ 6,165
========= ======== ======== ========
- ----------
(a) Adjusted Operating Income before Depreciation and Amortization excluded
the impact of noncash impairments of goodwill, intangible and fixed
assets, as well as gains and losses on asset sales and amounts related to
securities litigation and government investigations. Refer to the
reconciliations of Adjusted Operating Income before Depreciation and
Amortization to Operating Income before Depreciation and Amortization on
pages 15 and 16. Operating Income included these items in their respective
periods.
(b) For the twelve months ended December 31, 2005, Adjusted Operating Income
before Depreciation and Amortization excluded a noncash goodwill
impairment charge of $24 million related to America Online Latin America,
Inc., a $5 million gain related to the sale of a building and a $5 million
gain related to the 2004 sale of Netscape Security Solutions; for the
three and twelve months ended December 31, 2004, Adjusted Operating Income
before Depreciation and Amortization excluded a $7 million gain on the
sale of Netscape Security Solutions; for the twelve months ended December
31, 2004, Adjusted Operating Income before Depreciation and Amortization
excluded a $13 million gain on the sale of AOL Japan and a noncash
impairment charge of $10 million related to a building that was held for
sale. Operating Income included these amounts in their respective periods.
(c) For the three and twelve months ended December 31, 2005, Adjusted
Operating Income before Depreciation and Amortization excluded a $5
million gain related to the sale of a property in California at Filmed
Entertainment. Operating Income included this amount in both periods.
(d) For the twelve months ended December 31, 2004, Adjusted Operating Income
before Depreciation and Amortization excluded a loss of approximately $7
million related to the sale of the winter sports teams. Operating Income
included this amount in the period.
(e) For the twelve months ended December 31, 2005, Adjusted Operating Income
before Depreciation and Amortization excluded an $8 million gain 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; for the twelve months ended December 31,
2004, Adjusted Operating Income before Depreciation and Amortization
excluded an $8 million gain related to the sale of a building. Operating
Income included these items in their respective periods.
(f) For the three and twelve months ended December 31, 2005, Adjusted
Operating Income before Depreciation and Amortization excluded $160
million in net recoveries and $2.9 billion in net expenses, respectively,
related to securities litigation and government investigations; for the
three and twelve months ended December 31, 2004, Adjusted Operating Income
before Depreciation and Amortization excluded $13 million and $536
million, respectively, in net expenses related to securities litigation
and government investigations.
(g) For the twelve months ended December 31, 2004, Adjusted Operating Income
before Depreciation and Amortization and Operating Income included $53
million of costs associated with the relocation from the Company's former
corporate headquarters, of which approximately $4 million was reversed in
the twelve months ended December 31, 2005, as updated estimates indicated
they would no longer be incurred.
(h) Represented amounts related to securities litigation and government
investigations. For segment reporting purposes in the Company's financial
statements, amounts are reflected in the results of the Corporate segment.
For the three and twelve months ended December 31, 2005, amounts included
$160 million in net recoveries and $2.9 billion in net expenses,
respectively, related to securities litigation and government
investigations. For the three and twelve months ended December 31, 2004,
amounts included $13 million and $536 million, respectively, in net
expenses related to securities litigation and government investigations.
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Presented below is a discussion of Time Warner's segments for the fourth quarter
and full year 2005. Unless otherwise noted, the dollar amounts in parentheses
represent year-over-year changes.
AOL (AMERICA ONLINE)
FULL-YEAR RESULTS
REVENUES declined 5% ($409 million) to $8.3 billion, reflecting a 10% decrease
($722 million) in Subscription revenues, offset in part by a 33% increase ($333
million) in Advertising revenues. Driving the growth in Advertising revenues
were higher revenues from Advertising.com ($162 million), which was acquired on
August 2, 2004, as well as a 35% rise ($116 million) in paid search and an
increase in traditional advertising. The decline in Subscription revenues was
due to a decrease in domestic AOL brand members as well as unfavorable changes
in the price plan mix of AOL brand subscribers.
ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION climbed 9% ($151
million) to $1.9 billion, benefiting from reductions in network ($485 million)
and marketing expenses, as well as higher Advertising revenues, offset partially
by lower domestic Subscription revenues. The current and prior year periods
reflected net restructuring charges of $10 million and $50 million,
respectively.
OPERATING INCOME grew 25% ($234 million) to $1.2 billion, due to the increase in
Adjusted Operating Income before Depreciation and Amortization as well as lower
depreciation expense ($105 million).
FOURTH-QUARTER RESULTS
REVENUES decreased 8% ($171 million) to $2.0 billion. ADJUSTED OPERATING INCOME
BEFORE DEPRECIATION AND AMORTIZATION rose 5% ($16 million) to $342 million. The
current and prior year quarters reflected restructuring charges of $15 million
and $52 million, respectively. The 2004 period also included a $56 million
reserve reversal related to the extension of the moratorium on Internet sales
taxes (Internet Tax Nondiscrimination Act). This reversal had no meaningful
full-year impact, as the reserve was primarily accrued earlier in 2004.
OPERATING INCOME grew 45% ($54 million) to $174 million, benefiting from the
increase in Adjusted Operating Income before Depreciation and Amortization as
well as lower depreciation ($33 million) and amortization ($12 million)
expenses.
HIGHLIGHTS
As of December 31, 2005, the AOL service totaled 19.5 million U.S. members, a
decline of 625,000 from the prior quarter and 2.8 million from the year-ago
quarter. In Europe, the AOL service had 6.0 million members, a decrease of
108,000 from the previous quarter and a decline of 287,000 from last year's
quarter.
During the fourth quarter, AOL had 109 million average monthly domestic unique
visitors and 54 billion page views, according to comScore Media Metrix, which
translates into 164 average monthly page views per unique visitor.
CABLE (TIME WARNER CABLE)
FULL-YEAR RESULTS
REVENUES rose 12% ($1.0 billion) to $9.5 billion, representing a 12% increase
($995 million) in Subscription revenues and a 4% climb ($19 million) in
Advertising revenues. Subscription revenues benefited from a 22% increase ($385
million) in high-speed data revenues, significant growth in Digital Phone
revenues ($253 million) and an 18% rise ($121 million) in enhanced digital video
revenues as well
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as higher basic cable rates. Average monthly revenue per basic cable subscriber
climbed 12% to approximately $85.
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION increased 11% ($374
million) to $3.7 billion, due to the growth in Revenues, offset in part by a 10%
rise in programming expenses ($195 million) and higher general operating
expenses for new services. The current year includes merger-related and
restructuring charges of $42 million. The prior year included legal settlement
costs of $34 million related to Urban Cable.
OPERATING INCOME climbed 13% ($224 million) to $2.0 billion, reflecting the
increase in Operating Income before Depreciation and Amortization, offset partly
by higher depreciation expense ($150 million).
FOURTH-QUARTER RESULTS
REVENUES rose 13% ($296 million) to $2.5 billion. OPERATING INCOME BEFORE
DEPRECIATION AND AMORTIZATION grew 11% ($98 million) to $985 million. The fourth
quarter included a 6% ($28 million) increase in programming expenses, which
reflected a net benefit of approximately $25 million primarily associated with
changes in programming estimates (a portion of which were accrued earlier in
2005). The quarter also included $9 million of merger-related and restructuring
charges. OPERATING INCOME climbed 12% ($58 million) to $555 million, offset
partly by higher depreciation expense ($41 million).
SUBSCRIBER UPDATE
As of December 31, 2005, Time Warner Cable managed nearly 11.0 million basic
video cable subscribers, which included approximately 1.6 million subscribers in
unconsolidated joint ventures. Basic video cable subscribers climbed 34,000 from
the prior quarter (the highest fourth-quarter growth since 2002) and 73,000 from
the year-ago quarter. Digital video subscribers grew 199,000 in the quarter (the
largest fourth-quarter increase since 2002) and 595,000 in the full year for a
total of 5.4 million, representing 49% of basic video cable subscribers. Digital
Video Recorder subscribers rose 219,000 during the quarter (the largest
quarterly increase ever) and 621,000 for the full year to 1.5 million
subscribers, serving 27% of digital video customers.
Residential high-speed data subscribers grew by 265,000 during the quarter and
909,000 in the full year for a total of 4.8 million, representing 25% of
service-ready homes passed. This marks the largest fourth-quarter increase since
2002, and it is the fourth consecutive quarter in which net residential
high-speed data subscriber additions surpassed 200,000. Digital Phone
subscribers climbed 246,000 in the quarter (the largest quarterly increase ever)
and 880,000 in the full year for a total of 1.1 million, representing 7% of
eligible homes passed.
FILMED ENTERTAINMENT (WARNER BROS. ENTERTAINMENT & NEW LINE CINEMA)
FULL-YEAR RESULTS
REVENUES increased 1% ($71 million) to $11.9 billion. The current year benefited
from growth in home video revenue from television product, record international
television distribution results at Warner Bros. and a strong domestic theatrical
slate. These items more than offset difficult comparisons to the prior year's
industry record international theatrical performance at Warner Bros., which
included Harry Potter and the Prisoner of Azkaban, Troy and The Last Samurai, as
well as higher international overages from New Line's The Lord of the Rings
trilogy and higher domestic network and syndication revenues from episodic
television properties, most notably Friends, The Drew Carey Show and Seinfeld,
in the prior year.
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ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION decreased 13%
($190 million) to $1.3 billion. This decline is due to difficult comparisons to
the prior year contributions from The Lord of the Rings trilogy, domestic
television syndication results and the international theatrical slate. The
current year includes restructuring charges of $33 million.
OPERATING INCOME declined 18% ($214 million) to $943 million, due to the
decrease in Adjusted Operating Income before Depreciation and Amortization as
well as higher depreciation and amortization expenses.
FOURTH-QUARTER RESULTS
REVENUES climbed 11% ($352 million) to $3.6 billion. ADJUSTED OPERATING INCOME
BEFORE DEPRECIATION AND AMORTIZATION grew 42% ($118 million) to $402 million.
The current year quarter reflected restructuring charges of $33 million.
OPERATING INCOME rose 53% ($106 million) to $307 million, driven by higher
Adjusted Operating Income before Depreciation and Amortization, offset partially
by increases in amortization and depreciation expenses.
ACHIEVEMENTS
For the fifth consecutive year, Time Warner's studios combined for the #1
position in global box office. In domestic box office, Time Warner's studios
captured an industry-leading share of 21.7% in 2005, with four films each
generating more than $200 million in domestic box office receipts - Warner
Bros.' Harry Potter and the Goblet of Fire, Charlie and the Chocolate Factory
and Batman Begins as well as New Line's Wedding Crashers.
Warner Bros. Pictures earned first place in both the domestic ($1.4 billion) and
international ($1.9 billion) box offices in 2005. Internationally, Warner Bros.
Pictures has grossed over a billion dollars a year for five years in a row and
led in international box office in four of the past five years.
Warner Home Video ranked #1 for the fifth consecutive year, garnering an
industry-leading 21.4% share of home video sales in the U.S. Notable 2005 home
video releases included Warner Bros.' The Polar Express, Batman Begins, Charlie
and the Chocolate Factory, Troy and Ocean's Twelve and New Line's The Notebook
and Monster-in-Law.
At the 63rd Annual Golden Globe Awards, Warner Bros. Pictures received the Best
Supporting Actor award for George Clooney's performance in Syriana, and Warner
Independent Pictures' Paradise Now was named the Best Foreign Language Film.
Among the nominations for the 78th Annual Academy Awards are six for Warner
Independent Pictures' Good Night, and Good Luck, as well as one each for March
of the Penguins and Paradise Now. At Warner Bros. Pictures, Batman Begins,
Charlie and the Chocolate Factory, Harry Potter and the Goblet of Fire, North
Country, Syriana and Tim Burton's Corpse Bride all garnered nominations. And
New Line's A History of Violence and The New World received a total of three
nominations.
NETWORKS (TURNER BROADCASTING, HBO & THE WB NETWORK)
FULL-YEAR RESULTS
REVENUES rose 6% ($557 million) to $9.6 billion, benefiting from growth in
Subscription, Advertising and Content revenues. Subscription revenues climbed 7%
($347 million), due to higher rates and, to a lesser extent, increased
subscribers at Turner and HBO. These subscription gains were offset in part by
the lower net effect of resolving certain contractual agreements ($22 million in
the current year compared to approximately $50 million last year). The 7% growth
($191 million) in Advertising revenues included an 11% rise at the Turner
networks, offset partly by a 9% decline at The WB Network. Content revenues
climbed 4% ($41 million), due mainly to higher ancillary sales of HBO's original
programming, offset in
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part by lower licensing revenue associated with fewer episodes of Everybody
Loves Raymond and the absence of revenue ($22 million) from Turner's winter
sports teams and arena, which were sold in the first quarter of 2004.
ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION grew 11% ($298
million) to $3.0 billion, reflecting higher Subscription, Advertising and
Content revenues, offset partially by an increase in programming expenses ($101
million), due to higher costs for original series and sports rights at Turner
and a rise in overall general operating expenses. The current year includes
restructuring charges of $4 million. The prior year included a $75 million
benefit related to bad debt reserve reversals associated with the Adelphia
bankruptcy.
OPERATING INCOME climbed 11% ($277 million) to $2.7 billion, benefiting from the
increase in Adjusted Operating Income before Depreciation and Amortization,
offset partially by higher depreciation expense.
FOURTH-QUARTER RESULTS
REVENUES grew 6% ($146 million) to $2.4 billion. OPERATING INCOME BEFORE
DEPRECIATION AND AMORTIZATION climbed 22% ($148 million) to $811 million. The
current year quarter reflected restructuring charges of $4 million. OPERATING
INCOME rose 23% ($139 million) to $741 million, reflecting the increase in
Operating Income before Depreciation and Amortization, offset in part by higher
depreciation expense.
ACHIEVEMENTS
For the year, TNT was the leader in adults 18-49 and adults 25-54 in prime-time
and total day - setting new advertising-supported cable records in both
categories for the best ever annual delivery. In 2005, TBS ranked #1 in
prime-time delivery among adults 18-34 and aired the four top comedies on
advertising-supported cable among adults 18-49 - Sex and the City, Everybody
Loves Raymond, Seinfeld and Friends. In its first year as an individually rated
network, Adult Swim led in total day delivery among adults 18-34. No
advertising-supported cable network has ever delivered as many adult 18-34
viewers.
HBO earned three Golden Globe awards in 2006, with two for Empire Falls and one
for Lackawanna Blues. HBO earned three Academy Award nominations for The Death
of Kevin Carter: Casualty of the Bang Bang Club, The Mushroom Club and The Moon
and the Son: An Imagined Conversation.
PUBLISHING (TIME INC.)
FULL-YEAR RESULTS
REVENUES were up 5% ($281 million) to $5.8 billion, reflecting a 5% increase
($134 million) in Advertising revenues and an 18% climb ($99 million) in Content
revenues, driven by Time Warner Book Group. Advertising revenues benefited from
the acquisitions of Essence and Grupo Editorial Expansion, higher contributions
from recent magazine launches, led by Life, and strength at Real Simple and
People, offset partially by lower revenues at certain magazines, including
Sports Illustrated and Time.
ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION rose 5% ($63
million) to $1.3 billion, due primarily to growth at Time Warner Book Group,
Synapse and Real Simple, offset in part by restructuring charges of $28 million,
a decline at Time and greater start-up losses ($12 million).
OPERATING INCOME climbed 10% ($94 million) to $1.0 billion, benefiting from the
increase in Adjusted Operating Income before Depreciation and Amortization and
lower amortization expense ($41 million).
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FOURTH-QUARTER RESULTS
REVENUES increased 5% ($89 million) to $1.7 billion. OPERATING INCOME BEFORE
DEPRECIATION AND AMORTIZATION rose 11% ($43 million) to $448 million. The
current year quarter reflected restructuring charges of $28 million. OPERATING
INCOME climbed 15% ($51 million) to $392 million, driven by the increase in
Operating Income before Depreciation and Amortization and lower amortization
expense.
ACHIEVEMENTS
Based on Publishers Information Bureau (PIB) data, Time Inc.'s 2005
industry-leading share of overall domestic advertising was 23.4%, exclusive of
newspaper supplements.
People was named Advertising Age's 2005 "Magazine of the Year," with Real Simple
ranked second. (Real Simple has made the list four straight years.)
IPC Media's Pick Me Up won the British Society of Magazine Editors' Launch of
the Year award. This is the second year in a row IPC received this award (Nuts
in 2004).
Time Warner Book Group added 16 titles to the New York Times bestseller list
this quarter - with seven titles at #1, including James Patterson's Mary, Mary,
Nicholas Sparks' At First Sight, Michael Connelly's The Lincoln Lawyer and Joel
Osteen's Your Best Life Now - bringing the 2005 total to a record 69 titles.
CONSOLIDATED REPORTED NET INCOME AND PER SHARE RESULTS
FULL-YEAR RESULTS
For the year ended December 31, 2005, the Company reported Net Income of $2.9
billion, or $0.62 per diluted common share. This compares to 2004 Net Income of
$3.4 billion, or $0.72 per diluted common share.
For the year ended December 31, 2005, the Company reported Income before
Discontinued Operations and Cumulative Effect of Accounting Change of $2.9
billion, or $0.62 per diluted common share. This compares to Income before
Discontinued Operations and Cumulative Effect of Accounting Change in 2004 of
$3.2 billion, or $0.68 per diluted common share.
Certain pre-tax items in the current year affected comparability, including $2.9
billion in net expenses related to securities litigation and government
investigations, a $24 million impairment related to AOL Latin America and a $13
million writedown on an investment in NTV, offset in part by a $53 million gain
related to an increase in fair value of the option in Warner Music Group, an $8
million gain related to the collection of a loan made in conjunction with the
Company's 2003 sale of Time Life, a $5 million gain on the sale of a building at
AOL and a $5 million gain related to the sale of America Online's Netscape
Security Solutions business, as well as a $5 million gain on the sale of a
property in California at Filmed Entertainment. The current year also included a
$925 million gain on the sale of an investment in Google, a $44 million gain
related to the sale of an investment in Columbia House and $55 million in other
net investment gains. In addition, the current year's income tax provision
benefited from $481 million related to certain state tax law changes and state
tax methodologies and the recognition of net capital loss carryforwards.
Certain items in the prior year similarly affected comparability, including $536
million in net expenses related to securities litigation and government
investigations, a $10 million impairment related to the sale of a building at
America Online and an approximate $7 million loss on the sale of Turner's winter
sports teams, offset in part by a $50 million gain related to an increase in
fair value of the option in Warner Music
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Group and gains of $13 million, $8 million and $7 million on the sales of AOL
Japan, a Time Inc. building, and America Online's Netscape Security Solutions
business, respectively. The prior year also reflected $424 million in pre-tax
net investment gains, which included $188 million, $113 million and $44 million
related to the sale of investments in Google, VIVA and Gateway, respectively, as
well as a $110 million tax benefit associated with the realization of net
capital loss carryforwards.
In aggregate, the items noted above had the net effect of decreasing the current
year's Income before Discontinued Operations and Cumulative Effect of Accounting
Change by $849 million (net of taxes), or $0.18 per diluted common share, and
decreasing the previous year's Income before Discontinued Operations and
Cumulative Effect of Accounting Change by $33 million (net of taxes), or $0.01
per diluted common share. Excluding such items, the growth in Income before
Discontinued Operations and Cumulative Effect of Accounting Change and Diluted
Income per Common Share before Discontinued Operations and Cumulative Effect of
Accounting Change was driven primarily by an increase in Operating Income and
lower interest expense, offset partly by a higher tax provision.
FOURTH-QUARTER RESULTS
For the three months ended December 31, 2005, the Company reported Net Income of
$1.4 billion, or $0.29 per diluted common share. This compares to Net Income in
the 2004 comparable quarter of $1.1 billion, or $0.24 per diluted common share.
For the three months ended December 31, 2005, the Company reported Income before
Discontinued Operations and Cumulative Effect of Accounting Change of $1.4
billion, or $0.29 per diluted common share. This compares to Income before
Discontinued Operations and Cumulative Effect of Accounting Change in 2004 of
$1.1 billion, or $0.24 per diluted common share.
Certain pre-tax items in the current year affected comparability, including $160
million in net recoveries related to securities litigation and government
investigations, a $5 million gain on the sale of a property in California at
Filmed Entertainment and a $108 million benefit in the tax provision related to
changes in state tax methodologies and the recognition of net capital loss
carryforwards, offset in part by $4 million in net investment losses.
Certain items in the prior year quarter similarly affected comparability,
including $82 million in net investment gains (due primarily to a $44 million
gain on the sale of the Gateway investment), a $50 million gain related to an
increase in fair value of the option in Warner Music Group and a $7 million gain
on the sale of America Online's Netscape Security Solutions business, offset
partly by $13 million in net expenses related to securities litigation and
government investigations. The prior year quarter's amount also included a $110
million tax benefit associated with the realization of net capital loss
carryforwards.
In aggregate, the items noted above had the net effect of increasing the current
year quarter's Income before Discontinued Operations and Cumulative Effect of
Accounting Change by $206 million (net of taxes), or $0.04 per diluted common
share, and increasing the previous year period's Income before Discontinued
Operations and Cumulative Effect of Accounting Change by $183 million (net of
taxes), or $0.04 per diluted common share. Excluding such items, the growth in
Income before Discontinued Operations and Cumulative Effect of Accounting Change
and Diluted Income per Common Share before Discontinued Operations and
Cumulative Effect of Accounting Change was driven primarily by an increase in
Operating Income and lower interest expense, offset partly by a higher tax
provision.
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USE OF OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION, ADJUSTED OPERATING
INCOME BEFORE DEPRECIATION AND AMORTIZATION AND FREE CASH FLOW
During the fourth quarter of 2005, the Company revised its definitions of
Adjusted Operating Income before Depreciation and Amortization and Free Cash
Flow to exclude all of the amounts associated with the securities litigation and
SEC/DOJ government investigations. In addition to legal reserves that have been
previously excluded, Adjusted Operating Income before Depreciation and
Amortization now excludes legal and professional expenses and insurance
recoveries related to the securities litigation and government investigations.
Similarly, in addition to payments related to securities litigation that have
been previously excluded, Free Cash Flow now excludes legal and professional
expenses and insurance recoveries related to the securities litigation and
government investigations and payments for settlements related to the government
investigations. These revised definitions have been applied for all periods
presented.
The Company utilizes Operating Income before Depreciation and Amortization,
among other measures, to evaluate the performance of its businesses. The Company
also evaluates the performance of its businesses using Operating Income before
Depreciation and Amortization excluding the impact of noncash impairments of
goodwill, intangible and fixed assets, as well as gains and losses on asset
sales and amounts related to securities litigation and government investigations
(referred to herein as Adjusted Operating Income before Depreciation and
Amortization). Both Operating Income before Depreciation and Amortization and
Adjusted Operating Income before Depreciation and Amortization are considered
important indicators 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. Moreover, Adjusted Operating Income before Depreciation and
Amortization does not reflect gains and losses on asset sales or amounts related
to securities litigation and government investigations or any impairment charge
related to goodwill, intangible assets and fixed assets. 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.
Free Cash Flow is Cash Provided by Operations (as defined by U.S. generally
accepted accounting principles) plus payments related to securities litigation
and government investigations (net of any insurance recoveries), less cash flow
attributable to discontinued operations, capital expenditures and product
development costs, principal payments on capital leases, and partnership
distributions, if any. The Company uses Free Cash Flow to evaluate the
performance of its businesses and this measure is considered an important
indicator of the Company's liquidity, including its ability to reduce net debt,
make strategic investments, pay dividends to common shareholders and repurchase
stock. A limitation of this measure, however, is that it does not reflect
payments made in connection with the securities litigation and government
investigations, which reduce liquidity.
Operating Income before Depreciation and Amortization, Adjusted Operating Income
before Depreciation and Amortization and Free Cash Flow should be considered in
addition to, not as a substitute for, the Company's Operating Income, Net Income
and various cash flow measures (e.g., Cash Provided by Operations), as well as
other measures of financial performance and liquidity reported in accordance
with U.S. generally accepted accounting principles.
ABOUT TIME WARNER INC.
Time Warner Inc. is a leading media and entertainment company, whose businesses
include interactive services, cable systems, filmed entertainment, television
networks and publishing.
10
INFORMATION ON BUSINESS OUTLOOK RELEASE AND EARNINGS CONFERENCE CALL
Time Warner Inc. issued a separate release today regarding its 2006 full-year
business outlook.
The Company's earnings conference call can be heard live at 8:30 am ET on
Wednesday, February 1, 2006. To listen to the call, visit
www.timewarner.com/investors or AOL Keyword: IR.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This document includes certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are based
on management's current expectations or beliefs, and are subject to uncertainty
and changes in circumstances. Actual results may vary materially from those
expressed or implied by the statements herein due to changes in economic,
business, competitive, technological and/or regulatory factors, and other
factors affecting the operation of the businesses of Time Warner Inc. More
detailed information about these factors may be found in filings by Time Warner
with the Securities and Exchange Commission, including its most recent Annual
Report on Form 10-K and Quarterly Report on Form 10-Q. Time Warner is under no
obligation to, and expressly disclaims any such obligation to, update or alter
its forward-looking statements, whether as a result of new information, future
events, or otherwise.
CONTACTS:
Corporate Communications Investor Relations
- ------------------------ -------------------
Edward Adler (212) 484-6630 Jim Burtson (212) 484-8719
Susan Duffy (212) 484-6686 Kelli Turner (212) 484-8269
# # #
11
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
(MILLIONS, EXCEPT
PER SHARE AMOUNTS)
ASSETS
CURRENT ASSETS
Cash and equivalents..................................................................... $ 4,220 $ 6,139
Restricted cash.......................................................................... -- 150
Receivables, less allowances of $2.225 and $2.109 billion................................ 6,411 5,512
Inventories.............................................................................. 1,806 1,737
Prepaid expenses and other current assets................................................ 1,026 920
----------- -----------
Total current assets..................................................................... 13,463 14,458
Noncurrent inventories and film costs.................................................... 4,916 4,415
Investments, including available-for-sale securities..................................... 3,518 4,703
Property, plant and equipment, net....................................................... 13,676 13,094
Intangible assets subject to amortization, net........................................... 3,522 3,892
Intangible assets not subject to amortization............................................ 39,813 39,656
Goodwill................................................................................. 40,416 39,667
Other assets............................................................................. 3,151 3,273
----------- -----------
Total assets............................................................................. $ 122,475 $ 123,158
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable......................................................................... $ 1,380 $ 1,339
Participations payable................................................................... 2,426 2,452
Royalties and programming costs payable.................................................. 1,074 1,018
Deferred revenue......................................................................... 1,473 1,653
Debt due within one year................................................................. 92 1,672
Other current liabilities................................................................ 6,100 6,468
Current liabilities of discontinued operations........................................... 43 50
----------- -----------
Total current liabilities................................................................ 12,588 14,652
Long-term debt........................................................................... 20,238 20,703
Deferred income taxes.................................................................... 15,138 14,943
Deferred revenue......................................................................... 681 749
Mandatorily convertible preferred stock.................................................. -- 1,500
Other liabilities........................................................................ 5,324 4,288
Noncurrent liabilities of discontinued operations........................................ 7 38
Minority interests....................................................................... 5,784 5,514
SHAREHOLDERS' EQUITY
Series LMCN-V common stock, $0.01 par value, 87.2 and 105.7 million shares outstanding... 1 1
Time Warner common stock, $0.01 par value, 4.498 and 4.483 billion shares outstanding.... 45 45
Paid-in-capital.......................................................................... 155,927 156,252
Accumulated other comprehensive income, net.............................................. (64) 106
Accumulated deficit...................................................................... (93,194) (95,633)
----------- -----------
Total shareholders' equity............................................................... 62,715 60,771
----------- -----------
Total liabilities and shareholders' equity............................................... $ 122,475 $ 123,158
=========== ===========
Note: Certain reclassifications have been made to the prior year's financial
information to conform to the December 31, 2005 presentation.
See accompanying notes.
12
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------- -----------------------------
2005 2004 2005 2004
---------- ---------- ----------- --------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Subscription .......................................... $ 5,577 $ 5,437 $ 22,222 $ 21,605
Advertising ........................................... 2,169 2,016 7,612 6,955
Content ............................................... 3,778 3,348 12,615 12,350
Other ................................................. 363 308 1,203 1,179
-------- -------- -------- --------
Total revenues ............................................. 11,887 11,109 43,652 42,089
Costs of revenues .......................................... (6,772) (6,490) (25,075) (24,449)
Selling, general and administrative ........................ (2,840) (2,799) (10,478) (10,274)
Amortization of intangible assets .......................... (151) (159) (597) (626)
Amounts related to securities litigation and government
investigations ........................................... 160 (13) (2,865) (536)
Merger-related and restructuring costs ..................... (89) (52) (117) (50)
Asset impairments .......................................... -- -- (24) (10)
Gains on disposal of assets, net ........................... 5 7 23 21
-------- -------- -------- --------
Operating income ........................................... 2,200 1,603 4,519 6,165
Interest expense, net ...................................... (314) (374) (1,266) (1,533)
Other income, net .......................................... 15 153 1,124 521
Minority interest expense, net ............................. (83) (74) (285) (246)
-------- -------- -------- --------
Income before income taxes, discontinued operations and
cumulative effect of accounting change ................... 1,818 1,308 4,092 4,907
Income tax provision ....................................... (452) (187) (1,187) (1,698)
-------- -------- -------- --------
Income before discontinued operations and cumulative effect
of accounting change ..................................... 1,366 1,121 2,905 3,209
Discontinued operations, net of tax ........................ -- 6 -- 121
-------- -------- -------- --------
Income before cumulative effect of accounting change ....... 1,366 1,127 2,905 3,330
Cumulative effect of accounting change, net of tax ......... -- -- -- 34
-------- -------- -------- --------
Net income ................................................. $ 1,366 $ 1,127 $ 2,905 $ 3,364
======== ======== ======== ========
Basic income per common share before discontinued operations
and cumulative effect of accounting change ............... $ 0.29 $ 0.24 $ 0.62 $ 0.70
Discontinued operations .................................... -- 0.01 -- 0.03
Cumulative effect of accounting change ..................... -- -- -- 0.01
-------- -------- -------- --------
Basic net income per common share .......................... $ 0.29 $ 0.25 $ 0.62 $ 0.74
======== ======== ======== ========
Average basic common shares ................................ 4,635.3 4,576.4 4,648.2 4,560.2
======== ======== ======== ========
Diluted income per common share before discontinued
operations and cumulative effect of accounting change .... $ 0.29 $ 0.24 $ 0.62 $ 0.68
Discontinued operations .................................... -- -- -- 0.03
Cumulative effect of accounting change ..................... -- -- -- 0.01
-------- -------- -------- --------
Diluted net income per common share ........................ $ 0.29 $ 0.24 $ 0.62 $ 0.72
======== ======== ======== ========
Average diluted common shares .............................. 4,672.1 4,706.8 4,710.0 4,694.7
======== ======== ======== ========
Cash dividends declared per share of common stock .......... $ 0.05 $ -- $ 0.10 $ --
======== ======== ======== ========
Note: Certain reclassifications have been made to the prior year's financial
information to conform to the December 31, 2005 presentation.
See accompanying notes.
13
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(UNAUDITED)
2005 2004
---------- ----------
(MILLIONS)
OPERATIONS
Net income (a)....................................................................... $ 2,905 $ 3,364
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change, net of tax............................. -- (34)
Depreciation and amortization.................................................. 3,277 3,207
Amortization of film costs..................................................... 3,513 3,547
Asset impairments.............................................................. 25 10
Gain on investments and other assets, net...................................... (1,086) (432)
Equity in (income) losses of investee companies, net of cash distributions..... (14) 20
Legal reserves related to securities litigation and government investigations........ 111 300
Changes in operating assets and liabilities, net of acquisitions..................... (3,756) (3,366)
Adjustments relating to discontinued operations...................................... (10) 2
---------- ----------
Cash provided by operations (b)(c)................................................... 4,965 6,618
---------- ----------
INVESTING ACTIVITIES
Investments and acquisitions, net of cash acquired................................... (680) (877)
Capital expenditures and product development costs................................... (3,246) (3,024)
Investment proceeds from available-for-sale securities............................... 991 532
Other investment proceeds............................................................ 439 2,866
---------- ----------
Cash used by investing activities.................................................... (2,496) (503)
---------- ----------
FINANCING ACTIVITIES
Borrowings........................................................................... 6 1,320
Debt repayments...................................................................... (1,995) (4,523)
Proceeds from exercise of stock options.............................................. 307 353
Principal payments on capital leases................................................. (118) (191)
Repurchases of common stock.......................................................... (2,141) --
Dividends paid....................................................................... (466) --
Other................................................................................ 19 25
---------- ----------
Cash used by financing activities.................................................... (4,388) (3,016)
---------- ----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.......................................... (1,919) 3,099
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.......................................... 6,139 3,040
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD................................................ $ 4,220 $ 6,139
========== ==========
- ------------
(a) Includes net income from discontinued operations of $121 million for the
year ended December 31, 2004.
(b) 2005 includes $2.754 billion in payments related to securities litigation
and the government investigations. 2004 includes $236 million in payments
related to securities litigation and the government investigations.
(c) 2005 includes an approximate $36 million use of cash related to changing
the fiscal year end of certain international operations from November 30
to December 31.
Note: Certain reclassifications have been made to the prior year's financial
information to conform to the December 31, 2005 presentation.
See accompanying notes.
14
TIME WARNER INC.
RECONCILIATION OF ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND
AMORTIZATION TO OPERATING INCOME BEFORE
DEPRECIATION AND AMORTIZATION
(MILLIONS, UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2005
ADJUSTED AMOUNTS
OPERATING INCOME/(LOSS) RELATED TO SECURITIES GAINS/(LOSSES) OPERATING INCOME/(LOSS)
BEFORE DEPRECIATION ASSET LITIGATION & GOVERNMENT FROM BEFORE DEPRECIATION
AND AMORTIZATION IMPAIRMENTS INVESTIGATIONS ASSET DISPOSALS AND AMORTIZATION
---------------------- ----------- ----------------------- --------------- -----------------------
AOL........................ $ 342 $ - $ - $ - $ 342
Cable...................... 985 - - - 985
Filmed Entertainment(a).... 402 - - 5 407
Networks................... 811 - - - 811
Publishing................. 448 - - - 448
Corporate(b)............... (136) - 160 - 24
Intersegment elimination... 19 - - - 19
-------- --------- ----------- ----------- ---------
Total...................... $ 2,871 $ - $ 160 $ 5 $ 3,036
======== ========= =========== ============ =========
THREE MONTHS ENDED DECEMBER 31, 2004
ADJUSTED AMOUNTS
OPERATING INCOME/(LOSS) RELATED TO SECURITIES GAINS/(LOSSES) OPERATING INCOME/(LOSS)
BEFORE DEPRECIATION ASSET LITIGATION & GOVERNMENT FROM BEFORE DEPRECIATION
AND AMORTIZATION IMPAIRMENTS INVESTIGATIONS ASSET DISPOSALS AND AMORTIZATION
---------------------- ----------- ----------------------- --------------- -----------------------
AOL(c)..................... $ 326 $ - $ - $ 7 $ 333
Cable...................... 887 - - - 887
Filmed Entertainment....... 284 - - - 284
Networks................... 663 - - - 663
Publishing................. 405 - - - 405
Corporate(b)............... (116) - (13) - (129)
Intersegment elimination... (18) - - - (18)
-------- -------- ----------- ----------- ---------
Total...................... $ 2,431 $ - $ (13) $ 7 $ 2,425
======== ======== =========== =========== =========
- ----------
(a) For the three months ended December 31, 2005, Operating Income before
Depreciation and Amortization includes a $5 million gain related to the
sale of a property in California.
(b) For the three months ended December 31, 2005, Operating Income before
Depreciation and Amortization includes $160 million in net recoveries
related to securities litigation and government investigations. For the
three months ended December 31, 2004, Operating Income before Depreciation
and Amortization includes $13 million in net expenses related to
securities litigation and government investigations.
(c) For the three months ended December 31, 2004, Operating Income before
Depreciation and Amortization includes a gain of $7 million related to the
sale of Netscape Security Solutions ("NSS").
15
TIME WARNER INC.
RECONCILIATION OF ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND
AMORTIZATION TO OPERATING INCOME BEFORE
DEPRECIATION AND AMORTIZATION
(MILLIONS, UNAUDITED)
YEAR ENDED DECEMBER 31, 2005
ADJUSTED AMOUNTS
OPERATING INCOME/(LOSS) RELATED TO SECURITIES GAINS/(LOSSES) OPERATING INCOME/(LOSS)
BEFORE DEPRECIATION ASSET LITIGATION & GOVERNMENT FROM BEFORE DEPRECIATION
AND AMORTIZATION IMPAIRMENTS INVESTIGATIONS ASSET DISPOSALS AND AMORTIZATION
---------------------- ----------- ----------------------- --------------- -----------------------
AOL(a)..................... $ 1,913 $ (24) $ - $ 10 $ 1,899
Cable...................... 3,652 - - - 3,652
Filmed Entertainment(b).... 1,284 - - 5 1,289
Networks................... 2,999 - - - 2,999
Publishing(c).............. 1,251 - - 8 1,259
Corporate(d)............... (430) - (2,865) - (3,295)
Intersegment elimination... (7) - - - (7)
-------- --------- ----------- ----------- ---------
Total...................... $ 10,662 $ (24) $ (2,865) $ 23 $ 7,796
======== ========= =========== =========== =========
YEAR ENDED DECEMBER 31, 2004
ADJUSTED AMOUNTS
OPERATING INCOME/(LOSS) RELATED TO SECURITIES GAINS/(LOSSES) OPERATING INCOME/(LOSS)
BEFORE DEPRECIATION ASSET LITIGATION & GOVERNMENT FROM BEFORE DEPRECIATION
AND AMORTIZATION IMPAIRMENTS INVESTIGATIONS ASSET DISPOSALS AND AMORTIZATION
---------------------- ----------- ----------------------- --------------- -----------------------
AOL(a)..................... $ 1,762 $ (10) $ - $ 20 $ 1,772
Cable...................... 3,278 - - - 3,278
Filmed Entertainment....... 1,474 - - - 1,474
Networks(e)................ 2,701 - - (7) 2,694
Publishing(c).............. 1,188 - - 8 1,196
Corporate(d)............... (484) - (536) - (1,020)
Intersegment elimination... (22) - - - (22)
-------- -------- ----------- ----------- ---------
Total...................... $ 9,897 $ (10) $ (536) $ 21 $ 9,372
======== ======== =========== =========== =========
- ----------
(a) For the year ended December 31, 2005, Operating Income before Depreciation
and Amortization includes a $24 million noncash impairment charge related
to goodwill associated with America Online Latin America, Inc. ("AOLA"),
an approximate $5 million gain related to the sale of a building and a $5
million gain from the resolution of a previously contingent gain related
to the 2004 sale of NSS. For the year ended December 31, 2004, Operating
Income before Depreciation and Amortization includes a $10 million noncash
impairment charge related to a building that was held for sale, a gain of
$13 million related to the sale of AOL Japan and a $7 million gain related
to the sale of NSS.
(b) For the year ended December 31, 2005, Operating Income before Depreciation
and Amortization includes a $5 million gain related to the sale of a
property in California.
(c) For the year ended December 31, 2005, Operating Income before Depreciation
and Amortization includes an $8 million gain related to the collection of
a loan made in conjunction with the Company's 2003 sale of Time Life Inc.
("Time Life"), which was previously fully reserved due to concerns about
recoverability. For the year ended December 31, 2004, Operating Income
before Depreciation and Amortization includes an $8 million gain related
to the sale of a building.
(d) For the year ended December 31, 2005, Operating Loss before Depreciation
and Amortization includes $3 billion in legal reserves related to
securities litigation and $135 million in net recoveries related to
securities litigation and government investigations. For the year ended
December 31, 2004, Operating Income before Depreciation and Amortization
includes $510 million in legal reserves related to the government
investigations and $26 million in net expenses related to securities
litigation and government investigations.
(e) For the year ended December 31, 2004, Operating Income before Depreciation
and Amortization includes an approximate $7 million loss related to the
sale of the winter sports teams.
16
TIME WARNER INC.
RECONCILIATION OF OPERATING INCOME BEFORE DEPRECIATION
AND AMORTIZATION TO OPERATING INCOME
(MILLIONS, UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2005
OPERATING INCOME/(LOSS)
BEFORE DEPRECIATION OPERATING
AND AMORTIZATION DEPRECIATION AMORTIZATION INCOME/(LOSS)
---------------------- ------------ ------------ -------------
AOL...................................... $ 342 $ (131) $ (37) $ 174
Cable.................................... 985 (411) (19) 555
Filmed Entertainment(a).................. 407 (32) (68) 307
Networks................................. 811 (65) (5) 741
Publishing............................... 448 (34) (22) 392
Corporate(b)........................... 24 (12) - 12
Intersegment elimination................. 19 - - 19
---------- --------- --------- ---------
Total.................................... $ 3,036 $ (685) $ (151) $ 2,200
========== ========= ========= =========
THREE MONTHS ENDED DECEMBER 31, 2004
OPERATING INCOME/(LOSS)
BEFORE DEPRECIATION OPERATING
AND AMORTIZATION DEPRECIATION AMORTIZATION INCOME/(LOSS)
---------------------- ------------ ------------ -------------
AOL(c)................................... $ 333 $ (164) $ (49) $ 120
Cable.................................... 887 (370) (20) 497
Filmed Entertainment..................... 284 (29) (54) 201
Networks................................. 663 (57) (4) 602
Publishing............................... 405 (32) (32) 341
Corporate(b)............................ (129) (11) - (140)
Intersegment elimination................. (18) - - (18)
---------- --------- --------- ---------
Total.................................... $ 2,425 $ (663) $ (159) $ 1,603
========== ========= ========= =========
- ----------
(a) For the three months ended December 31, 2005, Operating Income before
Depreciation and Amortization and Operating Income include a $5 million
gain related to the sale of a property in California.
(b) For the three months ended December 31, 2005, Operating Income before
Depreciation and Amortization and Operating Income include $160 million in
net recoveries related to securities litigation and government
investigations. For the three months ended December 31, 2004, Operating
Income before Depreciation and Amortization and Operating Income include
$13 million in net expenses related to securities litigation and
government investigations.
(c) For the three months ended December 31, 2004, Operating Income before
Depreciation and Amortization and Operating Income include a gain of $7
million related to the sale of NSS.
17
TIME WARNER INC.
RECONCILIATION OF OPERATING INCOME BEFORE DEPRECIATION
AND AMORTIZATION TO OPERATING INCOME
(MILLIONS, UNAUDITED)
YEAR ENDED DECEMBER 31, 2005
OPERATING INCOME/(LOSS)
BEFORE DEPRECIATION OPERATING
AND AMORTIZATION DEPRECIATION AMORTIZATION INCOME/(LOSS)
---------------------- ------------ ------------ -------------
AOL(a)................................... $ 1,899 $ (557) $ (174) $ 1,168
Cable.................................... 3,652 (1,588) (76) 1,988
Filmed Entertainment(b).................. 1,289 (121) (225) 943
Networks................................. 2,999 (238) (23) 2,738
Publishing(c)............................ 1,259 (132) (99) 1,028
Corporate(d)............................ (3,295) (44) - (3,339)
Intersegment elimination................. (7) - - (7)
--------- --------- ------ --------
Total.................................... $ 7,796 $ (2,680) $ (597) $ 4,519
========= ========= ====== ========
YEAR ENDED DECEMBER 31, 2004
OPERATING INCOME/(LOSS)
BEFORE DEPRECIATION OPERATING
AND AMORTIZATION DEPRECIATION AMORTIZATION INCOME/(LOSS)
---------------------- ------------ ------------ -------------
AOL(a)................................... $ 1,772 $ (662) $ (176) $ 934
Cable.................................... 3,278 (1,438) (76) 1,764
Filmed Entertainment..................... 1,474 (104) (213) 1,157
Networks(e).............................. 2,694 (212) (21) 2,461
Publishing(c)............................ 1,196 (122) (140) 934
Corporate(d)............................ (1,020) (43) - (1,063)
Intersegment elimination................. (22) - - (22)
--------- -------- ------- -------
Total.................................... $ 9,372 $ (2,581) $ (626) $ 6,165
========= ======== ======= =======
- ----------
(a) For the year ended December 31, 2005, Operating Income before Depreciation
and Amortization and Operating Income include a $24 million noncash
impairment charge related to goodwill associated with AOLA, an approximate
$5 million gain related to the sale of a building and a $5 million gain
from the resolution of a previously contingent gain related to the 2004
sale of NSS. For the year ended December 31, 2004, Operating Income before
Depreciation and Amortization and Operating Income include a $10 million
noncash impairment charge related to a building that was held for sale, a
gain of $13 million related to the sale of AOL Japan and a $7 million gain
related to the sale of NSS.
(b) For the year ended December 31, 2005, Operating Income before Depreciation
and Amortization and Operating Income include a $5 million gain related to
the sale of a property in California.
(c) For the year ended December 31, 2005, Operating Income before Depreciation
and Amortization and Operating Income include an $8 million gain related
to the collection of a loan made in conjunction with the Company's 2003
sale of Time Life, which was previously fully reserved due to concerns
about recoverability. For the year ended December 31, 2004, Operating
Income before Depreciation and Amortization and Operating Income include
an $8 million gain related to the sale of a building.
(d) For the year ended December 31, 2005, Operating Loss before Depreciation
and Amortization and Operating Income (Loss) include $3 billion in legal
reserves related to securities litigation and $135 million in net
recoveries related to securities litigation and government investigations.
For the year ended December 31, 2004, Operating Income before
Depreciation and Amortization and Operating Income include $510 million in
legal reserves related to the government investigations and $26 million in
net expenses related to securities litigation and government
investigations.
(e) For the year ended December 31, 2004, Operating Income before Depreciation
and Amortization and Operating Income include an approximate $7 million
loss related to the sale of the winter sports teams.
18
TIME WARNER INC.
RECONCILIATION OF CASH PROVIDED BY OPERATIONS TO FREE CASH FLOW
(MILLIONS, UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------- -----------------------
2005 2004 2005 2004
---------- -------- --------- ---------
Cash provided (used) by operations................ $ (632) $ 1,230 $ 4,965 $ 6,618
Less discontinued operations:
Net loss..................................... - (6) - (121)
Other changes................................ 2 13 10 (2)
---------- -------- --------- ---------
Cash provided (used) by continuing operations..... (630) 1,237 4,975 6,495
Add payments related to securities litigation and
government investigations.................... 2,429 213 2,754 236
Less capital expenditures and product
development costs............................ (987) (1,003) (3,246) (3,024)
Less principal payments on capital leases......... (24) (43) (118) (191)
---------- -------- --------- ---------
Free Cash Flow(a)................................. $ 788 $ 404 $ 4,365 $ 3,516
========== ======== ========= =========
- ----------
(a) Free Cash Flow is cash provided by operations (as defined by U.S.
generally accepted accounting principles) plus payments related to
securities litigation and government investigations (net of any insurance
recoveries), less cash flow attributable to discontinued operations,
capital expenditures and product development costs, principal payments on
capital leases, and partnership distributions, if any.
19
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS, RECENT TRANSACTIONS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Time Warner Inc. ("Time Warner" or the "Company") is a leading media and
entertainment company, whose businesses include interactive services, cable
systems, filmed entertainment, television networks and publishing. Time Warner
classifies its business interests into five reportable segments: AOL: consisting
principally of interactive services; Cable: consisting principally of interests
in cable systems that provide video programming, high-speed data and Digital
Phone services; Filmed Entertainment: consisting principally of feature film,
television and home video production and distribution; Networks: consisting
principally of cable television and broadcast networks; and Publishing:
consisting principally of magazine and book publishing.
RECENT TRANSACTIONS
The WB Network JV
On January 24, 2006, Warner Bros. Entertainment Inc. ("Warner Bros.") and CBS
Corp. ("CBS") announced an agreement in principle to form a new
fully-distributed national broadcast network. 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 in
principle 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 receive a subordinated
participation in the new network.
Upon closing of this transaction, the Company will account for this investment
under the equity method of accounting. The Company anticipates that prior to the
close of this transaction, the Company will incur restructuring charges ranging
from $15 million to $20 million related to employee terminations. In addition,
the Company may incur costs in terminating certain programming arrangements that
will not be contributed to the new network or utilized in another manner.
AOL-Google Alliance
During December 2005, the Company announced that AOL was 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. Under the
alliance, Google and AOL will continue to provide search technology to AOL's
network of Internet properties worldwide. 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;
- - Expanding display advertising available for AOL to sell throughout the
Google network;
- - Making AOL content more accessible to Google Web crawlers;
- - Collaborating in video search and showcasing AOL's premium video service
within Google Video;
- - Enabling Google Talk and AIM instant messaging users to communicate with
each other, provided certain conditions are met; and
- - Providing AOL marketing credits for promotion of AOL's content on Google's
Internet properties.
In addition, Google will invest $1 billion for a 5% equity interest in a limited
liability company that will own all of the outstanding equity interests in AOL.
The Company expects these transactions with Google to close during the first
quarter of 2006.
20
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Amounts Related to Securities Litigation
In July 2005, the Company reached an agreement in principle for the settlement
of the securities class action lawsuits included in the matters consolidated
under the caption In re: AOL Time Warner Inc. Securities & "ERISA" Litigation
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004 (the "2004 Form 10-K"). The settlement is reflected in a
written agreement between the lead plaintiff and the Company. On September 30,
2005, the court issued an order granting preliminary approval of the settlement
and certified the settlement class. The court has scheduled the final approval
hearing for February 22, 2006. At this time, there can be no assurance that the
settlement of the securities class action litigation will receive final court
approval. In connection with reaching the agreement in principle on the
securities class action, the Company established a reserve of $2.4 billion
during the second quarter of 2005. Ernst & Young LLP also has agreed to a
settlement in this litigation matter and will pay $100 million. Pursuant to the
settlement, in October 2005 Time Warner paid $2.4 billion into a settlement fund
(the "MSBI Settlement Fund") for the members of the class represented in the
action. In addition, the $150 million previously paid by Time Warner into a fund
in connection with the settlement of the investigation by the U.S. Department of
Justice ("DOJ") was transferred to the MSBI Settlement Fund, and Time Warner is
using its best efforts to have the $300 million it previously paid in connection
with the settlement of its Securities and Exchange Commission ("SEC")
investigation, or at least a substantial portion thereof, transferred to the
MSBI Settlement Fund.
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 pages 39-42 of the
2004 Form 10-K, that are pending against the Company. This $600 million amount
continues to represent the Company's current best estimate of its potential
financial exposure in these matters, including the remaining individual
shareholder suits, the derivative actions and the actions alleging violations of
the Employee Retirement Income Security Act ("ERISA").
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 and in pages 38-42 of the 2004 Form 10-K (other than the
actions alleging violations of ERISA described on page 39 of the 2004 Form
10-K). As a result of this agreement, the Company has recorded a recovery of
approximately $185 million, which is expected to be collected in the first
quarter of 2006 and is reflected as a reduction to "Amounts related to
securities litigation and government investigations" in the accompanying
consolidated statement of operations for the year ended December 31, 2005.
21
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Update on Status of Government Investigations
As previously disclosed by the Company, the SEC and the DOJ had been conducting
investigations into the accounting and disclosure practices of the Company.
Those investigations focused on advertising transactions, principally involving
the Company's America Online segment, the methods used by the America Online
segment to report its subscriber numbers and the accounting related to the
Company's interest in AOL Europe prior to January 2002. 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.
The Company and its subsidiary, AOL, entered into a settlement with the DOJ in
December 2004 that provided for a deferred prosecution arrangement for a
two-year period. As part of the settlement with the DOJ, in December 2004, the
Company paid a penalty of $60 million and established a $150 million fund, which
the Company could use to settle related securities litigation. The fund is
reflected as restricted cash on the Company's accompanying consolidated balance
sheet at December 31, 2004. During October 2005, the $150 million was
transferred by the Company into the settlement fund for the members of the class
covered by the consolidated securities class action described above under the
heading "Amounts Related to Securities Litigation."
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 will not be
able to deduct the penalty for income tax purposes, be reimbursed or indemnified
for such payment through insurance or any other source, or use such payment to
setoff or reduce any award of compensatory damages to plaintiffs in related
securities litigation pending against the Company. As described above, in
connection with the pending settlement of the consolidated securities class
action, the Company is using its best efforts to have the $300 million, or a
substantial portion thereof, transferred to the settlement fund for the members
of the class represented in the action. The historical accounting adjustments
were reflected in the restatement of the Company's financial results for each of
the years ended December 31,
22
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2000 through December 31, 2003, which were included in the Company's 2004 Form
10-K.
The independent examiner has begun its review, which as a result of an
extension, is expected to be completed in the second quarter of 2006. Depending
on the independent examiner's conclusions, a further restatement might be
necessary. It is also possible that, so long as there are unresolved issues
associated with the Company's financial statements, the effectiveness of any
registration statement of the Company or its affiliates may be delayed.
Common Stock Dividends
On May 20, 2005, the Company announced that it would begin paying a regular
quarterly cash dividend of $0.05 per share on its common stock beginning in the
third quarter 2005. Under this dividend program, on September 15, 2005 and
December 15, 2005, the Company paid cash dividends of $0.05 per share on its
common stock, to shareholders of record on August 31, 2005 and November 30,
2005, respectively. The total amount of dividends paid during 2005 was $466
million.
Adelphia Acquisition Agreement
On April 20, 2005, a subsidiary of the Company, Time Warner NY Cable LLC ("TW
NY"), and Comcast Corporation ("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 Time Warner Cable
Inc. ("TWC Inc.").
At the same time that Comcast and TW NY entered into the Adelphia agreements,
Comcast, TWC Inc. and/or their respective affiliates entered into agreements
providing for the redemption of Comcast's interests in TWC Inc. and Time Warner
Entertainment Company, L.P. ("TWE") (the "TWC Inc. Redemption Agreement" and the
"TWE Redemption Agreement," respectively, and, collectively, the "TWC Inc. and
TWE Redemption Agreements"). Specifically, Comcast's 17.9% interest in TWC Inc.
will be redeemed in exchange for stock of a subsidiary of TWC Inc. holding cable
systems serving approximately 587,000 subscribers (as of December 31, 2004), as
well as approximately $1.9 billion in cash. In addition, Comcast's 4.7% interest
in TWE will be redeemed in exchange for interests in a subsidiary of TWE holding
cable systems serving approximately 168,000 subscribers (as of December 31,
2004), as well as approximately $133 million in cash. TWC Inc., Comcast and
their respective subsidiaries will also swap certain cable systems to enhance
their respective geographic clusters of subscribers ("Cable Swaps").
After giving effect to the transactions, TWC Inc. will gain systems passing
approximately 7.5 million homes (as of December 31, 2004), with approximately
3.5 million basic subscribers. TWC Inc. will then manage a total of
approximately 14.4 million basic subscribers. Time Warner will own 84% of TWC
Inc.'s common stock (including 83% of the outstanding TWC Inc. Class A Common
Stock, which will become publicly traded at the time of closing, and all
outstanding shares of TWC Inc. Class B Common Stock) and own a $2.9 billion
indirect economic interest in TW NY, a subsidiary of TWC Inc.
These transactions are subject to customary regulatory review and approvals,
including Hart-Scott-Rodino antitrust approval, Federal Communications
Commission ("FCC") and local franchise approvals, as well as, in the case of the
Adelphia acquisition, the Adelphia bankruptcy process, which involves approvals
by the bankruptcy court having jurisdiction over Adelphia's Chapter 11 case and
Adelphia's creditors. Closing of the Adelphia acquisition is expected during the
first half of 2006.
23
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The purchase of Adelphia's assets is not dependent on the closing of the Cable
Swaps or the transactions contemplated by the TWC Inc. and TWE Redemption
Agreements. Furthermore, if Comcast fails to obtain certain necessary
governmental authorizations, TW NY has agreed to acquire the cable operations of
Adelphia that would have been acquired by Comcast, with the purchase price
payable in cash or TWC Inc. stock at the Company's discretion.
Urban Cable Works of Philadelphia, L.P.
On November 22, 2005, TWC Inc. purchased the remaining 60% interest in Urban
Cable Works of Philadelphia, L.P. ("Urban Cable"), an operator of cable systems
in Philadelphia, Pennsylvania with approximately 47,000 basic subscribers. The
purchase price consisted of $54 million in cash and the assumption of $44
million of Urban Cable's third-party debt. Prior to TWC Inc.'s acquisition of
the remaining interest, Urban Cable was an unconsolidated joint venture of TWC
Inc., which was 40% owned by TWC Inc. and 60% owned by an investment group led
by Inner City Broadcasting ("Inner City"). Under a management agreement, TWC
Inc. was responsible for the day-to-day management of Urban Cable. During 2004,
TWC Inc. made cash payments of $34 million to Inner City to settle certain
disputes regarding the joint venture. In conjunction with the proposed Adelphia
acquisition described above, Urban Cable will be transferred to Comcast as part
of the Cable Swaps. For additional details, please refer to the subsection
titled "Adelphia Acquisition Agreement" above. From the time it was consolidated
through December 31, 2005, Urban Cable contributed Subscription revenues and
Operating Income of $7 million and $1 million, respectively.
BASIS OF PRESENTATION
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement of Financial Accounting Standards ("Statement") No. 123 (Revised),
"Share-Based Payment" ("FAS 123R"). FAS 123R requires all companies to measure
compensation costs for all share-based payments (including employee stock
options) at fair value and recognize such costs in the statement of operations.
As a result, the application of the provisions of FAS 123R will have a
significant impact on Operating Income before Depreciation and Amortization,
Operating Income, Net Income and Earnings per Share. In the accompanying
financial statements, the Company accounts for share-based compensation using
the intrinsic value method set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company will
adopt FAS 123R beginning January 1, 2006 and plans to restate previously
reported amounts as allowed by FAS 123R.
In accordance with APB 25 and related interpretations, compensation expense for
stock options is recognized in income based on the excess, if any, of the quoted
market price of the stock at the grant date of the award or other measurement
date over the amount an employee must pay to acquire the stock. The compensation
costs related to stock options recognized by the Company pursuant to APB 25 were
minimal. If a company measures share-based compensation using APB 25, it must
also disclose what the impact would have been if it had measured share-based
compensation using the fair value of the equity award on the date it is granted
as provided in FAS 123, the predecessor of FAS 123R. If compensation costs for
the Company's stock option plans had been determined based on the fair value
method set forth in FAS 123, the Company would have recorded $319 million and
$544 million of additional compensation expense from continuing operations on a
pre-tax basis for the years ended December 31, 2005 and 2004, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
information to conform to the December 31, 2005 presentation.
24
\
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2: INTERSEGMENT TRANSACTIONS
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 Cable segment recognizing Subscription revenues by offering the AOL
service to its subscribers;
- - 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 recognized by the segment that is counterparty to the
transaction) are eliminated in consolidation and, therefore, do not themselves
impact consolidated results. Additionally, transactions between divisions within
the same reporting segment (e.g., a transaction between HBO and Turner
Broadcasting System, Inc. within the Networks segment) are eliminated in
arriving at segment performance and, therefore, do not themselves impact segment
results.
Revenues recognized by Time Warner's segments on intersegment transactions are
as follows:
THREE MONTHS ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------- -----------------------
2005 2004 2005 2004
------ ----- ------- -------
(MILLIONS)
INTERSEGMENT REVENUES(a)
AOL................................. $ 10 $ 14 $ 28 $ 59
Cable............................... 8 17 40 54
Filmed Entertainment................ 210 264 749 757
Networks............................ 155 159 595 602
Publishing.......................... 32 27 98 87
------ ----- ------- -------
Total intersegment revenues......... $ 415 $ 481 $ 1,510 $ 1,559
====== ===== ======= =======
- ----------
(a) Intersegment revenues include intercompany Advertising revenues of $55
million and $57 million for the three months ended December 31, 2005 and
2004, respectively, and $176 million and $162 million for the year ended
December 31, 2005 and 2004, respectively.
25