UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		for the quarterly period ended March 31, 2010 or

o		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

 

One Time Warner Center
New York, NY 10019-8016

(Address of Principal Executive Offices) (Zip Code)

(212) 484-8000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o       No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

TIME WARNER INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION

		Page
PART I. FINANCIAL INFORMATION
Management’s Discussion and Analysis of Results of Operations and Financial Condition		1
Item 4. Controls and Procedures		18
Consolidated Balance Sheet at March 31, 2010 and December 31, 2009		19
Consolidated Statement of Operations for the Three Months Ended March 31, 2010 and 2009		20
Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2010 and 2009		21
Consolidated Statement of Equity for the Three Months Ended March 31, 2010 and 2009		22
Notes to Consolidated Financial Statements		23
Supplementary Information		40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		47
Item 1A. Risk Factors		47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 4. Other information		48
Item 5. Exhibits		49
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EX-10.2
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EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
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EX-101 DEFINITION LINKBASE DOCUMENT

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

     Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on Time Warner Inc.’s (“Time Warner” or the “Company”) businesses, current developments, financial condition, cash flows and results of operations. MD&A is organized as follows:

•

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.

•

Results of operations. This section provides an analysis of the Company’s results of operations for the three months ended March 31, 2010. This analysis is presented on both a consolidated and a business segment basis. In addition, a brief description is provided of significant transactions and events that affect the comparability of the results being analyzed.

•

Financial condition and liquidity. This section provides an analysis of the Company’s financial condition as of March 31, 2010 and cash flows for the three months ended March 31, 2010.

•

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.

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

OVERVIEW

     Time Warner is a leading media and entertainment company, whose major businesses encompass an array of the most respected and successful media brands. Among the Company’s brands are HBO, TNT, CNN, Warner Bros., New Line Cinema, People , Sports Illustrated and Time . During the three months ended March 31, 2010, the Company generated revenues of $6.322 billion (up 5% from $5.996 billion in 2009), Operating Income of $1.463 billion (up 43% from $1.024 billion in 2009), Net Income attributable to Time Warner shareholders of $725 million (up 10% from $660 million in 2009) and Cash Provided by Operations from Continuing Operations of $1.356 billion (up 16% from $1.165 billion in 2009).

Time Warner Businesses

     Time Warner classifies its operations into three reportable segments: Networks, Filmed Entertainment and Publishing. For additional information regarding Time Warner’s business segments, refer to Note 12, “Segment Information” to the accompanying consolidated financial statements.

      Networks. Time Warner’s Networks segment is comprised of Turner Broadcasting System, Inc. (“Turner”) and Home Box Office, Inc. (“HBO”). During the three months ended March 31, 2010, the Networks segment generated revenues of $2.958 billion (46% of the Company’s overall revenues) and $1.201 billion in Operating Income.

     Turner operates domestic and international networks, including such recognized brands as TNT, TBS, CNN, Cartoon Network, truTV and HLN, which are among the leaders in advertising-supported cable television networks. The Turner networks generate revenues principally from providing programming to cable system operators, satellite distribution services, telephone companies and other distributors (known as affiliates) that have contracted to receive and distribute this programming and from the sale of advertising. Key contributors to Turner’s success are its strong brands and continued investments in high-quality, popular programming focused on sports, original and syndicated series, news, network movie premieres and animation to drive audience delivery and revenue growth. During the first quarter of 2010, Turner benefited from an improved advertising environment domestically and in certain international territories, which contributed to advertising growth. This growth was partially offset by audience declines at its news networks.

     HBO operates the HBO and Cinemax multichannel premium pay television programming services, with the HBO service ranking as the nation’s most widely distributed premium pay television service. HBO generates revenues principally from providing programming to affiliates that have contracted to receive and distribute such programming to subscribers who are generally free to cancel their subscriptions at any time. An additional source of revenues for HBO is the sale and licensing of its original programming, including Entourage , True Blood , The Sopranos , Rome and The Pacific .

     The Company’s Networks segment has been pursuing international expansion in select areas. For example, in the first quarter of 2010, HBO acquired the remainder of its partners’ interests in HBO Central Europe (“HBO CE”) and purchased an additional 21% equity interest in HBO Latin America Group, consisting of HBO Brasil, HBO Olé and HBO Latin America Production Services (collectively, “HBO LAG”), and Turner acquired a majority stake in NDTV Imagine Limited, which owns a Hindi general entertainment channel in India. In recent years, Turner has also expanded its presence in Germany, Japan, Korea, Latin America, Turkey and the United Arab Emirates, and HBO has acquired additional equity interests in HBO Asia, HBO South Asia and HBO LAG. The Company anticipates that international expansion will continue to be an area of focus at the Networks segment for the foreseeable future.

      Filmed Entertainment. Time Warner’s Filmed Entertainment segment is comprised of businesses managed by the Warner Bros. Entertainment Group (“Warner Bros.”) that principally produce and distribute theatrical motion pictures, including Harry Potter and the Half-Blood Prince , The Hangover , The Blind Side and Sherlock Holmes , television shows and videogames. During the three months ended March 31, 2010, the Filmed Entertainment segment generated revenues of $2.694 billion (41% of the Company’s overall revenues) and $307 million in Operating Income.

     The Filmed Entertainment segment’s diversified sources of revenues within its film and television businesses, including its extensive film library and global distribution infrastructure, have helped it to deliver consistent long-term operating performance. Theatrical product revenues principally are generated domestically and internationally through rentals from

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

theatrical exhibition and subsequently through licensing fees received for the distribution of films on television networks and pay television programming services. Television product revenues principally are generated domestically and internationally from the licensing of the Filmed Entertainment segment’s programs on television networks and pay television programming services. The Filmed Entertainment segment also generates revenues for both its theatrical and television product through home video distribution on DVD and Blu-ray Discs and in various digital formats.

     Warner Bros. continues to be an industry leader in the television content business. During the 2009-2010 broadcast season, Warner Bros. is producing more than 25 scripted primetime series, with at least one series airing on each of the five broadcast networks (including Two and a Half Men , The Mentalist , The Big Bang Theory , Gossip Girl, Fringe and Chuck ) and original series for several cable networks (including The Closer and Southland ).

     Home video distribution, in particular revenues from the distribution of DVDs, has been one of the largest drivers of the segment’s profits over the last several years. The industry and the Company experienced a decline in home video sales over the past two years as a result of several factors, including the general economic downturn in the U.S. and many regions around the world, increasing competition for consumer discretionary time and spending, piracy and the maturation of the standard definition DVD format. During 2009, the decline in home video revenues was also affected by consumers shifting to subscription rental services and discount rental kiosks, which generate significantly less revenue per transaction than DVD sales. Partially offsetting the softening consumer demand for standard definition DVDs and the shift to rental services were growing sales of high definition Blu-ray Discs and increased electronic delivery, which have higher gross margins than standard definition DVDs.

     To increase operational efficiencies, over the past several years the Filmed Entertainment segment has undertaken restructuring activities to reduce its cost structure and streamline operations, including combining certain operations of its studios and outsourcing certain functions.

      Publishing. Time Warner’s Publishing segment consists principally of magazine publishing and related websites as well as direct-marketing businesses. During the three months ended March 31, 2010, the Publishing segment generated revenues of $799 million (13% of the Company’s overall revenues) and $50 million in Operating Income.

     As of March 31, 2010, Time Inc. published 22 magazines in the U.S., including People , Sports Illustrated , Time , InStyle , Real Simple , Southern Living , Entertainment Weekly and Fortune , and over 90 magazines outside the U.S., primarily through IPC Media (“IPC”) in the U.K. and Grupo Editorial Expansión (“GEE”) in Mexico. The Publishing segment generates revenues primarily from advertising (including advertising on digital properties), magazine subscriptions and newsstand sales. Time Inc. also owns the magazine subscription marketer, Synapse Group, Inc. (“Synapse”), and the school and youth group fundraising company, QSP, Inc. and its Canadian affiliate, Quality Service Programs Inc. (collectively, “QSP”). Advertising sales at the Publishing segment, particularly print advertising sales, were significantly adversely affected by the economic environment during 2009. However, during the first quarter of 2010, the Publishing segment’s domestic magazines began to experience an improvement in Advertising revenues driven by increases in advertising pages sold and online advertising. Time Inc. continues to develop digital content for its magazine websites and has also begun to publish magazine content on e-reader devices. For the three months ended March 31, 2010 and 2009, online Advertising revenues were 14% and 12%, respectively, of Time Inc.’s total Advertising revenues.

     In its ongoing effort to improve efficiency and reduce its cost structure, the Publishing segment executed restructuring initiatives, primarily resulting in headcount reductions, in the fourth quarters of 2009 and 2008, which are expected to benefit the segment’s performance during the remainder of 2010.

Recent Developments

March 2010 Debt Offering and Tender Offer and April 2010 Redemption

     As discussed more fully in “ Financial Condition and Liquidity – Outstanding Debt and Other Financing Arrangements ,” on March 11, 2010, Time Warner issued $2.0 billion aggregate principal amount of debt securities under a shelf registration statement. The Company used a portion of the net proceeds from this debt offering to repurchase $773

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

million of the Company’s outstanding 6.75% Notes due 2011 pursuant to a tender offer. On April 22, 2010, the Company redeemed the remaining $227 million aggregate principal amount of the 6.75% Notes due 2011.

Asset Securitization Arrangements

     During the first quarter, the Company repaid the $805 million outstanding under the Company’s two accounts receivable securitization facilities. The Company terminated the two accounts receivable securitization facilities on March 19, 2010 and March 24, 2010, respectively.

HBO LAG

     On March 9, 2010, HBO purchased additional interests in HBO LAG for $217 million in cash, which resulted in HBO owning 80% of the equity interests of HBO LAG. HBO accounts for this investment under the equity method of accounting. See Notes 1 and 2 to the accompanying consolidated financial statements.

HBO Central Europe Acquisition

     On January 27, 2010, HBO purchased the remainder of its partners’ interests in HBO CE for $136 million in cash, net of cash acquired. HBO CE operates the HBO and Cinemax premium pay television programming services serving 11 territories in Central Europe. The Company has consolidated the results of operations and financial condition of HBO CE effective January 27, 2010. Upon the acquisition of the controlling interest in HBO CE, a gain of $59 million was recognized reflecting the excess of the fair value over the Company’s carrying cost of its original investment in HBO CE. See Note 2 to the accompanying consolidated financial statements.

Benefit Plan Amendments

     In March 2010, the Company’s Board of Directors approved amendments to its domestic defined benefit pension plans, which generally provide that (i) effective June 30, 2010, benefits provided under the plans will stop accruing for additional years of service and the plans will be closed to new hires and employees with less than one year of service and (ii) after December 31, 2013, pay increases will no longer be taken into consideration when determining a participating employee’s benefits under the plans.

     In addition, effective July 1, 2010, the Company will increase its matching contributions for eligible participants in the Time Warner Savings Plan. Effective January 1, 2011, the Company will also implement a supplemental savings plan that will provide for similar Company matching for eligible participant deferrals above the Internal Revenue Service compensation limits that apply to the Time Warner Savings Plan up to $500,000 of eligible compensation.

     The net effect of these changes is expected to result in a net annual decrease to employee benefit plan expense of approximately $50 million.

NCAA Basketball Programming Agreement

     On April 22, 2010, Turner, together with CBS Broadcasting, Inc. (“CBS”), entered into a 14-year agreement with The National Collegiate Athletic Association (the “NCAA”), which provides Turner and CBS with exclusive television, Internet, and wireless rights to the NCAA Division I Men’s Basketball Championship events (the “NCAA Tournament Games”) in the United States and its territories and possessions.

     Under the terms of the arrangement, Turner and CBS will work together to produce and distribute the NCAA Tournament Games and related programming commencing in 2011. The games will be televised on Turner’s TNT, TBS and truTV networks and on the CBS network and advertising will be sold on a joint basis.

     The aggregate programming rights fee of approximately $10.8 billion, which will be shared by Turner and CBS, will be paid by Turner to the NCAA over the 14-year term of the agreement. Further, Turner and CBS have agreed to share advertising and sponsorship revenues and production costs. In the event, however, that the programming rights fee and

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

production costs exceed advertising and sponsorship revenues, CBS’s share of such shortfall is limited to specified annual amounts (the “Loss Cap Amounts”), ranging from approximately $90 million to $30 million (totaling approximately $670 million over the term of the agreement). Beginning in 2011, Turner’s share of the programming rights fee will be amortized based on the ratio of current period advertising revenue to total estimated advertising revenue over the term of the agreement. Any costs recognized and payable by Turner due to the Loss Cap Amounts will be expensed by the Company as incurred.

RESULTS OF OPERATIONS

Changes in Basis of Presentation

     As discussed more fully in Note 1 to the accompanying consolidated financial statements, the 2009 financial information has been recast to reflect the retroactive adoption of amendments to accounting guidance pertaining to the accounting for transfers of financial assets and variable interest entities.

Significant Transactions and Other Items Affecting Comparability

     As more fully described herein and in the related notes to the accompanying consolidated financial statements, the comparability of Time Warner’s results from continuing operations has been affected by significant transactions and certain other items in each period as follows (millions):

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Gain on Consolidated Assets

     For the three months ended March 31, 2010, the Company, upon the acquisition of the controlling interest in HBO CE, recognized a $59 million gain reflecting the recognition of the excess of the fair value over the Company’s carrying costs of its original investment in HBO CE.

Investment Losses, Net

     For the three months ended March 31, 2010 and 2009, the Company recognized $3 million and $13 million, respectively, of miscellaneous investment losses.

Amounts Related to the Separation of TWC

     For the three months ended March 31, 2010, the Company recognized $3 million of other loss related to the expiration, exercise and net change in the estimated fair value of Time Warner equity awards held by Time Warner Cable Inc. (“TWC”) employees. For the three months ended March 31, 2009, the Company incurred pretax direct transaction costs, primarily legal and professional fees related to the separation of TWC of $5 million, which have been reflected in other loss, net in the accompanying consolidated statement of operations.

Premium Paid and Costs Incurred on Debt Redemption

     For the three months ended March 31, 2010, the Company recognized $55 million of premium paid and costs incurred on the repurchase of $773 million of the Company’s outstanding 6.75% Notes due 2011, which was recorded in other loss, net in the accompanying consolidated statement of operations.

Income Tax Impact and Tax Items Related to TWC

     The income tax impact reflects the estimated tax or tax benefit associated with each item affecting comparability. Such estimated taxes or tax benefits vary based on certain factors, including the taxability or deductibility of the items and foreign tax on certain transactions. For the three months ended March 31, 2009, the Company also recognized approximately $24 million of tax benefits attributable to the impact of certain state tax law changes on TWC net deferred liabilities.

Noncontrolling Interest Impact

     For the three months ended March 31, 2009, the noncontrolling interest impact of $5 million reflects the minority owner’s share of the tax provision related to changes in certain state tax laws on TWC net deferred liabilities.

Consolidated Results

     The following discussion provides an analysis of the Company’s results of operations and should be read in conjunction with the accompanying consolidated statement of operations.

      Revenues. The components of revenues are as follows (millions):

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

     The increase in Subscription revenues for the three months ended March 31, 2010 was primarily related to an increase at the Networks segment. Advertising revenues increased for the three months ended March 31, 2010, primarily reflecting growth at the Networks and Publishing segments. The increase in Content revenues for the three months ended March 31, 2010 was due primarily to increases at the Filmed Entertainment and Networks segments.

     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, 2010 and 2009, costs of revenues totaled $3.353 billion and $3.358 billion, respectively, and, as a percentage of revenues, were 53% and 56%, respectively. The segment variations are discussed in detail in “Business Segment Results.”

      Selling, General and Administrative Expenses. For the three months ended March 31, 2010 and 2009, selling, general and administrative expenses decreased 1% to $1.488 billion in 2010 from $1.501 billion in 2009, due to a decrease at the Publishing segment, partially offset by increases at the Networks, Corporate and Filmed Entertainment segments. The segment variations are discussed in detail in “Business Segment Results.”

     Included in costs of revenues and selling, general and administrative expenses is depreciation expense, which was essentially flat at $164 million for the three months ended March 31, 2010 compared to $165 million for the three months ended March 31, 2009.

      Amortization Expense. Amortization expense decreased to $68 million for the three months ended March 31, 2010 from $77 million for the three months ended March 31, 2009, mainly due to a decrease at the Filmed Entertainment segment.

      Restructuring Costs. For the three months ended March 31, 2010, the Company incurred restructuring costs of $9 million primarily related to various employee terminations and other exit activities, consisting of $4 million at the Filmed Entertainment segment and $5 million at the Publishing segment.

     For the three months ended March 31, 2009, the Company incurred restructuring costs of $36 million, primarily related to various employee terminations and other exit activities, consisting of $37 million at the Filmed Entertainment segment and a $1 million reversal at the Publishing segment.

      Operating Income. Operating Income increased to $1.463 billion for the three months ended March 31, 2010 from $1.024 billion for the three months ended March 31, 2009. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $48 million of income and $7 million of expense for the three months ended March 31, 2010 and 2009, respectively, Operating Income increased $384 million, primarily reflecting increases at the Networks, Filmed Entertainment and Publishing segments. The segment variations are discussed under “Business Segment Results.”

      Interest Expense, Net. Interest expense, net, decreased to $296 million for the three months ended March 31, 2010 from $313 million for the three months ended March 31, 2009. The decrease in interest expense, net was due primarily to lower average net debt.

     The changes in investment losses, net, amounts related to the separation of TWC and premium paid and costs incurred on debt redemption are discussed under “Significant Transactions and Other Items Affecting Comparability.”

      Income Tax Provision. Income tax expense from continuing operations was $389 million for the three months ended March 31, 2010 compared to $227 million for the three months ended March 31, 2009. The Company’s effective tax rate for continuing operations was 35% for the three months ended March 31, 2010 compared to 33% for the three months ended March 31, 2009. The change is primarily due to the tax benefits related to TWC, as previously discussed, during the three months ended March 31, 2009, partially offset by the benefit of valuation allowance releases during the three months ended March 31, 2010.

      Income from Continuing Operations. Income from continuing operations increased to $725 million for the three months ended March 31, 2010 from $462 million for the three months ended March 31, 2009. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $10 million and $5 million of income, net for the three months ended March 31, 2010 and 2009, respectively, income from continuing operations increased by $258 million, primarily reflecting higher Operating Income and lower interest expense, partially offset by higher income tax expense. Basic and diluted income per common share from continuing operations attributable to Time Warner Inc. common shareholders were $0.63 and $0.62, respectively, for the three months ended March 31, 2010 compared to $0.39 for both for the three months ended March 31, 2009.

      Discontinued Operations, Net of Tax . The financial results for the three months ended March 31, 2009 included the impact of treating the results of operations and financial condition of TWC and AOL Inc. (“AOL”) as discontinued operations. Discontinued operations, net of tax was income of $226 million for the three months ended March 31, 2009 and included TWC’s results for the period from January 1, 2009 through March 12, 2009 and AOL’s results for the period January 1, 2009 through March 31, 2009. For additional information, see Note 2 to the accompanying consolidated financial statements.

      Net Income Attributable to Noncontrolling Interests. For the three months ended March 31, 2009, net income attributable to noncontrolling interests was $28 million.

      Net Income Attributable to Time Warner Inc. Shareholders. Net income attributable to Time Warner Inc. shareholders was $725 million and $660 million for the three months ended March 31, 2010 and 2009, respectively. Basic and diluted net income per common share attributable to Time Warner Inc. common shareholders were $0.63 and $0.62, respectively, for the three months ended March 31, 2010 compared to $0.55 for both for the three months ended March 31, 2009.

     Subscription revenues increased due primarily to higher domestic subscription rates at both Turner and HBO, international growth and expansion, including the consolidation of HBO CE, and the favorable impact of foreign exchange rates at Turner.

     The increase in Advertising revenues was due primarily to growth at Turner’s domestic entertainment networks, mainly as a result of strong scatter pricing and yield management, as well as growth and expansion at its international entertainment networks, partially offset by a decrease at Turner’s domestic news networks mainly due to audience declines.

     The increase in Content revenues was due primarily to higher ancillary sales of HBO’s original programming, including the domestic basic cable television sale of Entourage , and higher licensing revenues at Turner.

     Costs of revenues increased 2% as higher operating costs were largely offset by lower programming costs. Programming costs decreased 3% to $869 million for the three months ended March 31, 2010 from $895 million for the three months ended March 31, 2009. The decrease in programming costs was due primarily to lower expenses related to the timing of licensed programming at HBO and Turner and original programming at Turner, partially offset by international expansion, including the impact of the consolidation of HBO CE. Costs of revenues as a percentage of revenues were 42% and 45% for the three months ended March 31, 2010 and 2009, respectively.

     Selling, general and administrative expenses increased due primarily to merit-based increases in compensation as well as increases in overhead and marketing expenses.

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the 2010 results included a $59 million gain that was recognized upon the acquisition of the controlling interest in HBO CE, reflecting the excess of the fair value over the Company’s carrying costs of its original investment in HBO CE.

     Operating Income increased primarily due to the increase in revenues and the $59 million gain on HBO CE, partially offset by higher selling, general and administrative expenses.

 

     Content revenues primarily relate to theatrical product (which is content made available for initial exhibition in theaters) and television product (which is content made available for initial airing on television). The components of Content revenues for the three months ended March 31, 2010 and 2009 are as follows (millions):

 

     The increase in Content revenues included the positive impact of foreign exchange rates on many of the segment’s international operations.

     Theatrical film revenues in the first quarter of 2010, which included the releases of Valentine’s Day and The Book of Eli as well as carryover revenues from Sherlock Holmes and The Blind Side , increased slightly as compared to revenues in the first quarter of 2009, which included the releases of Watchmen and He’s Just Not that Into You as well as carryover revenues from Gran Torino , The Curious Case of Benjamin Button and Yes Man . Theatrical product revenues from home video and electronic delivery increased primarily due to the quantity and performance of new releases. Significant titles in the first quarter of 2010 included The Blind Side , Sherlock Holmes , Where the Wild Things Are , The Final Destination and

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

The Time Traveler’s Wife , while significant titles in the first quarter of 2009 included Body of Lies and Nights in Rodanthe . Theatrical product revenues from television licensing increased due primarily to the timing and number of availabilities, which included Harry Potter and the Order of the Phoenix in the first quarter of 2010.

     The decrease in television product licensing fees was primarily due to the 2009 conclusion of several series with high license fees, including Without a Trace and ER , and the timing of network deliveries of returning series.

     The decrease in costs of revenues resulted primarily from lower television product film costs, partially offset by higher theatrical product advertising and print costs due primarily to the timing and mix of films released and higher manufacturing and related costs associated with the increase in theatrical home video revenues. Film costs decreased to $1.133 billion for the three months ended March 31, 2010 from $1.267 billion for the three months ended March 31, 2009. Included in film costs are net pre-release theatrical film valuation adjustments, which were $0 for the three months ended March 31, 2010 compared to $31 million for the three months ended March 31, 2009. Costs of revenues as a percentage of revenues was 69% for the three months ended March 31, 2010 compared to 71% for the three months ended March 31, 2009.

     The increase in selling, general and administrative expenses was primarily the result of merit-based increases in compensation.

     The results for the three months ended March 31, 2010 and 2009 included $4 million and $37 million of restructuring costs, respectively, primarily consisting of headcount reductions and the outsourcing of certain functions. The Filmed Entertainment segment expects to incur approximately $10 million of additional restructuring charges during the remainder of 2010.

     The increase in Operating Income was primarily due to the increase in revenues, lower restructuring costs and a decrease in amortization expense primarily relating to film library assets.

      Publishing. Revenues and Operating Income (Loss) of the Publishing segment for the three months ended March 31, 2010 and 2009 are as follows (millions):

 

 

     Subscription revenues reflected increases at IPC, primarily from the positive impact of foreign exchange rates, partially offset by modest declines in domestic subscription revenues.

     Advertising revenues increased primarily due to improvements in domestic print advertising pages sold and online revenues.

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

     The decrease in Other revenues is due primarily to the sale of Southern Living At Home in the third quarter of 2009 and declines at other non-magazine businesses, including Synapse and QSP.

     Costs of revenues decreased 7%, and, as a percentage of revenues, were 38% and 41% for the three months ended March 31, 2010 and 2009, respectively. Costs of revenues for the magazine and online businesses include manufacturing costs (paper, printing and distribution) and editorial-related costs, which together decreased 6% to $286 million for the three months ended March 31, 2010 from $305 million for the three months ended March 31, 2009, primarily due to cost savings initiatives and lower paper costs associated with a decline in paper prices. In addition, costs of revenues at the non-magazine businesses declined as a result of lower revenues.

     Selling, general and administrative expenses decreased due primarily to lower marketing expenses, the absence of an $18 million prior year bad debt reserve related to a newsstand wholesaler, lower pension expense and cost savings resulting from Time Inc.’s fourth quarter 2009 restructuring activities.

     The results for the three months ended March 31, 2010 and 2009 included $5 million of restructuring costs and a $1 million reversal of restructuring costs, respectively.

     Operating Income increased due primarily to decreases in selling, general and administrative expenses and costs of revenues, partially offset by lower revenues.

      Corporate. Operating Loss of the Corporate segment for the three months ended March 31, 2010 and 2009 is as follows (millions):

 

     For the three months ended March 31, 2010, Operating Loss increased compared to the prior year, reflecting merit-based increases in compensation, severance charges and an increase in legal and other professional fees related to the defense of former employees in various lawsuits.

FINANCIAL CONDITION AND LIQUIDITY

     Management believes that cash generated by or available to the Company should be sufficient to fund its capital and liquidity needs for the foreseeable future, including quarterly dividend payments, the remainder of the $3 billion common stock repurchase program and scheduled debt repayments. Time Warner’s sources of cash include cash provided by operations, cash and equivalents on hand, available borrowing capacity under its committed credit facilities and commercial paper program and access to capital markets. Time Warner’s unused committed capacity at March 31, 2010 was $12.109 billion, including $5.167 billion of cash and equivalents.

Current Financial Condition

     At March 31, 2010, Time Warner had $16.647 billion of debt, $5.167 billion of cash and equivalents (net debt, defined as total debt less cash and equivalents, of $11.480 billion) and $33.311 billion of shareholders’ equity, compared to $16.208 billion of debt, $4.733 billion of cash and equivalents (net debt of $11.475 billion) and $33.396 billion of shareholders’ equity at December 31, 2009.

 

     On January 28, 2010, Time Warner’s Board of Directors increased the amount remaining on its common stock repurchase program to $3.0 billion for purchases beginning January 1, 2010. 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 are based on a number of factors, including price and business and market conditions. From January 1, 2010 through April 30, 2010, the Company repurchased approximately 22 million shares of common stock for approximately $666 million pursuant to trading programs under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

Cash Flows

     Cash and equivalents increased by $434 million, including $23 million of cash used by discontinued operations, for the three months ended March 31, 2010 and increased by $5.854 billion, including $337 million of cash provided by discontinued operations, for the three months ended March 31, 2009. Components of these changes are discussed below in more detail.

Operating Activities from Continuing Operations

     Details of cash provided by operations from continuing operations are as follows (millions):

 

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

     Cash provided by operations from continuing operations increased to $1.356 billion for the three months ended March 31, 2010 from $1.165 billion for the three months ended March 31, 2009. The increase in cash provided by operations from continuing operations was related primarily to an increase in Operating Income, partially offset by cash used by working capital. Working capital is subject to wide fluctuations based on the timing of cash transactions related to production schedules, the acquisition of programming, collection of accounts receivable and similar items.

Investing Activities from Continuing Operations

     Details of cash provided (used) by investing activities from continuing operations are as follows (millions):

     Cash used by investing activities from continuing operations was $535 million for the three months ended March 31, 2010 compared to cash provided by investing activities from continuing operations of $9.157 billion for the three months ended March 31, 2009. The change in cash provided (used) by investing activities from continuing operations was primarily due to the Company’s receipt of $9.253 billion on March 12, 2009 as its portion of the payment by TWC of the special cash dividend of $10.27 per share to all holders of TWC Class A Common Stock and TWC Class B Common Stock as of the close of business on March 11, 2009 (the “Special Dividend”) in connection with the separation of TWC from the Company, as well as an increase in investments and acquisitions.

Financing Activities from Continuing Operations

     Details of cash used by financing activities from continuing operations are as follows (millions):

 

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

     Cash used by financing activities from continuing operations decreased to $364 million for the three months ended March 31, 2010 from $4.805 billion for the three months ended March 31, 2009. The decrease in cash used by financing activities from continuing operations was primarily due to a decrease in debt repayments, partially offset by an increase in repurchases of common stock made in connection with the Company’s common stock repurchase program.

Cash Flows from Discontinued Operations

     Cash used by discontinued operations was $23 million for the three months ended March 31, 2010 as compared to cash provided by discontinued operations of $337 million for the three months ended March 31, 2009, which primarily reflected the cash activity of AOL.

Outstanding Debt and Other Financing Arrangements

Outstanding Debt and Committed Financial Capacity

     At March 31, 2010, Time Warner had total committed capacity, defined as maximum available borrowings under various existing debt arrangements and cash and short-term investments, of $28.852 billion. Of this committed capacity, $12.109 billion was unused and $16.647 billion was outstanding as debt. At March 31, 2010, total committed capacity, outstanding letters of credit, outstanding debt and total unused committed capacity were as follows (millions):

 

March 2010 Debt Offering and Tender Offer and April 2010 Redemption

     On March 3, 2010, Time Warner filed a shelf registration statement with the Securities and Exchange Commission that allows it to offer and sell from time to time debt securities, preferred stock, common stock and warrants to purchase debt and equity securities. On March 11, 2010, Time Warner issued $2.0 billion aggregate principal amount of debt securities under the shelf registration statement, consisting of $1.4 billion aggregate principal amount of 4.875% Notes due 2020 and $600 million aggregate principal amount of 6.200% Debentures due 2040 (the “2010 Debt Offering”). The securities issued pursuant to the 2010 Debt Offering are guaranteed, on an unsecured basis, by Historic TW Inc. (“Historic TW”). In addition, Turner and HBO have guaranteed, on an unsecured basis, Historic TW’s guarantee of the securities.

     The net proceeds to the Company from the 2010 Debt Offering were $1.984 billion, after deducting underwriting discounts. The Company used a portion of the net proceeds from the 2010 Debt Offering to repurchase $773 million of the Company’s outstanding 6.75% Notes due 2011 pursuant to a tender offer. The premium paid and costs incurred for the repurchase of $773 million of the 6.75% Notes due 2011 was $55 million and was recorded in other loss, net in the accompanying consolidated statement of operations. On April 22, 2010, the Company redeemed the remaining $227

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

million aggregate principal amount of the 6.75% Notes due 2011 pursuant to a notice of redemption dated March 23, 2010. Accordingly, the 6.75% Notes due 2011 are reflected as debt due within one year in the accompanying consolidated balance sheet. The premium paid and costs incurred on the repurchase of the remaining $227 million of the 6.75% Notes due 2011 was $14 million, and will be recorded in other loss, net in the second quarter 2010 consolidated statement of operations.

Asset Securitization Arrangements

     During the first quarter of 2010, the Company repaid the $805 million outstanding under the Company’s two accounts receivable securitization facilities. The Company terminated the two accounts receivable securitization facilities on March 19, 2010 and March 24, 2010, respectively.

Programming Licensing Backlog

     Programming licensing backlog represents the amount of future revenues not yet recorded from cash contracts for the licensing of theatrical and television product for pay cable, basic cable, network and syndicated television exhibition. Backlog was approximately $4.3 billion and $4.5 billion at March 31, 2010 and December 31, 2009, respectively. Included in these amounts is licensing of film product from the Filmed Entertainment segment to the Networks segment in the amount of $1.1 billion at both March 31, 2010 and December 31, 2009.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

     This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. Examples of forward-looking statements in this document include, but are not limited to, statements regarding the adequacy of the Company’s liquidity to meet its needs for the foreseeable future, the incurrence of additional restructuring charges in 2010, the impact of plan amendments on employee benefit plan expenses, the timing of programming expenditures, the impact of restructuring activities in 2010 and the Company’s international expansion plans.

     The Company’s forward-looking statements are based on management’s current expectations and assumptions regarding the Company’s business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances. The Company’s actual results may differ materially from those set forth in its forward-looking statements. Important factors that could cause the Company’s actual results to differ materially from those in its forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors:

	•		recent and future changes in technology, services and standards, including, but not limited to, alternative methods for the delivery and storage of digital media and the maturation of the standard definition DVD format;
	•		changes in consumer behavior, including changes in spending or saving behavior and changes in when, where and how they consume digital media;
	•		changes in the Company’s plans, initiatives and strategies, and consumer acceptance thereof;
	•		changes in advertising expenditures due to, among other things, the shift of advertising expenditures from traditional to digital media, pressure from public interest groups, changes in laws and regulations and other societal, political, technological and regulatory developments;
	•		competitive pressures, including, as a result of audience fragmentation;
	•		the popularity of the Company’s content;
	•		piracy and the Company’s ability to protect its content and intellectual property rights;
	•		lower than expected valuations associated with the cash flows and revenues at Time Warner’s segments, which could result in Time Warner’s inability to realize the value of recorded intangibles and goodwill at those segments;
	•		the Company’s ability to deal effectively with an economic slowdown or other economic or market difficulty;

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

	•		decreased liquidity in the capital markets, including any reduction in the Company’s ability to access the capital markets for debt securities or obtain bank financings on acceptable terms;
	•		the effects of any significant acquisitions, dispositions and other similar transactions by the Company;
	•		the failure to meet earnings expectations;
	•		the adequacy of the Company’s risk management framework;
	•		changes in applicable accounting policies;
	•		the impact of terrorist acts, hostilities, natural disasters and pandemic viruses;
	•		changes in tax laws; and
	•		the other risks and uncertainties detailed in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

     Any forward-looking statements made by the Company in this document speak only as of the date on which they are made. 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 new information, subsequent events or otherwise.

TIME WARNER INC.

See accompanying notes.

See accompanying notes.

See accompanying notes.

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND RECENT ACCOUNTING GUIDANCE

Description of Business

     Time Warner Inc. (“Time Warner” or the “Company”) is a leading media and entertainment company, whose businesses include television networks, filmed entertainment and publishing. Time Warner classifies its operations into three reportable segments: Networks: consisting principally of cable television networks that provide programming; Filmed Entertainment: consisting principally of feature film, television and home video production and distribution; and Publishing: consisting principally of magazine publishing. Financial information for Time Warner’s various reportable segments is presented in Note 12.

Changes in Basis of Presentation

     The 2009 financial information has been recast to reflect the retroactive adoption of amendments to accounting guidance pertaining to the accounting for transfers of financial assets and variable interest entities (“VIEs”) as described below.

Amendments to Accounting for Transfers of Financial Assets and VIEs

     On January 1, 2010, the Company adopted guidance on a retrospective basis that (i) eliminated the concept of a qualifying special-purpose entity (“SPE”), (ii) eliminated the exception from applying existing accounting guidance related to VIEs that were previously considered qualifying SPEs, (iii) changed the approach for determining the primary beneficiary of a VIE from a quantitative risk and reward model to a qualitative model based on control and (iv) requires the Company to assess each reporting period whether any of the Company’s variable interests give it a controlling financial interest in the applicable VIE.

     The Company’s investments in entities determined to be VIEs principally consist of certain investments at its Networks segment, primarily HBO Asia, HBO South Asia and HBO Latin America Group (“HBO LAG”), which operate multi-channel pay-television programming services. As of March 31, 2010, the Company held an 80% economic interest in HBO Asia, a 75% economic interest in HBO South Asia and an approximate 80% economic interest in HBO LAG, while sharing voting control with the other partners in each of the three entities. The Company provides programming as well as certain services, including distribution, licensing, technological and administrative support, to HBO Asia, HBO South Asia and HBO LAG. These investments are intended to enable the Company to more broadly leverage its programming and digital strategy in the territories served and to capitalize on the growing multi-channel television market in such territories. These entities are financed substantially through cash flows from their operations, and the Company is not obligated to provide them with any additional financial support. In addition, the assets of these entities are not available to settle obligations of the Company.

     The Company previously consolidated these entities; however, as a result of adopting this guidance, because voting control is shared with the other partners in these entities, the Company has determined that it is no longer the primary beneficiary of these entities and effective January 1, 2010 is accounting for its investments in these entities using the equity method. The adoption of this guidance with respect to these entities resulted in a decrease to revenues, operating income and net income attributable to Time Warner Inc. shareholders of $90 million, $24 million and $1 million, respectively, for the three months ended March 31, 2009. The impact on the consolidated balance sheet as of December 31, 2009 and consolidated statement of cash flows for the three months ended March 31, 2009 was not material. As of March 31, 2010 and December 31, 2009, the Company’s aggregate investment in these three entities was $596 million and $362 million, respectively, and recorded in investments, including available-for-sale securities, in the consolidated balance sheet.

     The Company also held variable interests in two wholly owned SPEs, through which the activities of its accounts receivable securitization facilities were conducted. The Company determined it was the primary beneficiary of these entities because of its ability to direct the key activities of the SPEs that most significantly impact their economic performance. Accordingly, as a result of adopting this guidance, the Company consolidated these SPEs, which resulted in an increase to securitized receivables and non-recourse debt of $805 million as of December 31, 2009. In addition, for the three months ended March 31, 2009, cash provided by operations increased by $88 million, with an offsetting decrease to cash used by financing activities. The impact on the consolidated statement of operations was not material. During the first

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

quarter of 2010, the Company repaid the $805 million outstanding under these facilities and terminated the two facilities on March 19, 2010 and on March 24, 2010, respectively.

Basis of Presentation

Basis of Consolidation

     The consolidated financial statements include 100% of the assets, liabilities, revenues, expenses and cash flows of Time Warner, all voting interest entities in which Time Warner has a controlling voting interest (“subsidiaries”) and VIEs of which the Company is the primary beneficiary. 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. Translation gains or losses of assets and liabilities are included in the consolidated statement of shareholders’ equity as a component of accumulated other comprehensive income, net.

Reclassifications

     Certain reclassifications have been made to the prior year information to conform to the March 31, 2010 presentation of the components of inventory.

Use of Estimates

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. Actual results could differ from those estimates.

     Significant estimates and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, allowances for doubtful accounts, depreciation and amortization, film ultimate revenues, home video and magazine returns, business combinations, pension and other postretirement benefits, equity-based compensation, income taxes, contingencies, litigation matters, certain programming arrangements and the determination of whether the Company is the primary beneficiary of entities in which it holds variable interests.

Interim Financial Statements

     The consolidated financial statements are unaudited; however, in the opinion of management, they contain all of the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position, the results of operations and cash flows for the periods presented in conformity with GAAP applicable to interim periods. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Time Warner included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”).

Accounting for Collaborative Arrangements

     The Company’s collaborative arrangements primarily relate to arrangements entered into with third parties to jointly finance and distribute theatrical productions. For the three months ended March 31, 2010 and 2009, net participation costs of $87 million and $68 million, respectively, were recorded in costs of revenues and net amounts received from collaborators for which capitalized film costs were reduced was $71 million and $38 million, respectively. As of March 31, 2010 and December 31, 2009, the net amount due to collaborators for their share of participations was $325 million and $332 million, respectively, and was recorded in participations payable in the consolidated balance sheet.

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2. BUSINESS ACQUISITIONS AND DISPOSITIONS

HBO LAG

     On March 9, 2010, HBO purchased additional interests in HBO LAG for $217 million in cash, which resulted in HBO owning 80% of the equity interests of HBO LAG. HBO LAG is considered a VIE and, because voting control of the entity is shared equally with another investor, the Company has determined it is not the primary beneficiary of this entity. Accordingly, HBO accounts for this investment under the equity method of accounting.

HBO Central Europe Acquisition

     On January 27, 2010, HBO purchased the remainder of its partners’ interests in HBO Central Europe (“HBO CE”) for $136 million in cash, net of cash acquired. HBO CE operates the HBO and Cinemax premium pay television programming services serving 11 territories in Central Europe. This transaction resulted in HBO owning 100% of HBO CE, and the Company has consolidated the results of operations and financial condition of HBO CE effective January 27, 2010. Prior to this transaction, HBO’s 33% interest in HBO CE had a carrying value of $19 million and was accounted for under the equity method of accounting. Upon the acquisition of the controlling interest in HBO CE, a gain of $59 million was recognized reflecting the excess of the fair value over the Company’s carrying cost of its original investment in HBO CE. The fair value of HBO’s original investment in HBO CE was determined using the consideration paid in the January 27, 2010 purchase, which was primarily derived using a combination of market and income valuation techniques.

Summary of Discontinued Operations

     During 2009, the Company completed the legal and structural separations of Time Warner Cable Inc. (“TWC”) and AOL Inc. (“AOL”). With the completion of these separations, the Company disposed of its Cable and AOL segments in their entirety and ceased to consolidate their financial condition and results of operations in its consolidated financial statements. Accordingly, the Company has presented the financial condition and results of operations of its former Cable and AOL segments as discontinued operations in the consolidated financial statements for all periods presented.

     Financial data for the discontinued operations is as follows (millions, except per share amounts):

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

4. FAIR VALUE MEASUREMENTS

     A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). The following table presents information about assets and liabilities required to be carried at fair value on a recurring basis as of March 31, 2010 (millions):

     The Company primarily applies the market approach for valuing recurring fair value measurements.

     The following table reconciles the beginning and ending balances of assets and liabilities classified as Level 3 and identifies the net income (losses) the Company recognized during the three months ended March 31, 2010 on such assets and liabilities that were included in the balance as of March 31, 2010 (millions):

     Gains and losses recognized for assets and liabilities valued using significant unobservable inputs are reported in other loss, net in the consolidated statement of operations (Note 15).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Other Financial Instruments

     The Company’s other financial instruments including debt are not required to be carried at fair value. Based on the interest rates prevailing at March 31, 2010, the fair value of Time Warner’s debt exceeds its carrying value by approximately $1.683 billion and at December 31, 2009, the fair value of Time Warner’s debt exceeded its carrying value by approximately $1.749 billion. Unrealized gains or losses on debt do not result in the realization or expenditure of cash and generally are not recognized for financial reporting purposes unless the debt is retired prior to its maturity. The carrying value for the majority of the Company’s other financial instruments approximates fair value due to the short-term nature of such instruments. For the remainder of the Company’s other financial instruments, differences between the carrying value and fair value are not significant at March 31, 2010. The fair value of financial instruments is generally determined by reference to the market value of the instrument as quoted on a national securities exchange or in an over-the-counter market. In cases where quoted market value is not available, fair value is based on an estimate using present value or other valuation techniques.

Non-Financial Instruments

     The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories and property, plant and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill and indefinite-lived intangible assets) such that a non-financial instrument is required to be evaluated for impairment, a resulting asset impairment would require that the non-financial instrument be recorded at the lower of cost or its fair value.

     In the case of film production costs, upon the occurrence of an event or change in circumstance that may indicate that the fair value of a film is less than its unamortized costs, the Company determines the fair value of the film and writes off to the consolidated statement of operations the amount by which the unamortized capitalized costs exceed the film’s fair value. Some of these events or changes in circumstance include: (i) an adverse change in the expected performance of a film prior to its release, (ii) actual costs substantially in excess of budgeted costs, (iii) substantial delays in completion or release schedules, (iv) changes in release plans, (v) insufficient funding or resources to complete the film and to market it effectively and (vi) the failure of actual performance subsequent to release to meet the expected performance of the film prior to release. In determining the fair value of its films, the Company employs a discounted cash flow methodology with assumptions for cash flows for periods not exceeding 10 years. The discount rate utilized in the discounted cash flow analysis is based on the weighted average cost of capital of the respective business (e.g., Warner Bros.) plus a risk premium representing the risk associated with producing a particular film. The fair value of any film costs associated with a film that management plans to abandon is zero. As the primary determination of fair value is determined using a discounted cash flow model, the resulting fair value is considered a Level 3 input. During the three months ended March 31, 2010, there were no film production costs that were required to be written down to fair value.

5. DERIVATIVE INSTRUMENTS

     Time Warner uses derivative instruments, principally forward contracts, to manage the risk associated with the volatility of future cash flows denominated in foreign currencies and changes in fair value resulting from changes in foreign currency exchange rates. The principal currencies being hedged include the British Pound, Euro, Australian Dollar and Canadian Dollar. Time Warner uses foreign exchange contracts that generally have maturities of three to 18 months to hedge various foreign exchange exposures, including the following: (i) variability in foreign-currency-denominated cash flows, such as the hedges of unremitted or forecasted royalty and license fees to be received from the sale, or anticipated sale of U.S. copyrighted products abroad or cash flows for certain film costs denominated in a foreign currency (i.e., cash flow hedges) and (ii) currency risk associated with foreign-currency-denominated operating assets and liabilities (i.e., fair value hedges). For these qualifying hedge relationships, the Company excludes the impact of forward points from its assessment of hedge effectiveness. As a result, changes in the fair value of forward points are recorded in other loss, net in the consolidated statement of operations each quarter.

     The Company also enters into derivative contracts that economically hedge certain of its foreign currency risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. These economic hedges are used primarily to offset the change in certain foreign currency denominated long-term receivables and certain foreign currency denominated debt due to changes in the underlying foreign exchange rates. For these economic hedges, gains or

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

losses resulting from changes in the fair value of the derivative contract are recorded in the consolidated statement of operations each quarter.

     Gains and losses from hedging activities recognized in the consolidated statement of operations, including hedge ineffectiveness, were not material for the three months ended March 31, 2010 and 2009. In addition, such gains and losses are largely offset by corresponding economic gains or losses from the respective transactions that were hedged.

     The following is a summary of amounts recorded in the consolidated balance sheet pertaining to Time Warner’s use of foreign currency derivatives at March 31, 2010 and December 31, 2009 (millions):

     The Company monitors its positions with, and the credit quality of, the financial institutions that are party to any of its financial transactions. Additionally, netting provisions are provided for in existing International Swap and Derivative Association Inc. agreements in situations where the Company executes multiple contracts with the same counterparty. As a result, net assets or liabilities resulting from foreign exchange derivatives subject to these netting agreements are classified within prepaid assets and other current assets or accounts payable and accrued expenses in the Company’s consolidated balance sheet. At March 31, 2010 and December 31, 2009, $59 million and $61 million, respectively, of losses related to cash flow hedges are recorded in accumulated other comprehensive income and are expected to be recognized in earnings at the same time the hedged items affect earnings. Included in these amounts are deferred net losses of $22 million and $17 million at March 31, 2010 and December 31, 2009, respectively, related to hedges of cash flows associated with films that are not expected to be released within the next twelve months.

6. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

March 2010 Debt Offering and Tender Offer and April 2010 Redemption

     On March 3, 2010, Time Warner filed a shelf registration statement with the Securities and Exchange Commission that allows it to offer and sell from time to time debt securities, preferred stock, common stock and warrants to purchase debt and equity securities. On March 11, 2010, Time Warner issued $2.0 billion aggregate principal amount of debt securities under the shelf registration statement, consisting of $1.4 billion aggregate principal amount of 4.875% Notes due 2020 and $600 million aggregate principal amount of 6.200% Debentures due 2040 (the “2010 Debt Offering”). The securities issued pursuant to the 2010 Debt Offering are guaranteed, on an unsecured basis, by Historic TW Inc. (“Historic TW”). In addition, Turner Broadcasting System Inc. (“Turner”) and Home Box Office Inc. (“HBO”) have guaranteed, on an unsecured basis, Historic TW’s guarantee of the securities.

     The net proceeds to the Company from the 2010 Debt Offering were $1.984 billion, after deducting underwriting discounts. The Company used a portion of the net proceeds from the 2010 Debt Offering to repurchase $773 million of the Company’s outstanding 6.75% Notes due 2011 pursuant to a tender offer. The premium paid and costs incurred for the repurchase of the $773 million of the 6.75% Notes due 2011 was $55 million and was recorded in other loss, net in the consolidated statement of operations. On April 22, 2010, the Company redeemed the remaining $227 million aggregate principal amount of the 6.75% Notes due 2011 pursuant to a notice of redemption dated March 23, 2010. Accordingly, the 6.75% Notes due 2011 are reflected as debt due within one year in the consolidated balance sheet.

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Asset Securitization Arrangements

     During the first quarter of 2010, the Company repaid the $805 million outstanding under the Company’s two accounts receivable securitization facilities. The Company terminated the two accounts receivable securitization facilities on March 19, 2010 and March 24, 2010, respectively.

7. SHAREHOLDERS’ EQUITY

Common Stock Repurchase Program

     On January 28, 2010, Time Warner’s Board of Directors increased the amount remaining on its common stock repurchase program to $3.0 billion for purchases beginning January 1, 2010. 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 are based on a number of factors, including price and business and market conditions. From January 1, 2010 through March 31, 2010, the Company repurchased approximately 17 million shares of common stock for approximately $500 million pursuant to trading programs under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

8. INCOME PER COMMON SHARE

     Basic income per common share is determined using the Two-Class Method and is computed by dividing net income attributable to Time Warner Inc. common shareholders by the weighted-average common shares outstanding during the period. The Two-Class Method is an earnings allocation formula that determines income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Diluted income per common share reflects the more dilutive earnings per share amount calculated using the treasury stock method or the Two-Class Method.

     Set forth below is a reconciliation of basic and diluted income per common share from continuing operations (millions, except per share amounts):

     Diluted income per common share for the three months ended March 31, 2010 and 2009 excludes approximately 146 million and 184 million, respectively, common shares that may be issued under the Company’s stock compensation plans because they do not have a dilutive effect.

     For the three months ended March 31, 2010 and 2009, the Company granted approximately 5 million and 4 million restricted stock units (“RSUs”), respectively, at a weighted-average grant date fair value per RSU of $26.95 and $22.07, respectively. For each of the three months ended March 31, 2010 and 2009, the Company granted approximately 0.2 million target performance stock units (“PSUs”), at a weighted-average grant date fair value per target PSU of $30.40 and $23.67, respectively. Total unrecognized compensation cost related to unvested RSUs and target PSUs as of March 31, 2010, without taking into account expected forfeitures, is $225 million and is expected to be recognized over a weighted-average period between one and two years.

     For each of the three months ended March 31, 2010 and 2009, the Company granted approximately 9 million stock options, at a weighted-average grant date fair value per option of $6.33 and $4.99, respectively. Total unrecognized compensation cost related to unvested stock options as of March 31, 2010, without taking into account expected forfeitures, is $105 million and is expected to be recognized over a weighted-average period between one and two years. The table below presents the weighted-average values of the assumptions used to value stock options at their grant date.

10. BENEFIT PLANS

     A summary of the components of the net periodic benefit costs from continuing operations recognized for substantially all of Time Warner’s domestic and international defined benefit pension plans for the three months ended March 31, 2010 and 2009 is as follows (millions):

Components of Net Periodic Benefit Costs

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Benefit Plan Amendments

     In March 2010, the Company’s Board of Directors approved amendments to its domestic defined benefit pension plans, which generally provide that (i) effective June 30, 2010, benefits provided under the plans will stop accruing for additional years of service and the plans will be closed to new hires and employees with less than one year of service and (ii) after December 31, 2013, pay increases will no longer be taken into consideration when determining a participating employee’s benefits under the plans.

     In addition, effective July 1, 2010, the Company will increase its matching contributions for eligible participants in the Time Warner Savings Plan. Effective January 1, 2011, the Company will also implement a supplemental savings plan that will provide for similar Company matching for eligible participant deferrals above the Internal Revenue Service compensation limits that apply to the Time Warner Savings Plan up to $500,000 of eligible compensation.

     The net effect of these changes is expected to result in a net annual decrease to employee benefit plan expense of approximately $50 million.

11. RESTRUCTURING COSTS

     The Company’s restructuring costs primarily related to employee termination costs and ranged from senior executives to line personnel. Restructuring costs expensed as incurred by segment for the three months ended March 31, 2010 and 2009 are as follows (millions):

     Selected information relating to accrued restructuring costs is as follows (millions):

     As of March 31, 2010, of the remaining liability of $201 million, $115 million was classified as a current liability in the consolidated balance sheet, with the remaining $86 million classified as a long-term liability. Amounts classified as long-term are expected to be paid through 2017.

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

12. SEGMENT INFORMATION

     Time Warner classifies its operations into three reportable segments: Networks, consisting principally of cable television networks that provide programming; Filmed Entertainment, consisting principally of feature film, television and home video production and distribution; Publishing, consisting principally of magazine publishing.

     Information as to the revenues, intersegment revenues, operating income (loss) and assets of Time Warner in each of its reportable segments is set forth below.