Time Warner Inc. Reports Results for 2006 Full Year and Fourth Quarter

Time Warner Inc. (NYSE:TWX) today reported financial results for its full year and fourth quarter ended December 31, 2006. Chairman and Chief Executive Officer Dick Parsons said: "I’m delighted that 2006 proved to be a good year for Time Warner. Taken together, our businesses performed well, and we achieved all of our announced financial objectives. We successfully executed on our strategy – enabling us to lead our industry and lay the foundation for creating significant new value. At the same time, we returned billions of dollars directly to our shareholders through dividends and stock repurchases.” Mr. Parsons continued: "We expect 2007 to be another superb year for Time Warner. Our businesses are well positioned to generate strong operating and financial performances. On the strategic front, we aim to create substantial incremental value by completing the integration of our recently acquired cable systems, further developing AOL’s online advertising business, and driving digital initiatives across the entire Company. In addition, we will continue to allocate our capital effectively, including the expected completion of our current $20 billion stock repurchase program during the first half of 2007.” Full-Year Results Revenues rose 4% over 2005 to $44.2 billion, reflecting increases at the Company’s Cable and Networks segments. Adjusted Operating Income before Depreciation and Amortization climbed to $11.1 billion, up 11% from $10.0 billion in the prior year, driven by double-digit gains at the Cable and Networks segments. Operating Income increased 85% to $7.4 billion in 2006 from $4.0 billion in 2005, reflecting growth in Adjusted Operating Income before Depreciation and Amortization, lower costs associated with securities litigation and government investigations and higher gains on asset sales. Cash Provided by Operations was $8.6 billion, and Free Cash Flow grew to $4.8 billion (reflecting a 43% conversion rate of Adjusted Operating Income before Depreciation and Amortization). As of December 31, 2006, Net Debt totaled $33.4 billion, up $17.3 billion from $16.1 billion at the end of 2005, due primarily to the Company’s stock repurchase program and the closing of the Adelphia and Comcast transactions. Diluted Income per Common Share before Discontinued Operations and Cumulative Effect of Accounting Change was $1.21 for the year ended December 31, 2006, compared to $0.54 in 2005. 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 the current year results by $0.40 and to decrease the prior year results by $0.19 per diluted common share. Fourth-Quarter Results Fourth-quarter revenues climbed 8% over the same period in 2005 to $12.5 billion, driven by increases at the Cable and Networks segments. Adjusted Operating Income before Depreciation and Amortization rose 13% to $3.0 billion, benefiting from increases at the Cable, Networks and Publishing segments. Operating Income grew 4% to $2.1 billion, reflecting the increase in Adjusted Operating Income before Depreciation and Amortization and higher gains on asset sales offset partially by incremental costs associated with securities litigation and government investigations. Diluted Income per Common Share before Discontinued Operations and Cumulative Effect of Accounting Change was $0.43 for the three months ended December 31, 2006, compared to $0.27 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 the current year results by $0.21 and to increase the prior year results by $0.04 per diluted common share. Stock Repurchase Program Update From the inception of its stock repurchase program through January 30, 2007, the Company has repurchased approximately 912 million shares of common stock for approximately $16.4 billion. At existing price levels, the Company expects to complete its $20 billion program in the first half of 2007. 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 Months and Year Ended December 31:   Three Months Ended December 31, Year EndedDecember 31, Revenues: 2006  2005  2006  2005  AOL $ 1,856  $ 2,012  $ 7,866  $ 8,283  Cable 3,651  2,315  11,767  8,812  Filmed Entertainment 3,093  3,624  10,625  11,924  Networks 2,679  2,428  10,273  9,570  Publishing 1,540  1,548  5,249  5,278  Intersegment eliminations   (353)   (404)   (1,556)   (1,466)   Total Revenues $ 12,466  $ 11,523  $ 44,224  $ 42,401    Adjusted Operating Income (Loss) before Depreciation and Amortization (a):   AOL (b) $ 302  $ 336  $ 1,812  $ 1,859  Cable 1,309  899  4,229  3,323  Filmed Entertainment (c) 240  391  1,136  1,226  Networks (d) 861  771  3,226  2,940  Publishing (e) 427  414  1,085  1,113  Corporate (f) (g) (103) (150) (411) (474) Intersegment eliminations   (22) 6    (14)   (9)   Total Adjusted Operating Income (Loss) before Depreciation and Amortization (a) $ 3,014  $ 2,667  $ 11,063  $ 9,978    Operating Income (Loss) (a): AOL (b) $ 913  $ 170  $ 1,923  $ 1,123  Cable 633  504  2,179  1,786  Filmed Entertainment (c) 155  296  784  885  Networks (d) 778  701  2,723  2,679  Publishing (e) 384  361  911  903  Corporate (f) (117) (162) (439) (518) Securities litigation expenses, net (h) (615) 160  (705) (2,865) Intersegment eliminations   (22) 6    (14)   (9)   Total Operating Income (Loss) $ 2,109  $ 2,036  $ 7,362  $ 3,984    (a) Adjusted Operating Income (Loss) 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. Operating Income (Loss) included these amounts in their respective periods. Refer to the reconciliations of Adjusted Operating Income (Loss) before Depreciation and Amortization to Operating Income (Loss) before Depreciation and Amortization on pages 16 and 17.   (b) For the three and twelve months ended December 31, 2006, Adjusted Operating Income before Depreciation and Amortization excluded a $769 million gain on the sales of AOL's U.K. and French Internet access businesses and $13 million of noncash impairments. Additionally, for the twelve months ended December 31, 2006, Adjusted Operating Income before Depreciation and Amortization excluded a $2 million gain from the resolution of a previously contingent gain related to the 2004 sale of Netscape Security Solutions. For the twelve months ended December 31, 2005, Adjusted Operating Income before Depreciation and Amortization excluded a $24 million noncash goodwill impairment charge related to America Online Latin America, Inc., a $5 million gain related to the sale of a building and a $5 million gain from the resolution of a previously contingent gain related to the 2004 sale of Netscape Security Solutions. 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. Operating Income included this amount in both periods.   (d) For the three and twelve months ended December 31, 2006, Adjusted Operating Income before Depreciation and Amortization and Operating Income included a net benefit of $5 million and shutdown costs of $114 million at The WB Network, respectively, at the Networks segment. Excluded from the $114 million of shutdown costs is $47 million of intersegment eliminations related to terminating programming arrangements with other Time Warner divisions. Including intersegment eliminations, the net impact to the Company of the shutdown was $67 million. For the twelve months ended December 31, 2006, Adjusted Operating Income before Depreciation and Amortization excluded a $200 million noncash goodwill impairment charge related to The WB Network. Operating Income included this amount in the same period.   (e) For the three and twelve months ended December 31, 2006, Adjusted Operating Income before Depreciation and Amortization excluded a $5 million gain related to the sale of a non-strategic magazine title. 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. Operating Income included these amounts in the same periods.   (f) For the twelve months ended December 31, 2006, Adjusted Operating Loss before Depreciation and Amortization excluded a $20 million gain on the sale of two aircraft. Operating Loss included this amount in the same period.   (g) For the three and twelve months ended December 31, 2006, Adjusted Operating Loss before Depreciation and Amortization excluded $600 million and $650 million, respectively, in legal reserves related to the securities litigation. Additionally, for the three and twelve months ended December 31, 2006, Adjusted Operating Loss before Depreciation and Amortization excluded $15 million and $55 million, respectively, in net expenses related to the securities litigation and government investigations. For the twelve months ended December 31, 2005, Adjusted Operating Loss before Depreciation and Amortization excluded $3 billion in legal reserves related to the securities litigation. Additionally, for the three and twelve months ended December 31, 2005, Adjusted Operating Loss before Depreciation and Amortization excluded $160 million and $135 million, respectively, in net recoveries related to the securities litigation and government investigations. Operating Loss included these amounts in the same periods.   (h) Represents amounts related to the securities litigation and government investigations. For segment reporting purposes in the Company's financial statements, amounts were reflected in the results of the Corporate segment. For the three and twelve months ended December 31, 2006, $600 million and $650 million, respectively, in legal reserves related to the securities litigation were included. Additionally, for the three and twelve months ended December 31, 2006, $15 million and $55 million, respectively, in net expenses related to the securities litigation and government investigations were included. For the twelve months ended December 31, 2005, $3 billion in legal reserves related to the securities litigation were included. Additionally, for the three and twelve months ended December 31, 2005, $160 million and $135 million, respectively, in net recoveries related to the securities litigation and government investigations were included. Presented below is a discussion of Time Warner’s segments for the 2006 fourth quarter and full year. Unless otherwise noted, the Dollar amounts in parentheses represent year-over-year changes. AOL Full-Year Results Revenues declined 5% ($417 million) to $7.9 billion, due to a 14% decrease ($971 million) in Subscription revenues, offset in part by a 41% increase ($548 million) in Advertising revenues. The lower Subscription revenues resulted mainly from a decline in domestic AOL brand subscribers, which related partially to AOL’s strategy, implemented in August 2006, of offering its e-mail, certain software and other products free of charge to Internet users. Advertising revenues reflected strong growth in display advertising, advertising run on third-party Web sites generated by Advertising.com and paid-search advertising. Adjusted Operating Income before Depreciation and Amortization decreased 3% ($47 million) to $1.8 billion, due primarily to lower revenues, higher traffic acquisition costs and higher restructuring charges ($212 million), offset largely by reductions in marketing ($503 million) and network ($129 million) expenses. Operating Income grew 71% ($800 million) to $1.9 billion, due mainly to the pretax gain of $769 million on the sales of AOL’s Internet access businesses in the U.K. and France, as well as lower depreciation ($45 million) and amortization ($30 million) expenses, offset partially by lower Adjusted Operating Income before Depreciation and Amortization. Fourth-Quarter Results Revenues decreased 8% ($156 million) to $1.9 billion. Adjusted Operating Income before Depreciation and Amortization declined 10% ($34 million) to $302 million. The current and prior year quarters reflected restructuring charges of $179 million and $15 million, respectively. Operating Income increased to $913 million from $170 million, due primarily to the pretax gain of $769 million on the sales of AOL’s Internet access businesses in the U.K. and France, offset partly by lower Adjusted Operating Income before Depreciation and Amortization. Highlights During the fourth quarter, AOL had 111 million average monthly domestic unique visitors and 44 billion domestic page views, according to comScore Media Metrix, which translates into 133 average monthly page views per unique visitor. As of December 31, 2006, the AOL service had 13.2 million U.S. access subscribers, a decline of 2.0 million from the prior quarter and 6.3 million from the year-ago quarter, reflecting subscriber losses due in part to AOL’s strategy to prioritize its advertising business. The sales of AOL’s Internet access businesses in France and the U.K. were completed on October 31, 2006, and December 29, 2006, respectively. The sale of AOL’s Internet access business in Germany is expected to close in the first quarter of 2007. CABLE (Time Warner Cable) Basis of Presentation On July 31, 2006, a subsidiary of Time Warner Cable acquired certain cable systems from Adelphia Communications Corporation, subsidiaries of Time Warner Cable and Comcast Corporation exchanged certain cable systems and Comcast’s interests in Time Warner Cable and one of its subsidiaries were redeemed. Therefore, the transactions included both acquisitions and dispositions of cable systems. Those systems that were owned by Time Warner Cable prior to these transactions and then transferred to Comcast in the exchange and redemption transactions are presented as discontinued operations for all periods presented. Those systems that Time Warner Cable owned both before and after the transactions served approximately 8.7 million basic video subscribers as of December 31, 2006, and are referred to as "Legacy Systems.” Systems that Time Warner Cable acquired in these transactions served approximately 3.9 million basic video subscribers as of December 31, 2006, and are referred to as "Acquired Systems.” On January 1, 2007, Texas and Kansas City Cable Partners, L.P., a joint venture between Time Warner Cable and Comcast that was managed by Time Warner Cable, distributed its assets to the partners. Time Warner Cable received cable systems in Kansas City, south and west Texas and New Mexico (the "Kansas City Pool”) serving approximately 788,000 basic video subscribers at December 31, 2006, in the distribution. Prior to January 1, 2007, the joint venture was accounted for as an equity investee and, accordingly, the financial results for the Kansas City Pool were not consolidated in the Time Warner Cable results for any period presented. The subscriber information presented below under "Highlights” includes the subscribers in the Kansas City Pool within both the Legacy Systems and total subscriber information for all periods presented. Full-Year Results Revenues rose 34% ($3.0 billion) to $11.8 billion. The year-over-year growth reflects the addition of the Acquired Systems, which contributed revenues of $1.7 billion, and 15% growth in the Legacy Systems. Subscription revenues rose 34% ($2.8 billion) to $11.1 billion, led by video revenue growth of 26% ($1.6 billion), greater high-speed data revenues, up 38% ($759 million), and an increase in Digital Phone revenues of 163% ($443 million). This growth was driven by the addition of the Acquired Systems as well as the continued penetration of digital video services, video rate increases and subscriber growth in the Legacy Systems. Average monthly subscription revenue per basic video subscriber climbed 11% to approximately $90. Advertising revenues increased 33% ($165 million) to $664 million, due primarily to the addition of the Acquired Systems, which contributed $137 million of Advertising revenues. Operating Income before Depreciation and Amortization increased 27% ($906 million) to $4.2 billion, benefiting from revenue growth, offset partially by higher operating expenses, primarily video programming, labor, marketing and Digital Phone service costs. Total programming expense increased 34% ($634 million), with a 12% ($225 million) increase in the Legacy Systems. In the Acquired Systems, programming expense was $409 million. The current and prior year results also included merger-related and restructuring charges of $56 million and $42 million, respectively. In addition, Operating Income before Depreciation and Amortization in 2006 included a benefit of approximately $40 million related to changes in estimates and an adjustment to prior period medical benefit accruals. Operating Income climbed 22% ($393 million) to $2.2 billion, reflecting the increase in Operating Income before Depreciation and Amortization, offset partly by higher depreciation ($418 million) and amortization ($95 million) expenses due in part to the Acquired Systems. Fourth-Quarter Results Revenues rose 58% ($1.3 billion) to $3.7 billion. Operating Income before Depreciation and Amortization grew 46% ($410 million) to $1.3 billion. The current and prior year quarters included $13 million and $9 million, respectively, of merger-related and restructuring charges. Operating Income increased 26% ($129 million) to $633 million, as growth in Operating Income before Depreciation and Amortization was offset partly by higher depreciation ($225 million) and amortization ($56 million) expenses. Highlights As of December 31, 2006, Time Warner Cable managed approximately 13.4 million basic video subscribers, which included 788,000 unconsolidated subscribers in the Kansas City Pool. Time Warner Cable added 675,000 revenue generating units, or RGUs, in the fourth quarter of 2006, including 636,000 in its Legacy Systems. This was the seventh consecutive quarter in which Time Warner Cable added more than a half-million RGUs in its Legacy Systems. At the end of 2006, 6.2 million customers subscribed to two or more primary products (video, high-speed data and voice), representing 42% of customer relationships. Triple Play subscriptions were 1.5 million, or 10% of customer relationships. Time Warner Cable’s Legacy Systems gained 29,000 basic video subscribers in the fourth quarter, marking the sixth consecutive quarter of net additions. This gain was more than offset by a reduction of 52,000 in the Acquired Systems, resulting in a net reduction of 23,000 basic video subscribers for the fourth quarter. The majority of the net reduction occurred in the newly acquired Dallas and Los Angeles systems. In the fourth quarter, net additions of digital video subscribers were 246,000. The Legacy Systems contributed 187,000 net subscriber additions. In addition, the Acquired Systems showed considerable improvement in the fourth quarter, with 59,000 net subscriber additions, compared to a net subscriber decline during the third quarter. Digital video subscribers totaled 7.3 million at the end of the quarter, or 54% penetration of basic video customers. Residential high-speed data subscriber net additions reached 246,000 in the fourth quarter. Net additions in the Legacy Systems were 206,000 ? marking the sixth consecutive quarter that net additions were at least 200,000. Time Warner Cable also added 40,000 residential high-speed data subscribers in the Acquired Systems. Total residential high-speed data subscribers at the end of the quarter were 6.6 million, representing nearly 26% of service-ready homes passed. Digital Phone subscriber net additions were 211,000 in the fourth quarter. The Legacy Systems had 208,000 net additions during the fourth quarter, an 11% increase compared to third-quarter net additions. Time Warner Cable also began rolling out its Digital Phone product in the Acquired Systems in the fourth quarter, generating 3,000 net subscriber additions. At the end of the quarter, Digital Phone subscribers totaled 1.9 million, representing 11% of service-ready homes passed. (For additional subscriber and homes passed information, refer to the subscriber and homes passed reconciliation schedule included in Note 4.) FILMED ENTERTAINMENT (Warner Bros. Entertainment & New Line Cinema) Full-Year Results Revenues decreased 11% ($1.3 billion) to $10.6 billion, due to difficult comparisons to the prior year record performance at Warner Bros. In 2005, Warner Bros. finished #1 in worldwide theatrical box office, driven by the success of Harry Potter and the Goblet of Fire, Charlie and the Chocolate Factory and Batman Begins. In addition, a strong theatrical slate contributed to a record performance at Warner Home Video during 2005. These difficult comparisons and the lower performance of the theatrical slate in 2006 led to a decline at Warner Home Video in 2006. Adjusted Operating Income before Depreciation and Amortization declined 7% ($90 million) to $1.1 billion, reflecting lower contributions from theatrical product attributable to the decrease in Revenues. This decline was offset partly by improved contributions from television product and consumer products. The current year results also included lower restructuring charges ($28 million). Operating Income decreased 11% ($101 million) to $784 million, due primarily to the decline in Adjusted Operating Income before Depreciation and Amortization. Fourth-Quarter Results Revenues declined 15% ($531 million) to $3.1 billion. Adjusted Operating Income before Depreciation and Amortization decreased 39% ($151 million) to $240 million. The prior year quarter reflected restructuring charges of $33 million. Operating Income declined 48% ($141 million) to $155 million, due largely to lower Adjusted Operating Income before Depreciation and Amortization. Highlights Notable theatrical releases during the current year included Warner Bros.’ Superman Returns, Happy Feet and The Departed. Through January 28, 2007, these three films have generated worldwide box office receipts of approximately $391 million, $355 million and $264 million, respectively. Warner Home Video ranked #1 for the sixth consecutive year, garnering an industry-leading 18.3% share of home video sales in the U.S. Notable 2006 home video releases included Warner Bros.’ Harry Potter and the Goblet of Fire and Superman Returns as well as New Line’s Wedding Crashers. At the 64th Annual Golden Globe Awards, Warner Bros. received a total of five awards: Best Foreign Language Film for Letters from Iwo Jima; Best Director, Motion Picture for Martin Scorsese, The Departed; Best Original Song for Happy Feet’s "The Song Of The Heart;” Best Original Score for The Painted Veil; and Best Performance by an Actress in a Television Series, Drama for Kyra Sedgwick in TNT’s The Closer. Among last week’s nominations for the 79th Academy Awards were 18 for Warner Bros., with five nominations for The Departed (including Best Motion Picture, Directing, Actor in a Supporting Role and Adapted Screenplay); five for Blood Diamond (including Actor in a Leading Role and Actor in a Supporting Role); four for Letters from Iwo Jima (including Best Motion Picture, Directing and Original Screenplay); and one each for Happy Feet (Best Animated Feature Film), The Good German, Poseidon and Superman Returns. New Line’s Little Children received nominations for Actress in a Leading Role, Actor in a Supporting Role and Adapted Screenplay. In addition, Pan’s Labyrinth from Picturehouse, a joint venture between New Line and HBO, received six nominations, including Best Foreign Language Film and Original Screenplay. NETWORKS (Turner Broadcasting & HBO) Full-Year Results Revenues rose 7% ($703 million) to $10.3 billion, benefiting from growth in Subscription, Advertising and Content revenues, including the consolidation of Court TV ($253 million) from January 1, 2006. Subscription revenues climbed 9% ($498 million), due to higher rates and, to a lesser extent, increased subscribers at Turner and HBO, as well as the consolidation of Court TV ($84 million). Included in the prior year results was a $22 million benefit from the resolution of certain contractual agreements at Turner. Advertising revenues were up 4% ($111 million), led by a 13% increase at Turner, including Court TV ($164 million), offset primarily by the cessation of The WB Network’s operations in September 2006. Content revenues increased 7% ($70 million), due mainly to higher sales of HBO’s original programming, including the domestic cable sale of The Sopranos, offset partially by lower syndication sales of Sex and the City and the prior year licensing revenues from Everybody Loves Raymond, which ended its broadcast run in 2005. Adjusted Operating Income before Depreciation and Amortization climbed 10% ($286 million) to $3.2 billion, reflecting Revenue growth, offset partially by higher programming and operating expenses as well as shutdown costs at The WB Network ($114 million). Operating Income grew 2% ($44 million) to $2.7 billion, as the increase in Adjusted Operating Income before Depreciation and Amortization was offset largely by a pretax goodwill impairment charge ($200 million) related to The WB Network as well as an increase in depreciation expense ($48 million). Fourth-Quarter Results Revenues rose 10% ($251 million) to $2.7 billion. Operating Income before Depreciation and Amortization climbed 12% ($90 million) to $861 million. Operating Income grew 11% ($77 million) to $778 million, reflecting the increase in Operating Income before Depreciation and Amortization, offset in part by higher depreciation expense ($13 million). Highlights For the fourth consecutive year, TNT ranked as advertising-supported cable’s #1 network in total day delivery of adults 18-49 and adults 25-54 in 2006. Leading the way was The Closer – advertising-supported cable’s #1 original series of all time in viewer and household delivery. TNT’s original movies, The Ron Clark Story and The Librarian: Return to King Solomon’s Mines, joined advertising-supported cable’s top five movies for 2006 among adults 18-49. TNT’s Nightmares & Dreamscapes: From the Stories of Stephen King was advertising-supported cable’s #1 program in its time period with key adult viewers during its four-week summer run. TBS boasted advertising-supported cable’s #1 original sitcom of the year, My Boys, among adults 18-34 and adults 18-49. On December 14, 2006, Turner reached an agreement to acquire seven pay-television networks operating in Latin America for approximately $235 million from Claxson Interactive Group, Inc. HBO received three Golden Globe Awards, tying for the most of any television network this year, with Elizabeth I winning for Best Mini-Series, as well as Best Performance by an Actress in a Mini-Series for Helen Mirren and Best Performance by an Actor in a Supporting Role in a Mini-Series for Jeremy Irons. Also, Best Performance by an Actress in a Television Series, Drama was awarded to Kyra Sedgwick in TNT’s The Closer, which is produced by Warner Bros. Television. HBO received nominations for Academy Awards in the Best Documentary Feature category for Iraq in Fragments and the Best Documentary Short Subject for The Blood of Yingzhou District, Recycled Life and Rehearsing a Dream. Also, Pan’s Labyrinth from Picturehouse, a joint venture between HBO and New Line, received six nominations. PUBLISHING (Time Inc.) Full-Year Results Revenues decreased 1% ($29 million) to $5.2 billion, reflecting a 7% decline in Other revenues ($48 million) as well as lower Subscription (1% or $18 million) and Content (15% or $14 million) revenues. The decline in Other revenues was due primarily to decreases at non-magazine businesses and lower licensing revenues from AOL. These items were offset in part by a 2% increase in Advertising revenues ($51 million), with growth in online advertising revenues offset in part by declines in print magazine advertising revenues. Adjusted Operating Income before Depreciation and Amortization declined 3% ($28 million) to $1.1 billion, as slight increases in the Company’s magazine business as well as lower stock compensation expense ($16 million) were more than offset by declines at Synapse ($18 million), Time Inc.’s subscription marketing business. In addition, the current and prior year results also included restructuring charges of $45 million and $28 million, respectively. Operating Income increased 1% ($8 million) to $911 million, reflecting lower depreciation ($10 million) and amortization ($29 million) expenses offset partly by a decrease in Adjusted Operating Income before Depreciation and Amortization. Fourth-Quarter Results Revenues declined 1% ($8 million) to $1.5 billion. Adjusted Operating Income before Depreciation and Amortization was up 3% ($13 million) to $427 million as the current year quarter reflected lower restructuring charges ($20 million). Operating Income rose 6% ($23 million) to $384 million, driven by the increase in Adjusted Operating Income before Depreciation and Amortization. Highlights Based on Publishers Information Bureau (PIB) data, Time Inc.’s 2006 industry-leading share of overall domestic advertising was 22.6%, exclusive of newspaper supplements. Time Inc. claimed two of the top ten magazines on Advertising Age’s "A-List,” with People ranked #6 and Real Simple ranked #9. Adweek named SI.com to its annual Web Site Hot List. People.com received top honors for editorial excellence from the Media Industry Newsletter's Best of the Web Awards. On January 25, 2007, the Company announced that a subsidiary of Bonnier AB, a Swedish media company, agreed to acquire Time Inc.’s Parenting Group and Time4 Media titles, consisting of 18 smaller niche magazines. The transaction, which is subject to customary closing conditions, is expected to close in the first quarter of 2007. Consolidated Reported Net Income and Per Share Results Full-Year Results For the year ended December 31, 2006, the Company reported Net Income of $6.6 billion, or $1.55 per diluted common share. This compares to 2005 Net Income of $2.7 billion, or $0.57 per diluted common share. For the year ended December 31, 2006, the Company reported Income before Discontinued Operations and Cumulative Effect of Accounting Change of $5.1 billion, or $1.21 per diluted common share. This compares to Income before Discontinued Operations and Cumulative Effect of Accounting Change in 2005 of $2.5 billion, or $0.54 per diluted common share. Certain pretax items in the current year affected comparability, including $1.1 billion of net investment gains related primarily to the sales of the Company’s interests in Time Warner Telecom, Warner Bros.’ Australian theme parks and Canal Satellite Digital, a $769 million gain on the sales of AOL’s Internet access businesses in the U.K. and France as well as a $20 million gain on the sale of two aircraft. In addition, 2006 included $705 million in net expenses related to securities litigation, including the establishment of an additional reserve of $600 million in the fourth quarter related to the remaining securities litigation matters. The 2006 results also included a pretax impairment charge of $200 million to reduce the carrying value of The WB Network’s goodwill and $13 million of noncash impairments at AOL. The 2006 tax provision included approximately $1.4 billion of tax benefits related primarily to the realization of net capital loss carryforwards of approximately $1.1 billion and the reversal of approximately $230 million of tax reserves associated with litigation settlements. See Note 2, "Securities Litigation and Related Tax Reserve," below for additional details. Certain pretax items in the prior year similarly affected comparability, including $2.9 billion of net expenses related to securities litigation and government investigations and a $24 million impairment charge related to AOL Latin America, offset in part by a $53 million gain related to an increase in fair value of the option in Warner Music Group. In addition, 2005 included $1.0 billion in net investment gains related primarily to the sales of the Company’s interests in Google and Columbia House. Also, the 2005 tax provision benefited from $423 million related to certain state tax law changes and state tax methodologies and the recognition of net capital loss carryforwards. In the aggregate, these items had the net effects of increasing the current year Income before Discontinued Operations and Cumulative Effect of Accounting Change by $1.7 billion (net of taxes), or $0.40 per diluted common share, and decreasing the prior year by $907 million (net of taxes), or $0.19 per diluted common share. Excluding such items, Income before Discontinued Operations and Cumulative Effect of Accounting Change declined, reflecting an increase in Adjusted Operating Income before Depreciation and Amortization, despite $283 million of incremental restructuring charges in 2006, more than offset by higher depreciation, amortization and interest expenses related to the Adelphia and Comcast transactions. Excluding such items, Diluted Income per Common Share before Discontinued Operations and Cumulative Effect of Accounting Change increased in 2006 compared to 2005, driven by a decrease in average diluted common shares as a result of common stock repurchases made under the stock repurchase program. Fourth-Quarter Results For the three months ended December 31, 2006, the Company reported Net Income of $1.8 billion, or $0.44 per diluted common share. This compares to Net Income in the 2005 comparable quarter of $1.3 billion, or $0.28 per diluted common share. For the three months ended December 31, 2006, the Company reported Income before Discontinued Operations and Cumulative Effect of Accounting Change of $1.7 billion, or $0.43 per diluted common share. This compares to Income before Discontinued Operations and Cumulative Effect of Accounting Change in 2005 of $1.3 billion, or $0.27 per diluted common share. Certain pretax items in the current year quarter affected comparability, including a $769 million gain on the sales of AOL’s Internet access businesses in the U.K. and France offset partly by $13 million of noncash impairments at AOL. In addition, as noted above, during the fourth quarter the Company established an additional reserve of $600 million related to the remaining securities litigation matters and incurred $15 million in expenses related to securities litigation. The fourth quarter tax provision included approximately $900 million of tax benefits related primarily to the realization of net capital loss carryforwards of approximately $660 million and the reversal of approximately $230 million of tax reserves associated with litigation settlements. See Note 2, "Securities Litigation and Related Tax Reserve," below for additional details. Certain pretax items in the prior year quarter similarly affected comparability, including $160 million in net recoveries related to securities litigation and government investigations and a $108 million benefit in the tax provision related to changes in the state tax methodologies and the recognition of net capital loss carryforwards. In aggregate, these items had the net effects of increasing the current year quarter’s Income before Discontinued Operations and Cumulative Effect of Accounting Change by $833 million (net of taxes), or $0.21 per diluted common share, and increasing the prior year quarter by $206 million (net of taxes), or $0.04 per diluted common share. Excluding such items, Income before Discontinued Operations and Cumulative Effect of Accounting Change declined, reflecting an increase in depreciation, amortization and interest expenses, related primarily to the Adelphia and Comcast transactions, offset partially by an increase in Adjusted Operating Income before Depreciation and Amortization, despite $106 million of incremental restructuring charges in the fourth quarter of 2006. Excluding such items, Diluted Income per Common Share before Discontinued Operations and Cumulative Effect of Accounting Change declined in 2006 compared to 2005, reflecting lower Income before Discontinued Operations and Cumulative Effect of Accounting Change as described above, offset partly by fewer average diluted common shares as a result of common stock repurchases made under the stock repurchase program. Use of Operating Income (Loss) before Depreciation and Amortization, Adjusted Operating Income (Loss) before Depreciation and Amortization and Free Cash Flow The Company utilizes Operating Income (Loss) 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 (Loss) 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 (Loss) before Depreciation and Amortization). Both Operating Income (Loss) before Depreciation and Amortization and Adjusted Operating Income (Loss) before Depreciation and Amortization are considered important indicators of the operational strength of the Company’s businesses. Operating Income (Loss) 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 (Loss) 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) and excess tax benefits from the exercise of stock options, 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 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 (Loss) before Depreciation and Amortization, Adjusted Operating Income (Loss) before Depreciation and Amortization and Free Cash Flow should be considered in addition to, not as a substitute for, the Company’s Operating Income (Loss), 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. Information on Time Warner’s Business Outlook Release and Conference Call Time Warner Inc. issued a separate release today regarding its 2007 full-year business outlook. The Company’s conference call can be heard live at 8:30 am ET on Wednesday, January 31, 2007. 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, as amended, and its Quarterly Reports on Form 10-Q, as amended. 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. TIME WARNER INC. CONSOLIDATED BALANCE SHEET (Unaudited)     December 31, 2006 December 31, 2005 (millions)   ASSETS   Current assets Cash and equivalents $ 1,549  $ 4,220  Restricted cash 29  —  Receivables, less allowances of $2.286 and $2.055 billion 6,151  6,523  Inventories 1,913  2,041  Prepaid expenses and other current assets 1,157  890  Current assets of discontinued operations   52    376  Total current assets 10,851  14,050  Noncurrent inventories and film costs 5,394  4,597  Investments, including available-for-sale securities 3,442  3,495  Property, plant and equipment, net 16,775  12,896  Intangible assets subject to amortization, net 5,230  3,476  Intangible assets not subject to amortization 46,623  37,367  Goodwill 40,953  40,139  Other assets 2,401  3,119  Noncurrent assets of discontinued operations   —    3,605  Total assets $ 131,669  $ 122,744    LIABILITIES AND SHAREHOLDERS’ EQUITY   Current liabilities Accounts payable $ 1,364  $ 1,194  Participations payable 2,049  2,401  Royalties and programming costs payable 1,216  937  Deferred revenue 1,471  1,463  Debt due within one year 64  92  Other current liabilities 6,559  6,113  Current liabilities of discontinued operations   57    328  Total current liabilities 12,780  12,528  Long-term debt 34,933  20,238  Mandatorily redeemable preferred membership units issued by a subsidiary 300  —  Deferred income taxes 13,196  12,146  Deferred revenue 547  681  Other liabilities 5,484  5,454  Noncurrent liabilities of discontinued operations 1  863  Minority interests 4,039  5,729    Shareholders’ equity Series LMCN-V common stock, $0.01 par value, 18.8 and 87.2 million shares issued and outstanding —  1  Time Warner common stock, $0.01 par value, 4.836 and 4.706 billion shares issued and 3.864 and 4.498 billion shares outstanding 48  47  Paid-in-capital 172,083  168,726  Treasury stock, at cost (972.4 and 208.0 million shares) (19,140) (5,463) Accumulated other comprehensive loss, net (136) (64) Accumulated deficit   (92,466)   (98,142) Total shareholders’ equity   60,389    65,105  Total liabilities and shareholders’ equity $ 131,669  $ 122,744    See accompanying notes. TIME WARNER INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)   Three Months EndedDecember 31, Year EndedDecember 31, 2006  2005  2006  2005  (millions, except per share amounts)   Revenues: Subscription $ 6,368  $ 5,404  $ 23,702  $ 21,581  Advertising 2,431  2,158  8,515  7,564  Content 3,319  3,604  10,769  12,075  Other   348    357    1,238    1,181  Total revenues 12,466  11,523  44,224  42,401  Costs of revenues (7,295) (6,606) (25,175) (24,408) Selling, general and administrative (2,842) (2,808) (10,560) (10,439) Amortization of intangible assets (171) (149) (605) (587) Amounts related to securities litigation and government investigations (615) 160  (705) (2,865) Merger-related, restructuring and shutdown costs (195) (89) (400) (117) Asset impairments (13) —  (213) (24) Gains on disposal of assets, net   774    5    796    23  Operating Income 2,109  2,036  7,362  3,984  Interest expense, net (560) (314) (1,675) (1,266) Other income, net 65  16  1,139  1,125  Minority interest expense, net   (110)   (73)   (375)   (244) Income before income taxes, discontinued operations and cumulative effect of accounting change 1,504  1,665  6,451  3,599  Income tax provision   226    (394)   (1,337)   (1,051) Income before discontinued operations and cumulative effect of accounting change 1,730  1,271  5,114  2,548  Discontinued operations, net of tax   23    33    1,413    123  Income before cumulative effect of accounting change 1,753  1,304  6,527  2,671  Cumulative effect of accounting change, net of tax   —    —    25    —  Net income $ 1,753  $ 1,304  $ 6,552  $ 2,671    Basic income per common share before discontinued operations and cumulative effect of accounting change $ 0.44  $ 0.27  $ 1.22  $ 0.55  Discontinued operations —  0.01  0.34  0.02  Cumulative effect of accounting change   —    —    0.01    —  Basic net income per common share $ 0.44  $ 0.28  $ 1.57  $ 0.57    Diluted income per common share before discontinued operations and cumulative effect of accounting change $ 0.43  $ 0.27  $ 1.21  $ 0.54  Discontinued operations 0.01  0.01  0.33  0.03  Cumulative effect of accounting change   —    —    0.01    —  Diluted net income per common share $ 0.44  $ 0.28  $ 1.55  $ 0.57    Average basic common shares   3,954.0    4,635.3    4,182.5    4,648.2  Average diluted common shares   4,005.8    4,672.1    4,224.8    4,710.0    Cash dividends declared per share of common stock $ 0.055  $ 0.05  $ 0.21  $ 0.10    See accompanying notes. TIME WARNER INC. CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31, (Unaudited)   2006  2005  (millions) OPERATIONS   Net income(a) $ 6,552  $ 2,671  Adjustments for noncash and nonoperating items: Cumulative effect of accounting change, net of tax (25) —  Depreciation and amortization 3,579  3,128  Amortization of film costs 3,374  3,505  Asset impairments 213  24  Gain on investments and other assets, net (1,830) (1,086) Equity in income of investee companies, net of cash distributions (73) (15) Equity-based compensation 263  356  Amounts related to securities litigation and government investigations(b) 361  111  Changes in operating assets and liabilities, net of acquisitions (2,530) (3,984) Adjustments relating to discontinued operations(a)   (1,286)   167  Cash provided by operations(c)   8,598    4,877    INVESTING ACTIVITIES Investments and acquisitions, net of cash acquired (12,311) (631) Investments and acquisitions from discontinued operations (1) (49) Investment in Wireless Joint Venture (633) —  Capital expenditures and product development costs (4,085) (3,102) Capital expenditures from discontinued operations (56) (144) Investment proceeds from available-for-sale securities 44  991  Other investment proceeds   4,570    439  Cash used by investing activities   (12,472)   (2,496)   FINANCING ACTIVITIES Borrowings 18,332  6  Debt repayments (3,651) (1,950) Debt repayment of discontinued operations —  (45) Proceeds from exercise of stock options 698  307  Excess tax benefit on stock options 116  88  Principal payments on capital leases (86) (118) Repurchases of common stock (13,660) (2,141) Issuance of mandatorily redeemable preferred membership units by a subsidiary 300  —  Dividends paid (876) (466) Other   30    19  Cash provided (used) by financing activities   1,203    (4,300)   DECREASE IN CASH AND EQUIVALENTS (2,671) (1,919) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD   4,220    6,139  CASH AND EQUIVALENTS AT END OF PERIOD $ 1,549  $ 4,220    (a) The years ended December 31, 2006 and 2005 include net income from discontinued operations of $1.413 billion and $123 million, respectively. After considering adjustments related to discontinued operations, net cash flows from discontinued operations were $127 million and $290 million for the years ended December 31, 2006 and 2005, respectively.   (b) The years ended December 31, 2006 and 2005 reflect $344 million and $2.754 billion, respectively, in payments, net of recoveries, related to securities litigation and government investigations.   (c) The years ended December 31, 2006 and 2005 include an approximate $181 million source of cash and $36 million use of cash, respectively, related to changing the fiscal year end of certain international operations from November 30 to December 31.   See accompanying notes. TIME WARNER INC. RECONCILIATION OF ADJUSTED OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION TO OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION (millions, unaudited)   Three Months Ended December 31, 2006     Adjusted Operating Income/(Loss) Before Depreciation And Amortization Asset Impairments Amounts Related To Securities Litigation & Government Investigations Gains/(Losses) From Asset Disposals Operating Income/(Loss) Before Depreciation And Amortization AOL(a) $ 302  $ (13) $ —  $ 769  $ 1,058  Cable 1,309  —  —  —  1,309  Filmed Entertainment 240  —  —  —  240  Networks 861  —  —  —  861  Publishing(b) 427  —  —  5  432  Corporate(c) (103) —  (615) —  (718) Intersegment elimination   (22)   —    —    —    (22) Total $ 3,014  $ (13) $ (615) $ 774  $ 3,160  Three Months Ended December 31, 2005   Adjusted Operating Income/(Loss) Before Depreciation And Amortization Asset Impairments Amounts Related To Securities Litigation & Government Investigations Gains/(Losses) From Asset Disposals Operating Income/(Loss) Before Depreciation And Amortization AOL $ 336  $ —  $ —  $ —  $ 336  Cable 899  —  —  —  899  Filmed Entertainment(d) 391  —  —  5  396  Networks 771  —  —  —  771  Publishing 414  —  —  —  414  Corporate(c) (150) —  160  —  10  Intersegment elimination   6    —    —    —    6  Total $ 2,667  $ —  $ 160  $ 5  $ 2,832    (a) For the three months ended December 31, 2006, Operating Income before Depreciation and Amortization includes a $769 million gain on the sales of AOL’s U.K. and French access businesses and $13 million of noncash impairments.   (b) For the three months ended December 31, 2006, Operating Income before Depreciation and Amortization includes a $5 million gain related to the sale of a non-strategic magazine title.   (c) For the three months ended December 31, 2006, Operating Loss before Depreciation and Amortization includes $600 million in legal reserves related to securities litigation and $15 million in net expenses related to securities litigation and government investigations. 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.   (d) 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. TIME WARNER INC. RECONCILIATION OF ADJUSTED OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION TO OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION (millions, unaudited)   Year Ended December 31, 2006   Adjusted Operating Income/(Loss) Before Depreciation And Amortization Asset Impairments Amounts Related To Securities Litigation & Government Investigations Gains/(Losses) From Asset Disposals Operating Income/(Loss) Before Depreciation And Amortization AOL(a) $ 1,812  $ (13) $ —  $ 771  $ 2,570  Cable 4,229  —  —  —  4,229  Filmed Entertainment 1,136  —  —  —  1,136  Networks(b) 3,226  (200) —  —  3,026  Publishing(c) 1,085  —  —  5  1,090  Corporate(d) (411) —  (705) 20  (1,096) Intersegment elimination   (14)   —    —    —    (14) Total $ 11,063  $ (213) $ (705) $ 796  $ 10,941  Year Ended December 31, 2005   Adjusted Operating Income/(Loss) Before Depreciation And Amortization Asset Impairments Amounts Related To Securities Litigation & Government Investigations Gains/(Losses) From Asset Disposals Operating Income/(Loss) Before Depreciation And Amortization AOL(a) $ 1,859  $ (24) $ —  $ 10  $ 1,845  Cable 3,323  —  —  —  3,323  Filmed Entertainment(e) 1,226  —  —  5  1,231  Networks 2,940  —  —  —  2,940  Publishing(c) 1,113  —  —  8  1,121  Corporate(d) (474) —  (2,865) —  (3,339) Intersegment elimination   (9)   —    —    —    (9) Total $ 9,978  $ (24) $ (2,865) $ 23  $ 7,112    (a) For the year ended December 31, 2006, Operating Income before Depreciation and Amortization includes a $769 million gain on the sales of AOL’s U.K. and French access businesses, $13 million of noncash impairments and a $2 million gain from the resolution of a previously contingent gain related to the 2004 sale of Netscape Security Solutions ("NSS”). For the year ended December 31, 2005, Operating Income before Depreciation and Amortization includes a $24 million noncash goodwill impairment charge related to America Online Latin America, Inc. ("AOLA”), a $5 million gain related to the sale of a building and a $5 million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS.   (b) For the year ended December 31, 2006, Operating Income before Depreciation and Amortization includes a $200 million noncash goodwill impairment charge related to The WB Network.   (c) For the year ended December 31, 2006, Operating Income before Depreciation and Amortization includes a $5 million gain related to the sale of a non-strategic magazine title. 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.   (d) For the year ended December 31, 2006, Operating Loss before Depreciation and Amortization includes a $20 million gain on the sale of two aircraft, $650 million in legal reserves related to securities litigation and $55 million in net expenses related to securities litigation and government investigations. 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.   (e) 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. TIME WARNER INC. RECONCILIATION OF OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION TO OPERATING INCOME (LOSS) (millions, unaudited)   Three Months Ended December 31, 2006   Operating Income/(Loss) Before Depreciation And Amortization Depreciation Amortization Operating Income/(Loss) AOL(a) $ 1,058  $ (120) $ (25) $ 913  Cable 1,309  (602) (74) 633  Filmed Entertainment 240  (36) (49) 155  Networks 861  (78) (5) 778  Publishing(b) 432  (30) (18) 384  Corporate(c) (718) (14) —  (732) Intersegment elimination   (22)   —    —    (22) Total $ 3,160  $ (880) $ (171) $ 2,109  Three Months Ended December 31, 2005   Operating Income/(Loss) Before Depreciation And Amortization Depreciation Amortization Operating Income/(Loss) AOL $ 336  $ (129) $ (37) $ 170  Cable 899  (377) (18) 504  Filmed Entertainment (d) 396  (32) (68) 296  Networks 771  (65) (5) 701  Publishing 414  (32) (21) 361  Corporate(c) 10  (12) —  (2) Intersegment elimination   6    —    —    6  Total $ 2,832  $ (647) $ (149) $ 2,036    (a) For the three months ended December 31, 2006, Operating Income before Depreciation and Amortization and Operating Income include a $769 million gain on the sales of AOL’s U.K. and French access businesses and $13 million of noncash impairments.   (b) For the three months ended December 31, 2006, Operating Income before Depreciation and Amortization and Operating Income include a $5 million gain related to the sale of a non-strategic magazine title.   (c) For the three months ended December 31, 2006, Operating Loss before Depreciation and Amortization and Operating Loss include $600 million in legal reserves related to securities litigation and $15 million in net expenses related to securities litigation and government investigations. For the three months ended December 31, 2005, Operating Income before Depreciation and Amortization and Operating Loss include $160 million in net recoveries related to securities litigation and government investigations.   (d) 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. TIME WARNER INC. RECONCILIATION OF OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION TO OPERATING INCOME (LOSS) (millions, unaudited)   Year Ended December 31, 2006   Operating Income/(Loss) Before Depreciation And Amortization Depreciation Amortization Operating Income/(Loss) AOL(a) $ 2,570  $ (503) $ (144) $ 1,923  Cable 4,229  (1,883) (167) 2,179  Filmed Entertainment 1,136  (139) (213) 784  Networks(b) 3,026  (286) (17) 2,723  Publishing(c) 1,090  (115) (64) 911  Corporate(d) (1,096) (48) —  (1,144) Intersegment elimination   (14)   —    —    (14) Total $ 10,941  $ (2,974) $ (605) $ 7,362  Year Ended December 31, 2005   Operating Income/(Loss) Before Depreciation And Amortization Depreciation Amortization Operating Income/(Loss) AOL(a) $ 1,845  $ (548) $ (174) $ 1,123  Cable 3,323  (1,465) (72) 1,786  Filmed Entertainment (e) 1,231  (121) (225) 885  Networks 2,940  (238) (23) 2,679  Publishing(c) 1,121  (125) (93) 903  Corporate(d) (3,339) (44) —  (3,383) Intersegment elimination   (9)   —    —    (9) Total $ 7,112  $ (2,541) $ (587) $ 3,984    (a) For the year ended December 31, 2006, Operating Income before Depreciation and Amortization and Operating Income include a $769 million gain on the sales of AOL’s U.K. and French access businesses, $13 million of noncash impairments and a $2 million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS. For the year ended December 31, 2005, Operating Income before Depreciation and Amortization and Operating Income include a $24 million noncash goodwill impairment charge related to AOLA, a $5 million gain related to the sale of a building and a $5 million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS.   (b) For the year ended December 31, 2006, Operating Income before Depreciation and Amortization and Operating Income include a $200 million noncash goodwill impairment charge related to The WB Network.   (c) For the year ended December 31, 2006, Operating Income before Depreciation and Amortization and Operating Income include a $5 million gain related to the sale a non-strategic magazine title. 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.   (d) For the year ended December 31, 2006, Operating Loss before Depreciation and Amortization and Operating Loss include a $20 million gain on the sale of two aircraft, $650 million in legal reserves related to securities litigation and $55 million in net expenses related to securities litigation and government investigations. For the year ended December 31, 2005, Operating Loss before Depreciation and Amortization and Operating Loss include $3 billion in legal reserves related to securities litigation and $135 million in net recoveries related to securities litigation and government investigations.   (e) 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. TIME WARNER INC. RECONCILIATION OF CASH PROVIDED BY OPERATIONS TO FREE CASH FLOW (millions, unaudited)   Three Months EndedDecember 31, Year EndedDecember 31, 2006  2005  2006  2005  Cash provided by operations $ 2,028  $ (640) $ 8,598  $ 4,877  Less cash provided by discontinued operations: Net income (23) (33) (1,413) (123) Other changes   31    (72)   1,286    (167)   Cash provided by continuing operations 2,036  (745) 8,471  4,587  Add payments related to securities litigation and government investigations 77  2,429  344  2,754  Add excess tax benefits on stock options 55  8  116  88  Less capital expenditures and product development costs (1,408) (951) (4,085) (3,102) Less principal payments on capital leases   (22)   (24)   (86)   (118) Free Cash Flow(a) $ 738  $ 717  $ 4,760  $ 4,209    (a) Free Cash Flow is cash provided by operations (as defined by U.S. generally accepted accounting principles ("GAAP”)) plus payments related to securities litigation and government investigations (net of any insurance recoveries) and excess tax benefits from the exercise of stock options, less cash flow attributable to discontinued operations, capital expenditures and product development costs, principal payments on capital leases, and partnership distributions, if any. 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, 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 networks; and Publishing: consisting principally of magazine publishing. Recent Transactions Parenting and Time4 Media On January 25, 2007, the Company announced an agreement with a subsidiary of Bonnier AB, a Swedish media company, to sell Time Inc.’s Parenting Group and Time4 Media magazine groups, consisting of 18 of Time Inc.’s smaller niche magazines. The transaction, which is subject to customary closing conditions, is expected to close in the first quarter of 2007. Changes in Basis of Presentation On November 3, 2006, the Company filed with the SEC a Current Report on Form 8-K containing recast consolidated financial statements as of December 31, 2005 and 2004 and for each year in the three-year period ended December 31, 2005 and the related Management’s Discussion and Analysis of Results of Operations and Financial Condition, which reflect (i) the retrospective application of Financial Accounting Standards Board ("FASB”) Statement of Financial Accounting Standards ("Statement”) No. 123 (revised 2004), Share-Based Payment ("FAS 123R”), which was adopted by the Company in 2006, (ii) the retrospective application of a change in accounting principle made in 2006 for recognizing programming inventory costs at HBO, and (iii) the retrospective presentation of certain businesses sold or transferred in 2006 as discontinued operations. The financial information presented herein reflects the impact of that recast as well as the previously disclosed restatement of the Company’s consolidated financial results for each of the years ended December 31, 2000 through December 31, 2005 and for the three months ended March 31, 2006 and the three and six months ended June 30, 2006. In addition, in the third quarter of 2006, the Company closed on the acquisition of certain assets and liabilities of Adelphia Communications Corporation ("Adelphia”) (the "Adelphia Acquisition”), the related exchange of cable systems with Comcast Corporation ("Comcast”) (the "Exchange”) and the redemption of Comcast’s interests in Time Warner Cable Inc. ("TWC”) and Time Warner Entertainment Company, L.P. ("TWE”) (collectively, the "Redemptions” and, together with the Adelphia Acquisition and the Exchange, the "Adelphia/Comcast Transactions”). The cable systems transferred to Comcast in connection with the Redemptions and the Exchange (the "Transferred Systems”), including gains recognized on the transfers, also have been reflected as discontinued operations for all periods presented. Recent Accounting Standards Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans As of December 31, 2006, the Company adopted the provisions of FASB Statement of Financial Accounting Standards No. 158, Employers’Accounting for Defined Benefit Pension and Other Postretirement Benefits ("FAS 158”). FAS 158 addresses the accounting for defined benefit pension plans and other postretirement benefit plans ("plans”). Specifically, FAS 158 requires companies to recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status and to measure a plan’s assets and its obligations that determine its funded status as of the end of the company’s fiscal year, the offset of which is recorded, net of tax, as a component of other comprehensive income in shareholders’ equity. As a result of adopting FAS 158, on December 31, 2006, the Company reflected the funded status of its plans by reducing its net pension asset by approximately $655 million and recording a corresponding after-tax charge of approximately $415 million in other comprehensive income in shareholders’ equity. Note 2: SECURITIES LITIGATION AND RELATED TAX RESERVE During the fourth quarter of 2006, the Company established an additional reserve of $600 million related to its remaining securities litigation matters. A prior reserve of $3.0 billion established during the second quarter of 2005 has been substantially utilized as a result of a number of settlements resolving many of the related pending shareholder lawsuits, including recent settlements entered into during the fourth quarter of 2006. However, additional lawsuits remain pending. As previously disclosed by the Company, plaintiffs in these remaining matters claim several billion dollars in aggregated damages. The Company has engaged in, and may in the future engage in, mediation in an attempt to resolve the remaining cases. The mediation efforts conducted to date with regard to the remaining lawsuits have not been fruitful and trials are expected in these matters with the first such trial as to certain issues scheduled to begin in March 2007. The additional reserve of $600 million reflects the Company’s best estimate, based on the many related securities litigation matters that it has resolved to date, of its financial exposure in the remaining lawsuits. The Company intends to defend the remaining lawsuits vigorously, including through trial. It is possible, however, that the ultimate resolution of these matters could involve amounts materially greater or less than the additional reserve the Company has established, depending on various developments in these litigation matters. Additionally, when the Company established the prior reserve of $3.0 billion in the second quarter of 2005, it was unable to conclude at that time that it was probable that there would be a deduction for a portion of such reserve and, therefore, the Company established a tax reserve related to these matters of approximately $230 million. After review of an interpretation of tax law released by the Internal Revenue Service in the fourth quarter of 2006, circumstances surrounding the Company’s settlements of the consolidated securities class action and other securities litigations, applicable law and other factors, the Company has determined that amounts paid in connection with such settlements should be fully deductible for tax purposes and no reserve is required. Accordingly, during the fourth quarter of 2006, the Company reversed this tax reserve. The Company also believes it is probable that any payment from the additional reserve of $600 million established in the fourth quarter of 2006 will be deductible and, thus, a tax benefit of approximately $230 million is reflected in the Company’s consolidated statement of operations for the year ended 2006. Note 3: INCOME TAXES Income tax from continuing operations was a benefit of $226 million for the three months ended December 31, 2006, compared to a provision of $394 million for the three months ended December 31, 2005, and was a provision of $1.337 billion for the year ended December 31, 2006, compared to $1.051 billion for the year ended December 31, 2005. The Company’s effective tax rate for continuing operations was a benefit of 15% and a provision of 21% for the three months and year ended December 31, 2006, respectively, compared to provisions of 24% and 29% for the three months and year ended December 31, 2005, respectively. In 2006, certain items affected the Company’s income tax provision, including the recognition of capital loss carryforwards of approximately $1.1 billion (including approximately $660 million for the three months ended December 31, 2006, related primarily to the sale of AOL’s access businesses in the U.K. and France) and the reversal in the fourth quarter of 2006 of approximately $230 million of tax reserves associated with litigation settlements as discussed above. Included in income taxes for the year ended December 31, 2005, were the favorable impact of state tax law changes in Ohio and New York, an ownership restructuring in Texas and certain other methodology changes totaling approximately $350 million (approximately $100 million for the three months ended December 31, 2005), partially offset by the establishment of approximately $230 million in tax reserves related to the non-deductibility of certain litigation settlements as discussed above. Excluding these items, the effective tax rate increased for the three months and year ended December 31, 2006, primarily due to taxes attributable to foreign operations. Note 4: TIME WARNER CABLE INC. Adelphia Acquisition and Related Transactions The results of the systems acquired in connection with the Adelphia/Comcast Transactions have been included in the accompanying consolidated statement of operations since the closing of the transactions on July 31, 2006. The Transferred Systems have been reflected as discontinued operations in the accompanying consolidated statement of operations for all periods presented. The following schedule presents 2006 and 2005 supplemental pro forma information for Time Warner as if the Adelphia/Comcast Transactions had occurred on January 1, 2005. The unaudited pro forma information is presented based on information available, is intended for informational purposes only and is not necessarily indicative of and does not purport to represent what Time Warner’s future financial condition or operating results will be after giving effect to the Adelphia/Comcast Transactions and does not reflect actions that may be undertaken by management in integrating these businesses (e.g., the cost of incremental capital expenditures). In addition, this information does not reflect financial and operating benefits TWC expects to realize as a result of the Adelphia/Comcast Transactions (amounts in millions, except per share data). Pro Forma Year Ended December 31, 2006  2005    Revenues $ 46,395  $ 45,840  Costs of revenues(a) (23,790) (24,105) Selling, general and administrative expenses(a) (10,437) (10,566) Other, net   (531)   (2,987) Operating Income before Depreciation and Amortization 11,637  8,182  Depreciation (3,314) (3,201) Amortization   (734)   (806) Operating Income 7,589  4,175  Interest expense, net (2,051) (1,912) Other income, net   798    973  Income before income taxes, discontinued operations and cumulative effect of accounting change 6,336  3,236  Income tax provision   (1,299)   (919) Income before discontinued operations and cumulative effect of accounting change $ 5,037  $ 2,317    Basic net income per common share before discontinued operations and cumulative effect of accounting change $ 1.20  $ 0.50  Diluted net income per common share before discontinued operations and cumulative effect of accounting change $ 1.19  $ 0.49    (a) Costs of revenues and selling, general and administrative expenses exclude depreciation. Dissolution of Texas/Kansas City Cable Joint Venture Texas and Kansas City Cable Partners, L.P. ("TKCCP”) is a 50-50 joint venture between Time Warner Entertainment-Advance/Newhouse Partnership ("TWE-A/N”) (a partnership of TWE and the Advance/Newhouse Partnership) and Comcast. In accordance with the terms of the TKCCP partnership agreement, on July 3, 2006, Comcast notified TWC of its election to trigger the dissolution of the partnership and its decision to allocate all of TKCCP’s debt, which totaled approximately $2 billion, to the pool of assets consisting of the Houston cable systems (the "Houston Pool”). On August 1, 2006, TWC notified Comcast of its election to receive the pool of assets consisting of the Kansas City, south and west Texas and New Mexico cable systems (the "Kansas City Pool”). On October 2, 2006, TWC received approximately $630 million from Comcast due to the repayment of debt owed by TKCCP to TWE-A/N that had been allocated to the Houston Pool. Since July 1, 2006, TWC has been entitled to 100% of the economic interest in the Kansas City Pool (and has recognized such interest pursuant to the equity method of accounting), and it has not been entitled to any economic benefits of ownership from the Houston Pool. On January 1, 2007, TKCCP distributed its assets to its partners, TWC and Comcast. TWC received the Kansas City Pool, which served approximately 788,000 basic video subscribers as of December 31, 2006, and Comcast received the Houston Pool, which served approximately 795,000 basic video subscribers as of December 31, 2006. TWC began consolidating the results of the Kansas City Pool on January 1, 2007. Previously, TWC received a management fee from TKCCP for management services provided to the partnership. Such management fees totaled approximately $50 million annually, approximately half of which were attributable to the Kansas City Pool and the other half of which were attributable to the Houston Pool. Effective August 1, 2006, the Company no longer receives such management fees. TWC also received fees from TKCCP for providing high-speed data network services using infrastructure from its Road Runner service. The net fees associated with such services totaled approximately $62 million annually, with $32 million attributable to the Houston Pool and $30 million attributable to the Kansas City Pool. The Company will no longer receive the Road Runner service fees related to the Houston Pool after migration of the systems, which is expected to be substantially completed in the second quarter of 2007. The following schedule presents selected operating statement information of the Kansas City Pool for the three months and years ended December 31, 2006 and 2005 (in millions): Three Months Ended Year Ended December 31, December 31, 2006  2005  2006  2005    Revenues $ 209  $ 177  $ 795  $ 691  Costs of revenues(a) (99) (94) (399) (352) Selling, general and administrative expenses(a)(b)   (30)   (28)   (121)   (117) Operating Income before Depreciation and Amortization 80  55  275  222  Depreciation (31) (34) (119) (128) Amortization   —    —    (1)   (1) Operating Income $ 49  $ 21  $ 155  $ 93    (a) Costs of revenues and selling, general and administrative expenses exclude depreciation.   (b) Includes management fees paid to TWC totaling $8 million for the three months ended December 31, 2005 (none for the three months ended December 31, 2006) and $14 million and $23 million for the years ended December 31, 2006 and 2005, respectively. Cable Subscriber and Homes Passed Information The following table sets forth certain composite subscriber and homes passed data for consolidated systems held before and retained after the Adelphia/Comcast Transactions and the managed subscribers in the Kansas City Pool (the "Legacy Systems”) and the systems acquired from Adelphia and Comcast (the "Acquired Systems”) for the respective periods set forth below (in thousands):   Legacy Systems Acquired Systems Total Systems   Net   Net Additions   Net Additions   12/31/05    Additions   12/31/06  7/31/06    (Declines)   12/31/06  (Declines)   12/31/06    Subscriber and homes passed information (a) Homes passed(b) 16,338  462  16,800  9,195  67  9,262  529  26,062  Basic video(c) 9,384  147  9,531  3,953  (82) 3,871  65  13,402  Digital video(d) 4,595  706  5,301  1,917  52  1,969  758  7,270  High-speed data - residential(e) 4,141  928  5,069  1,498  77  1,575  1,005  6,644  High-speed data - commercial(e) 183  28  211  27  7  34  35  245  Digital Phone(f) 998  859  1,857  —  3  3  862  1,860  Circuit-switched telephone service(g) —  —  —  134  (28) 106  (28) 106  Revenue generating units(h) 19,301  2,668  21,969  7,529  29  7,558  2,697  29,527    (a) Adelphia and Comcast employed methodologies that differed slightly from those used by TWC to determine subscriber numbers. As of September 30, 2006, TWC had converted subscriber numbers for most of the Acquired Systems to TWC’s methodology. During the fourth quarter of 2006, TWC completed the conversion of such data, which resulted in a reduction of approximately 46,000 basic video subscribers and revenue generating units in the Acquired Systems as of July 31, 2006.   (b) Homes passed represent the estimated number of service-ready single residence homes, apartment and condominium units and commercial establishments passed by TWC’s cable systems without further extending the transmission lines.   (c) Basic video subscriber numbers reflect billable subscribers who receive basic video service. Legacy and Total Systems include 788,000 and 781,000 managed subscribers in the Kansas City Pool at December 31, 2006 and 2005, respectively.   (d) Digital video subscriber numbers reflect billable subscribers who receive any level of video service via digital technology (including the digital guide tier, the digital basic tier, digital sports tiers, digital movie tiers, etc.).   (e) High-speed data subscriber numbers reflect billable subscribers who receive Road Runner high-speed data service or any of the other high-speed data services offered by TWC.   (f) Digital Phone subscribers reflect billable subscribers who receive an IP-based telephony service. An IP-based telephony service comparable to TWC’s Digital Phone product was not available in the Acquired Systems at July 31, 2006.   (g) Circuit-switched telephone subscribers include subscribers acquired from Comcast who receive traditional, circuit-switched telephone service.   (h) Revenue generating units represent the total of all basic video, digital video, high-speed data and voice customers, including circuit-switched telephone service customers. Note 5: 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; and The AOL, Cable, Networks and Publishing segments generating Advertising revenues by promoting the products and services of other Time Warner segments. 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 (in millions): Three Months EndedDecember 31, Year EndedDecember 31, 2006  2005  2006  2005  Intersegment Revenues(a) AOL $ 9  $ 10  $ 48  $ 28  Cable 9  8  29  38  Filmed Entertainment 121  210  688  749  Networks(b) 201  144  738  553  Publishing   13    32    53    98    Total intersegment revenues $ 353  $ 404  $ 1,556  $ 1,466    (a) Intersegment revenues include intercompany Advertising revenues of $21 million and $55 million for the three months ended December 31, 2006 and 2005, respectively, and $119 million and $176 million for the years ended December 31, 2006 and 2005, respectively.   (b) Intersegment revenues at the Networks segment include the impact of the Acquired Systems.