AOL Posts a $98.7 Billion Loss On New Goodwill Write-Down

MARTIN PEERS and JULIA ANGWIN / Wall Street Journal 30jan03

Annual Loss Is Biggest in History; AOL Says Ted Turner Will Resign

NEW YORK -- In an astonishing end to a disastrous year, AOL Time Warner Inc. reported a 2002 net loss of $98.7 billion after taking a fourth-quarter charge of $45.5 billion, mostly to write down the value of its troubled America Online unit. The write-down, creating the biggest annual corporate loss in history, was more than twice what Wall Street had anticipated.

AOL also announced the resignation of Ted Turner as vice chairman. Mr. Turner, the maverick entrepreneur who founded Cable News Network, is the latest in an exodus of senior executives. Mr. Turner has been one of the most outspoken members of the AOL board, angry at the disastrous outcome of America Online's $103.5 billion acquisition of Time Warner in January 2001. (See related article below)

Mr. Turner, one of the single biggest shareholders in AOL, said he wants to spend more time on philanthropic activities. If he also resigns from the board, Mr. Turner could become a more public critic of the company. An AOL spokesman said Chief Executive Richard Parsons expects Mr. Turner to remain on the board, but said the two plan to meet soon "to discuss it."

The huge loss underscores how much value has evaporated from what was once the largest, and most-heralded, merger in U.S. history. The merger, marrying old media and new media, unraveled amid intense corporate infighting and a sharp slump in America Online's business a few months after the deal closed. AOL's stock price dropped sharply during the past 18 months, wiping out more than $100 billion in market value.

The announcement came after the close of regular trading Wednesday, during which AOL stock rose 30 cents a share to $13.96. In after-hours trading, AOL stock was quoted at $12.55 a share.

But the size of the noncash write-down probably won't cause a change in direction for the company, which is already in fix-it mode. It represents an effort by the company to get as much bad news as possible out of the way. Most of the senior executives associated with the merger deal, including former Time Warner chairman Gerald Levin, former America Online president Robert Pittman and former AOL chairman Steve Case, have quit the company, leaving Mr. Parsons with an agenda he has already outlined: Pay down debt and try to turn around America Online.

Mr. Parsons, a former Time Warner executive known for his smooth political skills, took over as CEO last spring and has so far been unsullied by the merger's failure. Now, if Mr. Parsons doesn't show improvement at the vast media conglomerate by the end of the year, Capital Group and other big shareholders, who successfully agitated for Mr. Case's ouster, could push for installation of a new CEO, such as Viacom Inc. President Mel Karmazin.

Until now, the strength of the Time Warner businesses -- which range from HBO to Warner Bros. to Time Inc. -- had been the saving grace of the company, reinforcing Time Warner executives' anger at America Online. Those complaints may now start to wear thin. On Wednesday evening, Mr. Parsons said that the music and cable-television units would likely post weaker results this year. As a result, AOL said it expects earnings before interest, taxes, depreciation and amortization, known as Ebitda, the company's preferred measure of profitability, to be "essentially flat year-over-year" in 2003, much worse than analysts had expected. The weak results will undoubtedly add to a drumbeat in certain quarters that America Online be jettisoned.

In a conference call with analysts, Mr. Parsons described 2003 as a "reset year," from which he promised that AOL would "re-emerge with new momentum."

"The structural issues are perhaps messier than I anticipated," said John Tinker, an analyst at Blaylock & Partners. "Even though music is small, music is in danger of imploding."

The monstrous fourth-quarter charge came on top of a $54 billion write-down in the first quarter, which reflected a reduction in value of assets of the Time Warner businesses. But that charge, mandated by new accounting rules on goodwill, didn't include any reduction for the online business.

AOL has now written off most of the goodwill -- usually defined as the difference between the purchase price and the book value of a company's assets -- associated with America Online, a move that underscores the depth of problems facing the business. Indeed, the online unit said Wednesday its U.S. and world-wide subscriber numbers fell for the first time ever. The charge also included a write-down in the value of the cable-TV unit and the music division.

The size of the charge took AOL close to breaching covenants, or conditions, on its bank-loan agreements. But AOL Chief Financial Officer Wayne Pace said in the conference call that the company had renegotiated its credit line. Breach of those agreements would have been embarrassing for AOL, which is trying to preserve its investment-grade credit rating.

The charge also reveals how quickly the value of AOL's assets have plummeted. In August, Mr. Pace had said "it's absolutely premature and inappropriate to take an impairment charge at this time." Some accounting specialists had predicted last year that the company would have to write down its intangible assets further by tens of billions of dollars, significantly narrowing the gap between the company's net worth, which then was listed at $97.7 billion, and its $50 billion net-worth loan covenant. Today, AOL's net worth, or its assets minus liabilities, is down to $52.82 billion, although the net worth covenant isn't in the loan agreement anymore.

Mr. Parsons also indicated that while he is redoubling his efforts to reduce AOL's $26 billion debt, he won't show clear progress until next year. AOL sold its stake in Hughes Electronics Corp., a unit of General Motors Corp., for about $800 million on Tuesday night to pay down debt. But Mr. Parsons said AOL faces additional obligations this year, such as buying Vivendi Universal SA's stake in a European venture for $800 million. Still, he promised to cut debt to about $20 billion by the end of 2004.

For the quarter, AOL reported a net loss of $44.9 billion, or $10.04 a share, compared with a loss of $1.8 billion, or 41 cents a share, a year earlier. Revenue rose 10% to $11.4 billion.

The Time Warner businesses accounted for all the growth in the fourth quarter. America Online's Ebitda fell 32% to $474 million. The number of world-wide subscribers declined to 35.2 million on Dec. 31 from 35.3 million on Sept. 30. In contrast, AOL's cable networks boosted Ebitda 46% to $661 million, led by a strong performance from Home Box Office. AOL's film unit, which includes Warner Bros. and New Line Cinema, performed well, helped by hit film franchises such as the "Harry Potter" and "Lord of the Rings" series.

Mr. Turner's departure is likely to prompt speculation about some of his intentions. Mr. Turner had a big falling out with Mr. Levin and has publicly stated that he should have never agreed to the merger. Mr. Parsons, however, lured him back into to the fold. Mr. Turner is close to two other influential shareholders, Gordon Crawford, a senior vice president at money managers Capital Group's Capital Research & Management, and with cable pioneer John Malone. The three played a role in Mr. Case's departure, and if the troika team up again, they could spell trouble for Mr. Parsons and could try to oust board members who hail from America Online.

However, his leaving could remove one major hurdle to the merger talks between the cable news channel CNN and Walt Disney Co.'s ABC news. Those talks, which heated up last year, have since cooled. While Mr. Turner has not publicly blasted the talks, he is known to be territorial when it comes to CNN. In an interview set to air next week on the television program "60 Minutes II," Mr. Turner said his vice chairman's post had been "kind of a title without portfolio... like the emperor of Japan."

-- Jonathan Weil contributed to this article.

Ted Turner Plans to Step Down From AOL Vice Chairman Post

WALL STREET JOURNAL 30jan03

Billionaire Ted Turner announced plans to step down as vice chairman of AOL Time Warner Inc. to focus on his philanthropic efforts, an apparently anticlimactic exit for the man who once said he greeted the merger of America Online and Time Warner "with as much or more excitement and enthusiasm as I did on the night when I first made love some 40 years ago."

Since then, Mr. Turner, 64, has become an outspoken critic of the marriage of the once-soaring Internet company and the traditional media giant, and was the most vocal board member in calling for the ouster of Steve Case, the former America Online chairman who helped engineer the deal.

In a letter to AOL Chairman and Chief Executive Richard Parsons that the company released Wednesday, Mr. Turner said he had "not come to this decision lightly," adding that he has the "deepest respect for [Mr. Parsons], the senior management and my fellow members of the board." His resignation is effective in May at the company's annual meeting.

In a statement, Mr. Turner said he derived "much personal satisfaction" from an assortment of "philanthropic interests" as well as "several socially responsible business efforts." Over the last five years, Mr. Turner said, "it has become even clearer to me how much personal satisfaction I derive from these activities. Therefore, I would like to now devote even more time, effort and resources to them."

In response to Mr. Turner's resignation, Mr. Parsons said: "I speak for everybody in our company when I say how profoundly grateful we are to Ted Turner for his vision and genius, and how proud we will always be of his courageous and pioneering spirit." Mr. Parsons said during a conference call Wednesday that Mr. Turner had informed him of the decision Tuesday.

If Mr. Turner, one of the single biggest shareholders in AOL, also resigns from the board, he could become a more public critic of the company. An AOL spokesman said Mr. Parsons expects Mr. Turner to remain on the board, but said the two plan to meet soon "to discuss it."

Mr. Turner is close to two other influential shareholders, Gordon Crawford, a senior vice president at Capital Group's Capital Research & Management, and with cable pioneer John Malone. The three played a role in Mr. Case's departure, and if the troika team up again, they could spell trouble for Mr. Parsons and could try to oust board members who hail from America Online.

His departure could also remove one major hurdle to the merger talks between CNN and Walt Disney Co.'s ABC news. Those talks, which heated up last year, have since cooled. While Mr. Turner hasn't publicly blasted the talks, he is known to be territorial when it comes to CNN. In an interview set to air next week on the television program "60 Minutes II," Mr. Turner said his vice chairman's post had been "kind of a title without portfolio... like the emperor of Japan."

Born in Cincinnati, on Nov. 19. 1938, Mr. Turner has largely worked for himself and his family, which relocated to Georgia when he was nine years old.

He began his business career as an account executive for Turner Advertising Co., which would later become Turner Broadcasting System, Inc., according to his biography on AOL's Web site. He entered the television business in 1970 by purchasing an independent UHF station, which he developed into the first national "superstation" via cable by 1976. He also set about diversifying his empire by purchasing Atlanta sports teams, such as the Braves and the Hawks.

Mr. Turner also developed the first 24-hour cable network devoted to news. The Cable News Network, launched in 1980, has changed the media landscape, turning the news cycle into something that gets updated minute by minute, rather than once or twice a day. Other cable channels, including TNT and CNN Headline News, would come later, as Mr. Turner developed offshoots of CNN both here and abroad, and as he sought an outlet for the library of MGM film and television properties he acquired in 1986.

Mr. Turner became an executive and a big shareholder of Time Warner after the media company bought Turner Broadcasting System in 1996. But his relations with top executives, including then-Chief Executive Gerald Levin, cooled after his role at the company was severely limited in a management restructuring that occurred with the AOL merger. As part of the merger, Mr. Turner retained his title of vice chairman but lost responsibility for the cable networks he previously ran.