'Realistic' AOL to Take $60Bln Charge

NEW YORK -- AOL Time Warner Inc. said Monday it would take an accounting charge of up to $60 billion, likely the largest corporate charge on record, and the world's largest media and Internet company reined in forecasts of earnings growth for 2001 and 2002, citing the weak economy.

In its first conference call since naming a successor to chief executive Gerald Levin, AOL Time Warner said it was not counting on an economic recovery or growth in the hard-hit advertising market this year.

"We all learned a lesson in the current economic environment," said Richard Parsons, co-chief operating officer. "The economy backed up on us much more quickly and more steeply than anyone anticipated, and then you find yourself at the wrong end of overly aggressive guidance, and you get punished big time. I think realism tempered by prudence is the way to go."

Parsons, who will succeed Levin in May, repeatedly told investors the company was going to take a conservative stance so it could deliver rather than overpromise -- a marked contrast to the bold growth targets the company laid out a year ago and stood by amid the ad slowdown before finally abandoning the strategy in September.

AOL Time Warner said growth in cash flow for 2002, a key measure of performance for media companies, could drop into the high single digits in a range of 8 percent to 12 percent from previous expectations of double-digit growth. The company said it expected revenue growth of 5 percent to 8 percent.

The Internet and media giant also confirmed it would buy Bertelsmann AG's 49 percent interest in money-losing AOL Europe for $6.75 billion in cash. The venture, which saw about $800 million in revenues in 2001, is seen as a key vehicle for the company's much-talked about expansion.

While its revaluation under new accounting rules has not been completed, AOL said it expected to post a one-time, noncash charge of $40 billion to $60 billion for the first quarter of 2002, reflecting overall market declines since its merger was announced in January 2000.

The merger of AOL and Time Warner was originally valued at about $181 billion, but fell to about $106 billion by the time the deal closed in January 2001.

"All companies that have goodwill and have gone through large business combinations will be more significantly affected than others," said chief executive Wayne Pace.

"The amount of the charge can roughly be tied back to the change in the stock price from January 2000 to January 2001 when we closed the deal."

The charge stands to be one of the largest ever and would be greater than the 1999 gross national income of countries such as Peru, New Zealand and Hungary, according to the World Bank.

Fiber optic components maker JDS Uniphase Corp. slashed the value of goodwill on its books by some $38 billion to adjust a drop in the value of 10 acquisitions last July.

"The last thing management wants to do is set financial targets that are unreachable," said Jordan Rohan, analyst at SoundView Technologies. "These targets are pretty low. If anything goes right for AOL, such as an ad recovery, they could be seeing a 20 to 30 percent increase in its share price."

Wall Street analysts had already been cutting their estimates for AOL Time Warner's earnings in recent weeks amid expectations the company would tame forecasts after falling short of its aggressive 2001 targets last year.

For the full year 2001, AOL Time Warner said it expects to post EBITDA growth of about 18 percent to just under $10 billion, falling shy of its revised guidance in September of about 20 percent growth.

Revenues for 2001 are expected to grow about 5 percent to just over $38 billion. Free cash flow for 2001 will increase by more than 200 percent to about $3 billion.

The company said fourth-quarter EBITDA is expected to grow by about 14 percent to over $2.7 billion and that revenues will grow some 3 percent to $10.5 billion, hurt by advertising.

The 2001 results exclude certain one-time nonrecurring charges expected in the fourth quarter, including about $50 million of merger-related costs and about $1.5 billion to $1.8 billion of noncash charges primarily related to the revaluation of certain equity investments, such as Time Warner Telecom, and market declines in the company's portfolio.

Meanwhile, Bertelsmann will transfer 80 percent of its stake in AOL Europe to AOL Time Warner on Jan. 31 for $5.3 billion. AOL Time Warner will buy the remaining 20 percent for $1.45 billion in cash in July 2002.

The European Internet venture, which has about $800 million in revenue and $600 million in losses in 2001, is largely seen as the company's vehicle into its much-talked about global expansion. Pace said the company hopes to cut AOL Europe's losses in half this year and generate revenue of up to about $1 billion.