Business Services Industry
AOL Time Warner Reports Results for Third Quarter 2002 and Announces It Will Restate Certain Financial Information Related To America Online Division
Business Wire, Oct 23, 2002
Business Editors
NOTE: Unless otherwise specified, AOL Time Warner's results
discussed below have been adjusted to normalize out the effect of
merger and restructuring costs, as well as unusual or nonrecurring
items that are discussed in detail in the accompanying footnotes. By
presenting normalized results, the Company's management intends to
provide a better understanding of the core results and underlying
trends from which to consider not only past performance, but also the
prospects for the future. Supplemental financial information is
attached that provides the Company's reported results (as adjusted by
the restatement that will be done) and reconciles those results to
these normalized results. Users of this financial information should
consider the types of events and transactions for which adjustments
have been made. In addition, 2001 results have been prepared on a pro
forma basis assuming that the acquisitions of AOL Europe and IPC
Media, the consolidation of Road Runner, and the adoption of the new
accounting standard on Goodwill and Other Intangible Assets ("FAS
142") had occurred on January 1, 2001. These results also reflect the
deconsolidation of certain cable systems pursuant to the restructuring
of the cable partnership between Time Warner Entertainment Company,
L.P. and Advance/Newhouse that was announced in June 2002. AOL Time
Warner's results discussed below and the attached supplemental
financial information also reflect the adjustments that will be made
in the restatement of the historical financial statements discussed
in more detail below.
NEW YORK--(BUSINESS WIRE)--October 23, 2002--AOL Time Warner
(NYSE:AOL)
Revenues Increase 6% to $10.0 Billion;
EBITDA Declines 1% to $2.2 Billion
Continued Growth in Subscription Revenues, Up 13%, and
Content & Other Revenues, Up 8%
Normalized Free Cash Flow of $1.4 Billion for the Quarter;
For First Nine Months, Total Climbs 151% to $4.0 Billion
AOL Time Warner Inc. (NYSE:AOL) today reported financial results
for its third quarter ended September 30, 2002.
The Company also announced it will restate its financial results
for the quarters ended September 30, 2000 through the quarter ended
June 30, 2002, which will reduce, in total, revenues by $190 million
and EBITDA by $97 million, as a result of the Company's previously
announced internal review of certain advertising and commerce
transactions at its America Online division.
For the third quarter 2002, revenues increased 6% over the same
period in 2001 to $10.0 billion. Subscription revenues climbed 13% to
$4.8 billion, due to continued subscriber growth in the Company's
America Online, Cable and Networks businesses. Content and Other
revenues grew 8% to $3.5 billion, led by the quarter's home video
success of The Lord of the Rings: The Fellowship of the Ring and
strong theatrical results of Austin Powers in Goldmember. Advertising
and Commerce revenues declined 12% to $1.7 billion, due to weakness in
online advertising and difficult comparisons to last year as a result
of the closure of the Warner Bros. Studio Stores, partially offset by
improvements in advertising at the Networks and Publishing divisions.
EBITDA for the quarter totaled $2.2 billion, down 1% from 2001,
due primarily to a decline at America Online, offset partially by
double-digit EBITDA growth at the Company's Networks, Cable,
Publishing and Music divisions, and an 8% increase at the Filmed
Entertainment division. Cash EPS for the quarter declined to $0.19
compared to $0.24 in the prior period, mainly as a result of increased
depreciation. The EBITDA margin for the third quarter of 2002
decreased to 22%, compared to 23% in the third quarter of 2001,
reflecting primarily declines in high-margin advertising revenues at
America Online.
The Company generated $1.4 billion in Free Cash Flow during the
quarter. For the first nine months of 2002, Free Cash Flow totaled
$4.0 billion, up 151%, versus $1.6 billion for the same period last
year. This significant increase in Free Cash Flow was due principally
to lower working capital requirements and lower capital spending. Free
Cash Flow represented 64% of EBITDA for the first nine months of 2002.
Chief Executive Officer Dick Parsons said: "In connection with our
ongoing internal review of certain advertising and commerce
transactions at America Online, we will be restating our financial
results for a two-year period. Even though the total amount of the
restatement represents a small portion of America Online's total
revenues during the period, we have taken, and do take, this matter
very seriously. We have devoted a significant amount of time and
resources to our review and, based on the substantial work we have
done to date, do not expect any further restatements from it. This
restatement will not affect the Company's committed liquidity, which
includes over $8 billion of cash and unused bank facilities."
Mr. Parsons continued: "Turning to the Company's third-quarter
results, I'm pleased that our overall performance was right in line
with expectations. Our operating results reflected the continued
collective strength of our traditional media and entertainment
businesses, offset by the declining trend in advertising at America
Online. We also generated a substantial amount of Free Cash Flow for
the third quarter in a row this year. Importantly, this quarter's
performance keeps us on track to deliver on our overall Company
full-year revenue and EBITDA goals. As we move forward, we will stay
focused on growing our businesses, putting the right plan in place for
America Online, and continuing our progress toward achieving our other
top priorities."
Consolidated Reported Results
The Company reported a loss from continuing operations of $55
million, or $0.01 per basic common share, in the third quarter of 2002
(which includes $733 million of pre-tax non-cash charges reflecting
the write-downs of certain investments in the AOL Time Warner
investment portfolio and $77 million of restructuring charges related
primarily to lease obligations at America Online for network modems).
This compares to a reported loss from continuing operations of $987
million, or $0.22 loss per basic common share, in the same quarter of
2001. The 2001 third quarter results included $134 million of merger
and restructuring expenses and $196 million of pre-tax non-cash
charges reflecting the write-downs of certain investments in the AOL
Time Warner investment portfolio, and goodwill and intangible
amortization of approximately $1.7 billion, which did not recur in
2002 due to the adoption of FAS 142.
During the third quarter of 2002, in connection with the
restructuring of the cable partnership between Time Warner
Entertainment Company, L.P. and Advance/Newhouse, the Company began
reflecting certain cable systems as discontinued operations. Including
the effect of discontinued operations, the Company reported net income
of $57 million, or $0.01 per basic common share, in the third quarter
of 2002, as compared to net loss of $997 million, or $0.22 per basic
common share, in the third quarter of 2001.
Restatement of Prior Financial Information
The Company has been conducting an internal review of certain
advertising and commerce transactions at the America Online division
under the direction of the Company's Chief Financial Officer. In
connection with this internal review, the financial results for the
quarters ended September 30, 2000 through June 30, 2002 will be
restated. The total impact of the adjustments will be to reduce the
Company's consolidated advertising and commerce revenues by $190
million over these eight quarterly periods, with a corresponding
reduction in EBITDA for the same time period of $97 million. For the
America Online division, the impact of the adjustments will be to
reduce advertising and commerce revenues by $168 million over these
eight quarterly periods, with a corresponding reduction in EBITDA for
that same time period of $97 million. The remaining $22 million
represents a reduction in revenues from certain transactions related
to the America Online division in which the advertising was delivered
by other AOL Time Warner divisions.
The adjustments represent approximately 1% of the America Online
division's total revenues for that same two-year period, approximately
3.4% of its advertising and commerce revenues, and approximately 1.9%
of its EBITDA. The largest impact of the adjustments is in the quarter
ended September 30, 2000, for which advertising and commerce revenues
will be reduced by $66 million and EBITDA will be reduced by $30
million. It is expected that restated financial statements for the
affected periods will be filed with the Securities and Exchange
Commission in the fourth quarter. The Company's financial statements
for the affected periods should no longer be relied upon as a result
of the announced restatement, including the audited financial
statements for 2000 and 2001 contained in the Company's Annual
Report on Form 10-K.
While the internal review is still ongoing, based on the
substantial work done to date, the Company does not expect any further
restatements as a result of this review. The Company also will
continue its efforts to cooperate with the separate
investigations of the Company being conducted by the Securities and
Exchange Commission and the Department of Justice. The Company is
unable to predict the outcome of these investigations.
For more detailed information regarding the restatement of the
Company's prior period financial results, refer to the Current Report
on Form 8-K furnished today by the Company with the Securities and
Exchange Commission.
Business Outlook
The Company reaffirmed that it expects full-year revenue growth
within the previously announced 5% to 8% range and full-year EBITDA
growth at the low end of the previously announced 5% to 9% range.
Performance of Divisions
The schedules below reflect AOL Time Warner's performance for the
third quarter and the nine-month period by line of business (in
millions):
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*T
Three Months Ended September 30:
Normalized Reported
---------- --------
Actual Pro Forma Actual Actual
Revenues: 2002 2001 2002 2001
---- ---- ---- ----
AOL $ 2,215 $ 2,378 $ 2,215 $ 2,173
Cable 1,753 1,543 1,753 1,525
Filmed Entertainment 2,643 2,112 2,643 2,112
Networks 1,832 1,663 1,832 1,663
Music 983 962 983 962
Publishing 1,353 1,221 1,353 1,095
Intersegment Eliminations (796) (462) (796) (462)
--------- -------- ------- --------
Total Revenues $ 9,983 $ 9,417 $ 9,983 $ 9,068
-------------- ========= ======== ======= ========
EBITDA:
AOL $ 432 $ 617 $ 432 $ 736
Cable 680 612 680 650
Filmed Entertainment 331 307 331 307
Networks 520 450 520 450
Music 96 87 96 87
Publishing 276 224 276 196
Corporate (87) (74) (87) (74)
Merger and restructuring costs - - (77) (134)
Intersegment Eliminations (79) (36) (79) (36)
--------- -------- ------- --------
Total EBITDA $ 2,169 $ 2,187 $ 2,092 $ 2,182
------------ ========= ======== ======= ========
Nine Months Ended September 30:
Normalized Reported
---------- --------
Actual Pro Forma Actual Actual
Revenues: 2002 2001 2002 2001
---- ---- ---- ----
AOL $ 6,772 $ 6,966 $ 6,772 $ 6,373
Cable 5,198 4,472 5,198 4,404
Filmed Entertainment 7,165 6,217 7,165 6,217
Networks 5,575 5,190 5,575 5,190
Music 2,902 2,801 2,902 2,801
Publishing 3,830 3,563 3,830 3,179
Intersegment Eliminations (1,801) (1,313) (1,801) (1,313)
--------- -------- ------- --------
Total Revenues $ 29,641 $ 27,896 $29,641 $ 26,851
-------------- ========= ======== ======= ========
EBITDA
AOL $ 1,324 $ 1,768 $ 1,324 $ 2,213
Cable 2,007 1,796 2,007 1,924
Filmed Entertainment 840 670 840 670
Networks 1,371 1,343 1,371 1,343
Music 294 268 294 268
Publishing 758 647 758 580
Corporate (246) (219) (246) (219)
Merger and restructuring costs - - (184) (205)
Intersegment Eliminations (66) (59) (66) (59)
--------- -------- ------- --------
Total EBITDA $ 6,282 $ 6,214 $ 6,098 $ 6,515
------------ ========= ======== ======= ========
*T
America Online
America Online's EBITDA declined 30% in the quarter on revenues
that fell 7%.
Growth in America Online's Subscription revenues was more than
offset by declines in Advertising and Commerce and in Content and
Other revenues. Subscription growth continued to be strong, with
revenues increasing 15%, as a result of membership growth in the US
and Europe. Advertising and Commerce revenues decreased by 48% in the
quarter, reflecting a reduction in the benefits from prior-period
contract sales and continued softness in online advertising. In the
Advertising and Commerce category, intercompany advertising was
essentially flat. Content and Other revenues declined 63% to $67
million in the quarter, primarily as a result of the termination of
the iPlanet agreement in 2001.
EBITDA results reflected the decline in high-margin advertising
revenues, the end of the iPlanet agreement, and an increase in
marketing expenses, which were offset in part by an improved
performance at AOL Europe's operations driven by revenue growth and
network efficiencies.
Earlier this month, the AOL service officially launched its
next-generation software, AOL 8.0, which is focused on enhancing what
members use and care about most - more convenient e-mail and instant
messaging, more relevant content that's easily personalized for
members' interests, easier and more powerful Parental Controls to keep
children safe online, new tools to build online communities and an
automatic reconnect feature to make the service more reliable than
ever. AOL 8.0 has been downloaded a record-breaking 5 million-plus
times in the two weeks since it has become available, and has been
used by more than 8 million AOL Screen Names.
At September 30, the AOL service's worldwide membership totaled
35.3 million, including 26.7 million in the US and 6.1 million in
Europe. The AOL service added 206,000 net members worldwide in the
quarter, including 129,000 in the US and 148,000 in Europe. Elsewhere
in the world, AOL membership declined by 71,000, due primarily to
difficult economic conditions in Latin America and continued
initiatives at America Online Latin America, Inc. (NASDAQ-SCM:AOLA) to
better target higher value members. During the quarter, AOL members in
the US spent an average of 69 minutes online per day, up from 64
minutes in the year-ago quarter.
In September, according to Jupiter Media Metrix, AOL Time Warner's
network of Web properties drew an industry-high 94.8 million unique
visitors, up 17% year over year, totaling 75.4% of all domestic online
users.
Cable
Cable's EBITDA climbed 11% in the quarter on a 14% increase in
revenues.
Subscription revenues grew a strong 15%, driven by increased
basic, digital and high-speed data subscribers and higher basic cable
rates. Advertising and Commerce revenues climbed 5%, due to increased
intercompany advertising, offset in part by a decrease in advertising
from programmers promoting channel launches.
The EBITDA gains reflected increases in basic, digital and
high-speed data revenues, partly offset by higher programming
expenses, costs associated with the rollout of new digital and
high-speed data services and development spending in the Company's
Interactive Video division.
Basic cable subscribers increased at an annual rate of 1.5%. Time
Warner Cable added 229,000 net digital video subscribers during the
quarter to reach a total of 3.5 million. This is an increase of 1.1
million subscribers, or 47%, over the subscriber level at September
30, 2001. As a leading US broadband provider, Time Warner Cable added
257,000 net high-speed data subscribers this quarter for a total of
2.3 million. This is an increase of 945,000 subscribers, or 69%, since
the end of the 2001 third quarter. At the end of the quarter, digital
video subscribers represented 32% of basic cable subscribers, while
high-speed data subscribers represented 13% of eligible homes passed.
To date, Time Warner Cable has launched video-on-demand,
subscription video-on-demand or both services in 32 of its 34
divisions.
Filmed Entertainment
Filmed Entertainment's EBITDA rose 8% in the quarter on a 25%
increase in revenues.
Growth in Content and Other revenues was partially offset by
declines in Advertising and Commerce revenues. The 28% increase in
Content and Other revenues was primarily due to the worldwide home
video release of New Line's The Lord of the Rings and the carry-over
successes of previously released home videos, including Warner Bros.'
Harry Potter and the Sorcerer's Stone and Ocean's Eleven. Also
contributing to revenues was the theatrical release of New Line's
Austin Powers in Goldmember ($283 million in worldwide box office to
date), which was the top 2002 summer comedy and highest-grossing film
domestically in the Austin Powers series. The 61% decrease in
Advertising and Commerce revenues resulted primarily from the 2001
closing of the Warner Bros. Studio Stores.
The quarter's EBITDA growth was driven primarily by increased
revenues from home video, offset in part by lower box office results
at Warner Bros.
For the second consecutive quarter, worldwide DVD revenue more
than doubled year over year.
For the first nine months of the year, Warner Bros. and New Line
generated $683 million and $595 million respectively in domestic box
office - combining for an industry share of 19.1%, up from 16.2% in
the prior-year period.
Last month, Warner Bros. Television received nine Primetime Emmy
awards. The West Wing won five awards, including Outstanding Drama
Series for a rare third consecutive year, and Friends - the #1 comedy
on television - was honored with the Outstanding Comedy Series and
Outstanding Lead Actress in a Comedy Series awards.
Networks
Networks' EBITDA increased 16% in the quarter on revenue growth of
10%.
Subscription, Advertising and Commerce, and Content and Other
revenues all increased during the quarter. Subscription revenue gains
of 8% resulted from an increase in domestic subscribers and
subscription rates - led by the TNT, TBS Superstation, CNN and Cartoon
Network cable networks, as well as the HBO and Cinemax pay services.
Advertising and Commerce revenues increased 7%, reflecting continued
improvement in cable television advertising, as well as increased
advertising revenue at The WB due to higher CPMs. Content and Other
revenues increased 39%, due primarily to higher home video and foreign
sales of HBO's original programming.
The EBITDA increase reflects across-the-board higher revenues,
partially offset by increases in programming expenses.
In the first four weeks of its new season, The WB's delivery of
viewers 12-34 is running 23% higher than the same period last year -
led by 7th Heaven and Everwood, as well as Smallville, Gilmore Girls
and Birds of Prey, which are produced by Warner Bros. Television. For
the quarter, The WB was the highest-rated network among female teens,
and The Kids' WB! ranked #1 with kids 2-11, kids 6-11, boys 2-11 and
boys 6-11 versus its broadcast competition.
For the 19th consecutive quarter, TBS Superstation was the #1
basic cable network among adults 18-34 in total day. TNT was the
leading basic cable network in primetime delivery of adults 18-49 and
25-54 in the quarter, and won three Primetime Emmy awards. Cartoon
Network ranked #1 in primetime delivery of kids 2-11 for the 10th
consecutive quarter.
Among CNN's signature shows during the quarter, American Morning
with Paula Zahn, Lou Dobbs Moneyline and Crossfire all experienced
double-digit increases in total viewers, and Larry King Live was the
most-watched cable news program in its time period, with a 1.3
household rating.
HBO earned 24 Primetime Emmy awards, tied for first among
networks, including six awards each for Band of Brothers and Six Feet
Under, which won the most of any drama series, and three each for The
Gathering Storm and Sex and the City. In addition, the season premiere
of The Sopranos last month became the most-watched original program in
HBO's 30-year history, and was the week's #1 primetime program among
adults 18-34.
Music
Warner Music Group's EBITDA increased 10% in the quarter on
revenue gains of 2%.
The revenue growth reflected the acquisition of Word
Entertainment, lower provisions for actual and future returns,
favorable currency translation and improved performances in DVD
manufacturing volume, offset in part by declines in recorded music
shipments related to the ongoing weakness in the worldwide music
industry and lower DVD manufacturing prices.
The EBITDA increase was primarily due to the revenue increase,
including the favorable effect from lower returns, lower marketing and
overhead costs, and lower bad debt expenses, offset in part by higher
artist and repertoire costs.
On a year-to-date basis, Warner Music improved its competitive
position despite difficult industry trends. According to Soundscan,
Warner Music's domestic album share through September 30 was 17.2% -
ranking second among all music companies - up from 16.8% at December
31, 2001.
Top worldwide sellers in the quarter included established artists
such as Red Hot Chili Peppers and Linkin Park, and strong carryover
sales from Josh Groban and P.O.D.
Publishing
Publishing's EBITDA grew 23% in the quarter on revenue gains of
11%.
Revenue growth reflected gains in Subscription, Advertising and
Commerce, and Content and Other revenues. Subscription revenues were
up 8% from the previous year, due primarily to lower commission
payments to subscription agents. Advertising and Commerce revenues
grew 13%, largely because of Synapse, a subscription marketing company
acquired in December 2001, increased intercompany revenues, continued
improvements in advertising and an additional issue of each of the
major weekly magazines.
EBITDA growth reflected the increase in revenues, improved
performance associated with the integration of Synapse and IPC Media,
the largest publisher in the UK, acquired in October 2001, and
significant savings from cost-reduction efforts.
Based on Publishers Information Bureau (PIB) data, Time Inc.'s
2002 share of overall domestic advertising through September 30 was
24.8%, up 1.4 percentage points from the same period last year. This
represents Time Inc.'s best nine-month share performance since 1988.
Based on PIB advertising spending data, Time Inc. has outperformed the
rest of the industry this year through September by 7.6 percentage
points.
AOL Time Warner Book Group added 8 titles to the New York Times
bestsellers list during the third quarter, bringing the year-to-date
total to 43. Popular titles this quarter included Alice Sebold's The
Lovely Bones, which is the biggest-selling novel of the year, as well
as Nicholas Sparks' Nights in Rodanthe and David Baldacci's Last
Man Standing.
Probable Impairment of Goodwill
While the Company's overall goodwill impairment analysis under FAS
142 will not be completed until the fourth quarter, based on current
market conditions and lower than expected performance at the America
Online division, management believes that it is probable that a
substantial overall goodwill impairment has occurred as of September
30, 2002.
At this time, management is unable to reasonably estimate the
magnitude of such an impairment. The factors that will affect the
magnitude of impairment include management's revised operating plan of
the America Online division, the results of the Company's overall
current budgeting and long-term planning process, and a valuation of
assets and liabilities, all of which will be completed in the fourth
quarter.
Additionally, the magnitude of any impairment also will take into
consideration market conditions, including the extent to which the
stock price of comparable companies in the cable industry continue to
experience a sustained decline in values. Any write-off would be
non-cash in nature and, therefore, is not expected to affect the
Company's liquidity or result in non-compliance with any debt
covenants, including the Company's covenant to maintain at least $50
billion of net worth contained in the Company's primary credit
facilities.
About AOL Time Warner
AOL Time Warner is the world's leading media and entertainment
company, whose businesses include interactive services, cable systems,
filmed entertainment, television networks, music and publishing.
The Company's earnings conference call can be heard live at 4:45
pm ET on Wednesday, October 23. To listen to the call, visit
www.aoltimewarner.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, strategic and/or regulatory factors, and
factors affecting the operation of the businesses of AOL Time Warner
Inc. on an integrated basis. More detailed information about these
factors may be found in filings by AOL Time Warner with the Securities
and Exchange Commission, including its most recent annual report on
Form 10-K and quarterly report on Form 10-Q. AOL 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.
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*T
AOL TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
September December
30, 31,
2002 2001
(unaudited)
ASSETS (millions, except
per share amounts)
Current assets
Cash and equivalents $ 2,349 $ 719
Receivables, less allowances of $2.163 and $1.889
billion 4,858 6,054
Inventories 1,731 1,791
Prepaid expenses and other current assets 1,876 1,687
-------- --------
Total current assets 10,814 10,251
Noncurrent inventories and film costs 3,344 3,490
Investments, including available-for-sale
securities 5,002 6,886
Property, plant and equipment 11,763 12,669
Intangible assets subject to amortization 7,162 7,289
Intangible assets not subject to amortization 38,300 37,708
Goodwill 81,688 127,420
Other assets 2,815 2,791
-------- --------
Total assets $160,888 $208,504
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,918 $ 2,266
Participations payable 1,498 1,253
Royalties and programming costs payable 1,635 1,515
Deferred revenue 1,550 1,451
Debt due within one year 89 48
Other current liabilities 6,312 6,443
-------- --------
Total current liabilities 13,002 12,976
Long-term debt 28,244 22,792
Deferred income taxes 10,975 11,231
Deferred revenue 1,038 1,048
Other liabilities 4,694 4,839
Minority interests 4,917 3,591
Shareholders' equity
Series LMCN-V Common Stock, $0.01 par value, 171.2
million shares
outstanding in each period 2 2
AOL Time Warner Common Stock, $0.01 par value,
4.296 and
4.258 billion shares outstanding 42 42
Paid-in capital 155,093 155,172
Accumulated other comprehensive income, net (90) 49
Retained earnings (57,029) (3,238)
-------- --------
Total shareholders' equity 98,018 152,027
-------- --------
Total liabilities and shareholders' equity $160,888 $208,504
======== ========
See accompanying notes
AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended September 30,
--------------------------------
2002 2001 2001
Historical Pro Historical
Forma(a)
---------- ------- ----------
(millions, except per share amounts)
Revenues:
Subscriptions $ 4,818 $ 4,273 $ 3,970
Advertising and commerce 1,698 1,937 1,880
Content and other 3,467 3,207 3,218
-------- -------- --------
Total revenues 9,983 9,417 9,068
Costs of revenues (6,111) (5,308) (5,006)
Selling, general and administrative (2,299) (2,384) (2,191)
Amortization of goodwill and other
intangible assets (181) (155) (1,784)
Merger and restructuring costs (77) (134) (134)
-------- -------- --------
Operating income (loss) 1,315 1,436 (47)
Interest expense, net (489) (458) (341)
Other expense, net (851) (276) (437)
Minority interest income (expense) (55) (42) 12
-------- -------- --------
Income (loss) before income taxes,
discontinued operations and cumulative
effect of accounting change (80) 660 (813)
Income tax provision 25 (266) (174)
-------- -------- --------
Income (loss) before discontinued
operations and cumulative effect of
accounting change (55) 394 (987)
Discontinued operations, net of tax 112 1 (10)
-------- -------- --------
Income (loss) before cumulative effect
of accounting change 57 395 (997)
Cumulative effect of accounting change - - -
-------- -------- --------
Net income (loss) applicable to common
shares $ 57 $ 395 $ (997)
======== ======== ========
Basic income (loss) per common share
before discontinued operations and
cumulative effect of accounting change $ (0.01) $ 0.09 $ (0.22)
Discontinued operations 0.02 - -
Cumulative effect of accounting change - - -
-------- -------- --------
Basic net income (loss) per common share $ 0.01 $ 0.09 $ (0.22)
======== ======== ========
Diluted income (loss) per common share
before discontinued operations and
cumulative effect of accounting change $ (0.01) $ 0.09 $ (0.22)
Discontinued operations 0.02 - -
Cumulative effect of accounting change - - -
-------- -------- --------
Diluted net income (loss) per common
share $ 0.01 $ 0.09 $ (0.22)
======== ======== ========
Diluted cash earnings per common share
before discontinued operations and
cumulative effect of accounting change $ 0.01 $ 0.17 $ 0.22
======== ======== ========
Average basic common shares 4,464.2 4,439.9 4,439.9
======== ======== ========
Average diluted common shares for cash
earnings per share 4,507.0 4,583.8 4,583.8
======== ======== ========
Nine Months Ended September 30,
--------------------------------
2002 2001 2001
Historical Pro Historical
Forma(a)
---------- ------- ----------
(millions, except per share amounts)
Revenues:
Subscriptions $ 14,032 $ 12,344 $ 11,448
Advertising and commerce 5,518 6,273 6,088
Content and other 10,091 9,279 9,315
-------- -------- --------
Total revenues 29,641 27,896 26,851
Costs of revenues (17,787) (15,887) (14,759)
Selling, general and administrative (7,258) (7,130) (6,643)
Amortization of goodwill and other
intangible assets (520) (494) (5,318)
Merger and restructuring costs (184) (205) (205)
-------- -------- --------
Operating income (loss) 3,892 4,180 (74)
Interest expense, net (1,306) (1,349) (996)
Other expense, net (1,837) (1,069) (1,572)
Minority interest income (expense) (139) (130) 18
-------- -------- --------
Income (loss) before income taxes,
discontinued operations and
cumulative effect of accounting change 610 1,632 (2,624)
Income tax provision (279) (698) (450)
-------- -------- --------
Income (loss) before discontinued
operations and cumulative effect of
accounting change 331 934 (3,074)
Discontinued operations, net of tax 113 3 (29)
-------- -------- --------
Income (loss) before cumulative effect
of accounting change 444 937 (3,103)
Cumulative effect of accounting change (54,235) - -
-------- -------- --------
Net income (loss) applicable to common
shares $(53,791) $ 937 $ (3,103)
======== ======== ========
Basic income (loss) per common share
before discontinued operations and
cumulative effect of accounting change $ 0.07 $ 0.21 $ (0.69)
Discontinued operations 0.03 - (0.01)
Cumulative effect of accounting change (12.19) - -
-------- -------- --------
Basic net income (loss) per common share $ (12.09) $ 0.21 $ (0.70)
======== ======== ========
Diluted income (loss) per common share
before discontinued operations and
cumulative effect of accounting change $ 0.07 $ 0.20 $ (0.69)
Discontinued operations 0.03 - (0.01)
Cumulative effect of accounting change (12.19) - -
-------- -------- --------
Diluted net income (loss) per common
share $ (12.09) $ 0.20 $ (0.70)
======== ======== ========
Diluted cash earnings per common share
before discontinued operations and
cumulative effect of accounting change $ 0.21 $ 0. 41 $ 0.62
======== ======== ========
Average basic common shares 4,449.2 4,429.2 4,429.2
======== ======== ========
Average diluted common shares for cash
earnings per share 4,523.1 4,593.8 4,593.8
======== ======== ========
(a) In order to enhance comparability, pro forma financial
statements for 2001 are presented supplementally as if IPC and
the remaining interest in AOL Europe had been acquired, Road
Runner had been consolidated and FAS 142 had been applied at
the beginning of 2001 (Note 1).
See accompanying notes.
AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited)
2002 2001 2001
Historical Pro Historical
Forma(a)
---------- ------- ----------
(millions, except per share amounts)
OPERATIONS
Net income (loss)(b) $(53,791) $ 937 $(3,103)
Adjustments for noncash and nonoperating
items:
Cumulative effect of accounting
change 54,235 - -
Depreciation and amortization 2,206 1,829 6,589
Amortization of film costs 1,810 1,671 1,671
Loss on writedown of investments 1,685 821 821
Gain on sale of investments (95) (33) (33)
Equity in losses of investee
companies after distributions 248 195 716
Changes in operating assets and
liabilities, net of acquisitions (638) (2,425) (2,824)
Adjustments for noncash and nonoperating
items, and changes in operating
assets and liabilities for
discontinued operations 265 361 393
-------- ------- -------
Cash provided by operations 5,925 3,356 4,230
-------- ------- -------
INVESTING ACTIVITIES
Acquisition of Time Warner Inc. cash and
equivalents - 690 690
Investments and acquisitions, net of cash
acquired (7,582) (1,193) (1,774)
Capital expenditures and product
development costs from continuing
operations (2,078) (2,423) (2,362)
Capital expenditures from discontinued
operations (206) (298) (298)
Investment proceeds 248 1,820 1,751
-------- ------- -------
Cash used by investing activities (9,618) (1,404) (1,993)
-------- ------- -------
FINANCING ACTIVITIES
Borrowings 19,133 8,404 7,948
Debt repayments (13,640) (9,397) (9,196)
Redemption of redeemable preferred
securities of subsidiaries (255) (963) (575)
Proceeds from exercise of stock option and
dividend reimbursement plans 255 813 813
Current period repurchases of common stock (102) (2,298) (2,298)
Dividends paid and partnership
distributions from discontinued
operations, net (11) (51) (51)
Dividends paid from continuing operations - (4) (4)
Principal payments on capital leases (35) - -
Other (22) 9 21
-------- ------- -------
Cash provided (used) by financing
activities 5,323 (3,487) (3,342)
-------- ------- -------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 1,630 (1,535) (1,105)
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD 719 2,833 2,610
-------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 2,349 $ 1,298 $ 1,505
======== ======= =======
FREE CASH FLOW FROM CONTINUING OPERATIONS $ 3,434 $ 565 $ 1,500
======== ======= =======
(a) In order to enhance comparability, pro forma financial
statements for 2001 are presented supplementally as if IPC and
the remaining interest in AOL Europe had been acquired, Road
Runner had been consolidated and FAS 142 had been applied at
the beginning of 2001 (Note 1).
(b) Includes net income (loss) from discontinued operations of
$113 million in 2002, $3 million in 2001 on a pro forma basis
and $(29) million in 2001 on a historical basis.
See accompanying notes.
AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Description of Business and Basis of Presentation
Description of Business
AOL Time Warner Inc. ("AOL Time Warner" or the "Company") is the
world's leading media and entertainment company, whose businesses
include interactive services, cable systems, filmed entertainment,
television networks, music and publishing. The Company was formed in
connection with the merger of America Online, Inc. ("America Online")
and Time Warner Inc. ("Time Warner"), which was consummated on January
11, 2001 (the "Merger"). As a result of the Merger, America Online and
Time Warner each became a wholly owned subsidiary of AOL Time Warner.
AOL Time Warner classifies its business interests into six
fundamental areas: AOL, consisting principally of interactive
services, Web properties, Internet technologies and electronic
commerce services; Cable, consisting principally of interests in cable
television systems; Filmed Entertainment, consisting principally of
interests in filmed entertainment and television production; Networks,
consisting principally of interests in cable television and broadcast
network programming; Music, consisting principally of interests in
recorded music and music publishing; and Publishing, consisting
principally of interests in magazine publishing, book publishing and
direct marketing.
A majority of AOL Time Warner's interests in the Filmed
Entertainment and Cable segments, and a portion of its interests in
the Networks segment, are held through Time Warner Entertainment
Company, L.P. ("TWE"). Prior to the change in ownership discussed
below, AOL Time Warner owned general and limited partnership interests
in TWE consisting of 74.49% of the pro rata priority capital ("Series
A Capital") and residual equity capital ("Residual Capital"), and 100%
of the junior priority capital ("Series B Capital"). The remaining
25.51% limited partnership interests in the Series A Capital and
Residual Capital of TWE were held by subsidiaries of AT&T Corp.
("AT&T").
During the second quarter of 2002, AT&T exercised a one-time
option to increase its ownership in the Series A Capital and Residual
Capital of TWE. As a result, on May 31, 2002, AT&T's interest in the
Series A Capital and Residual Capital of TWE increased by
approximately 2.13% to approximately 27.64% and AOL Time Warner's
corresponding interest in the Series A Capital and Residual Capital of
TWE decreased by approximately 2.13% to approximately 72.36%. In
accordance with Staff Accounting Bulletin No. 51, "Accounting for
Sales of Stock of a Subsidiary", AOL Time Warner has reflected the
pretax impact of the dilution of its interest in TWE of approximately
$690 million as an adjustment to paid-in capital.
In August 2002, AOL Time Warner and AT&T announced that they had
agreed to restructure TWE. As a result of the restructuring, AOL Time
Warner will assume complete ownership of TWE's content assets,
including Warner Bros. and Home Box Office, as well as TWE's interests
in The WB Network, Comedy Central and Court TV. In addition, all of
AOL Time Warner's interests in cable television systems, including
systems held at TWE and wholly-owned subsidiaries, will be contributed
to a new subsidiary of AOL Time Warner to be called "Time Warner Cable
Inc." AT&T will exchange its current 27.64% interest in the Series A
Capital and Residual Capital of TWE for $2.1 billion in cash, AOL Time
Warner common stock valued at $1.5 billion at the time of closing and
a 21% economic stake in Time Warner Cable Inc. AT&T's 21% economic
interest in Time Warner Cable Inc. will represent less than a 5%
voting interest in Time Warner Cable Inc. The Company anticipates that
the restructuring will be completed in early 2003, upon the receipt of
local cable franchise approvals, where required, and other required
regulatory approvals.
Based upon its controlling voting interest in Time Warner Cable
Inc., AOL Time Warner will consolidate the results of Time Warner
Cable Inc. for accounting purposes. At closing, it is anticipated that
Time Warner Cable Inc. will have approximately $8.1 billion in
consolidated net debt and preferred equity. Subject to market
conditions, AOL Time Warner plans to conduct an initial public
offering of Time Warner Cable Inc. soon after the restructuring. It is
anticipated that the first $2.1 billion raised in any such offering
would be used to repay Time Warner Cable Inc.'s debt incurred to fund
the $2.1 billion cash payment to AT&T. Thereafter, AT&T will have
certain priority registration rights with respect to its interest in
Time Warner Cable Inc.
Basis of Presentation
Restatement of Prior Financial Information
The Company has been conducting an internal review of certain
advertising and commerce transactions at the America Online division
under the direction of the Company's Chief Financial Officer. In
connection with this internal review, the financial results for each
of the quarters ended September 30, 2000 through June 30, 2002 will be
restated. The total impact of the adjustments will be to reduce the
Company's consolidated advertising and commerce revenues by $190
million over these eight quarterly periods, with a corresponding
reduction in EBITDA for that same time period of $97 million. For the
America Online division, the impact of the adjustments will be to
reduce advertising and commerce revenues by $168 million over these
eight quarterly periods, with a corresponding reduction in EBITDA for
that same time period of $97 million. The remaining $22 million
represents a reduction in revenues from certain transactions related
to the America Online division in which the advertising was delivered
by other AOL Time Warner divisions.
The adjustments represent approximately 1% of the America Online
segment's total revenues for that same two-year period, approximately
3.4% of its advertising and commerce revenues, and approximately 1.9%
of its EBITDA. The largest impact of the adjustments is in the quarter
ended September 30, 2000, where advertising and commerce revenues will
be reduced by $66 million and EBITDA will be reduced by $30 million.
It is expected that the financial statements for the affected periods
will be filed with the Securities and Exchange Commission in the
fourth quarter. The Company's financial statements for the affected
periods, including the audited financial statements contained in the
2001 Annual Report on Form 10-K, should no longer be relied upon as a
result of the announced restatement.
The financial results presented reflect the impact of the
adjustments that will be made in the restatement of the Company's
financial results. For the three months ended September 30, 2001, the
total impact of these adjustments is a reduction of both the America
Online division's and the Company's consolidated advertising and
commerce revenues of $16 million, with a corresponding reduction in
EBITDA of $6 million. For the nine months ended September 30, 2002 and
2001, the total impact is a reduction of consolidated advertising and
commerce revenues of $12 million and $72 million, respectively, with a
corresponding reduction in EBITDA of $14 million and $14 million,
respectively. For the America Online division, for the nine months
ended September 30, 2002 and 2001, the impact of these adjustments is
a reduction of advertising and commerce revenues of $6 million and $57
million, respectively, with a corresponding reduction in EBITDA of $14
million and $14 million, respectively. The remaining impact on
advertising and commerce revenues of $6 million and $15 million for
the nine months ended September 30, 2002 and 2001, respectively,
represents a reduction in revenues from certain transactions related
to the America Online division in which the advertising was delivered
by other AOL Time Warner divisions.
While the internal review is still ongoing, based on the
substantial work done to date, the Company does not expect any further
restatements as a result of this review. The Company also will
continue its efforts to cooperate with the separate
investigations of the Company being conducted by the Securities and
Exchange Commission and the Department of Justice. The Company is
unable to predict the outcome of these investigations.
Restructuring of TWE-Advance/Newhouse Partnership and Road Runner
As of June 30, 2002, the TWE-Advance/Newhouse Partnership
("TWE-A/N") was owned approximately 64.8% by TWE, the managing
partner, 33.3% by the Advance/Newhouse Partnership
("Advance/Newhouse") and 1.9% indirectly by AOL Time Warner. Prior to
August 1, 2002, as discussed in more detail below, the financial
position and operating results of TWE-A/N were consolidated by AOL
Time Warner and TWE, and the partnership interest owned by
Advance/Newhouse was reflected in the consolidated financial
statements of AOL Time Warner and TWE as minority interest. In
addition, Road Runner, a high-speed cable modem Internet service
provider, was owned by TWI Cable Inc. (a wholly owned subsidiary of
AOL Time Warner), TWE and TWE-A/N, with AOL Time Warner owning
approximately 65% on a fully attributed basis (i.e., after considering
the portion attributable to the minority partners of TWE and TWE-A/N).
AOL Time Warner's interest in Road Runner was accounted for using the
equity method of accounting prior to the restructuring of the
ownership interests on August 1, 2002 because of certain approval
rights held by Advance/Newhouse, a partner in TWE-A/N.
On June 24, 2002, TWE and Advance/Newhouse agreed to restructure
TWE-A/N, which, on August 1, 2002, resulted in Advance/Newhouse taking
a more active role in the day-to-day operations of certain TWE-A/N
cable systems serving approximately 2.1 million subscribers located
primarily in Florida (the "Advance/Newhouse Systems"). The
restructuring is anticipated to be completed by the end of 2002, upon
the receipt of certain regulatory approvals. On August 1, 2002,
Advance/Newhouse and its affiliates arranged for a new credit facility
to support the Advance/Newhouse Systems and repaid approximately $780
million of TWE-A/N's senior indebtedness (the "Debt Closing Date"). As
of the Debt Closing Date, Advance/Newhouse assumed management
responsibilities for the Advance/Newhouse Systems, to the extent
permitted under applicable government regulations, and, accordingly,
AOL Time Warner and TWE deconsolidated the financial position and
operating results of these systems. Additionally, all prior period
results associated with the Advance/Newhouse Systems, including the
historical minority interest allocated to Advance/Newhouse's interest
in TWE-A/N, have been reflected as a discontinued operation for all
periods presented. Under the new TWE-A/N Partnership Agreement,
effective as of the Debt Closing Date, Advance/Newhouse's partnership
interest tracks only the performance of the Advance/Newhouse Systems,
including associated liabilities, while AOL Time Warner retains all of
the interests in the other TWE-A/N assets and liabilities.
On the Debt Closing Date, AOL Time Warner acquired
Advance/Newhouse's interest in Road Runner, thereby increasing its
ownership to approximately 82% on a fully attributed basis. As a
result of the termination of Advance/Newhouse's minority rights in
Road Runner, AOL Time Warner has consolidated the financial position
and results of operations of Road Runner with the financial position
and results of operations of AOL Time Warner's Cable segment. As
permitted under generally accepted accounting principles, the Company
has consolidated the results of Road Runner retroactive to the
beginning of the year.
In connection with these transactions, AOL Time Warner recognized
a noncash pretax gain of approximately $1.4 billion. Of this gain,
approximately $1.2 billion related to the difference between the
carrying value of AT&T's interest in the Advance/Newhouse Systems and
the fair value of AT&T's additional interest acquired in the remaining
TWE-A/N systems. This gain is included as part of discontinued
operations in the accompanying consolidated statement of operations.
However, because this gain relates fully to AT&T's interest in
TWE-A/N, it is completely offset by minority interest expense, which
is similarly included as part of discontinued operations. The
remaining gain of approximately $188 million relates to the amount
that the fair value of AOL Time Warner's acquired interest in the
remaining TWE-A/N systems exceeded the carrying value of AOL Time
Warner's interest in the Advance/Newhouse Systems. The gain is
significantly less than the gain recognized by AT&T because the
carrying value of AOL Time Warner's interest in TWE-A/N, including its
interest in the Advance/Newhouse Systems, was recently adjusted to
fair value as part of the purchase accounting for the Merger. The $188
million gain is also included as part of discontinued operations.
Exclusive of the gains associated with these transactions, the impact
of the TWE-A/N restructuring on AOL Time Warner's consolidated net
income is substantially mitigated because the earnings of TWE-A/N
attributable to Advance/Newhouse's historical one-third interest was
reflected as minority interest expense. As stated previously, this
historical minority interest expense is currently classified as part
of the discontinued operations for all periods presented.
Additionally, there is no impact on AOL Time Warner's consolidated net
income from consolidating Road Runner.
Transactions Affecting Comparability of Results of Operations
Pro Forma Items
AOL Time Warner's results for 2002 have been impacted by certain
transactions and events that cause them not to be comparable to the
results reported in 2001. In order to make the 2001 operating results
more comparable to the 2002 presentation and make an analysis of 2002
and 2001 more meaningful, the results of operations and cash flow
information for 2001 has been adjusted for the items discussed in the
following paragraphs.
-- New Accounting Standard for Goodwill and Other Intangible
Assets. During 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"),
which requires that, effective January 1, 2002, goodwill,
including the goodwill included in the carrying value of
investments accounted for using the equity method of
accounting, and certain other intangible assets deemed to have
an indefinite useful life, cease amortizing (Note 2). FAS 142
does not require retroactive restatement for all periods
presented, however, the accompanying pro forma information for
2001 assumes that FAS 142 was in effect beginning January 1,
2001.
-- Consolidation of AOL Europe, S.A. ("AOL Europe"). On January
31, 2002, AOL Time Warner acquired 80% of Bertelsmann AG's
("Bertelsmann") 49.5% interest in AOL Europe for $5.3 billion
in cash and on July 1, 2002, acquired the remaining 20% of
Bertelsmann's interest for $1.45 billion in cash. As a result
of the purchase of Bertelsmann's interest in AOL Europe, AOL
Time Warner has a majority interest in and began consolidating
AOL Europe, retroactive to the beginning of 2002. The pro
forma information for 2001 assumes the interests in AOL Europe
were acquired on January 1, 2001.
-- Consolidation of IPC Group Limited ("IPC"). In October 2001,
AOL Time Warner's Publishing segment acquired IPC, the parent
company of IPC Media, from Cinven, one of Europe's leading
private equity firms, for approximately $1.6 billion. The pro
forma information for 2001 assumes that IPC was acquired on
January 1, 2001.
-- Consolidation of Road Runner. In August 2002, AOL Time
Warner's Cable segment acquired Advance/Newhouse's 17%
indirect ownership in Road Runner, increasing the Company's
fully attributed ownership to approximately 82%. As a result
of the termination of Advance/Newhouse's minority rights in
Road Runner, AOL Time Warner has consolidated the financial
position and results of operations of Road Runner with the
financial position and results of operations of AOL Time
Warner's Cable segment. As permitted under generally accepted
accounting principles, the Company has consolidated the
results of Road Runner retroactive to the beginning of the
year. The pro forma information for 2001 assumes that Road
Runner was consolidated as of January 1, 2001.
New Accounting Standards
In addition to the pro forma adjustments previously discussed, in
the first quarter of 2002, the Company adopted new accounting guidance
in several areas that require retroactive restatement of all periods
presented to reflect the new accounting provisions; therefore, these
adjustments affect both pro forma and historical results. These
adjustments are discussed below.
-- Reimbursement of "Out-of-Pocket" Expenses. In November 2001,
the FASB Staff issued as interpretive guidance Emerging Issues
Task Force ("EITF") Topic No. D-103, "Income Statement
Characterization of Reimbursements Received for
'Out-of-Pocket' Expenses Incurred" ("Topic D-103"). Topic
D-103 requires that reimbursements received for out-of-pocket
expenses be classified as revenue on the income statement and
was effective for AOL Time Warner in the first quarter of
2002. This change in revenue classification impacts AOL Time
Warner's Cable and Music segments, resulting in an increase in
both revenues and costs of approximately $105 million and $326
million on both a pro forma and historical basis in the three
and nine months ended September 30, 2001, respectively.
-- Emerging Issues Task Force Issue No. 01-09. In April 2001, the
FASB's EITF reached a final consensus on EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendor's Products," which was later
codified along with other similar issues, into EITF 01-09,
"Accounting for Consideration Given by a Vendor to a Customer
or a Reseller of the Vendor's Products" ("EITF 01-09"). EITF
01-09 was effective for AOL Time Warner in the first quarter
of 2002. EITF 01-09 clarifies the income statement
classification of costs incurred by a vendor in connection
with the reseller's purchase or promotion of the vendor's
products, resulting in certain cooperative advertising and
product placement costs previously classified as selling
expenses to be reflected as a reduction of revenues earned
from that activity. The new guidance impacts AOL Time Warner's
AOL, Music and Publishing segments. As a result of applying
the provisions of EITF 01-09, the Company's revenues and costs
each were reduced by an equal amount of approximately $44
million and $154 million on both a pro forma and historical
basis in the three and nine months ended September 30, 2001,
respectively.
Normalized Results
In order to fully assess underlying operating results and trends,
management believes that, in addition to the actual operating results,
the operating results adjusted to exclude the impact of significant
unusual and nonrecurring items should be evaluated. Accordingly, in
addition to presenting actual operating results, the Company has
presented normalized results, which exclude the impact of significant
unusual and nonrecurring items, discussed in more detail in Note 2. It
should be noted, however, that significant unusual or nonrecurring
items may occur in any period; therefore, investors and other users of
this financial information individually should evaluate the types of
events and transactions for which adjustments have been made.
Capital Expenditures and Product Development Costs
AOL Time Warner's capital expenditures and product development
costs from continuing operations amounted to $2.078 billion and $2.423
billion for the nine months ended September 30, 2002 and 2001,
respectively ($2.362 billion on a historical basis). Capital
expenditures and product development costs principally relate to the
Company's Cable segment ($1.225 billion in 2002 as compared to $1.358
billion in 2001), which over the past several years has been engaged
in a plan to upgrade the technological capability and reliability of
its cable television systems and develop new services. Also
contributing to capital expenditures and product development costs are
product development costs incurred by the AOL segment which amounted
to $169 million and $255 million for the nine months ended September
30, 2002 and 2001, respectively.
AOL Time Warner's Cable segment generally capitalizes expenditures
for tangible fixed assets having a useful life of greater than one
year. Capitalized costs typically include direct material, direct
labor, overhead and interest. Sales and marketing costs, as well as
costs of repairing or maintaining existing fixed assets, are expensed
as incurred. Types of capitalized expenditures at the Cable segment
include plant upgrades, initial drops, converters and cable modems.
With respect to converters and cable modems, the Cable segment
capitalizes direct installation charges only upon the initial
deployment of such assets. All costs incurred in the re-deployments of
these assets are expensed as incurred. Similarly, once a given
household has been wired, all costs incurred in subsequent disconnects
and reconnects applicable to that household are expensed as incurred.
Depreciation on these assets is provided generally using the
straight-line method over their estimated useful life. For converters
and modems, such life is generally 3-5 years and for plant upgrades
such useful life is up to 16 years. As of September 30, 2002, the
total net book value of capitalized labor and overhead costs
associated with the installation of converters and modems was
approximately $150 million.
Included in the AOL segment's product development costs are costs
incurred for the production of technologically feasible computer
software that generates additional functionality to its existing
software products. Capitalized costs typically include direct labor
and related overhead for software produced by AOL as well as the cost
of software purchased from third parties. Costs incurred on a product
prior to the determination that the product is technologically
feasible, as well as maintenance costs of established products, are
expensed as incurred. All costs in the software development process
which are experimental in nature are classified as research and
development and are expensed as incurred until technological
feasibility has been established. Once technological feasibility has
been established, such costs are capitalized until the software has
completed testing and is mass-marketed. Amortization is provided on a
product-by-product basis using the greater of the straight-line method
or the current year revenue as a percentage of total revenue estimates
for the related software product, not to exceed five years, commencing
the month after the date of the product release. The total net book
value related to capitalized software costs was approximately $330
million as of September 30, 2002.
Note 2: Significant Unusual and Nonrecurring Items
Cumulative Effect of Accounting Change
As discussed in Note 1, in January 2002, AOL Time Warner adopted
FAS 142, which requires companies to stop amortizing goodwill and
certain intangible assets with an indefinite useful life. Instead, FAS
142 requires that goodwill and intangible assets deemed to have an
indefinite useful life be reviewed for impairment upon adoption of FAS
142 (January 1, 2002) and annually thereafter.
Under FAS 142, goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. This
methodology differs from AOL Time Warner's previous policy, in
accordance with accounting standards existing at that time, of using
undiscounted cash flows on an enterprise-wide basis to determine if
goodwill is recoverable. Upon adoption of FAS 142 in the first quarter
of 2002, AOL Time Warner recorded a one-time, noncash charge of
approximately $54 billion to reduce the carrying value of its
goodwill. Such charge is nonoperational in nature and is reflected as
a cumulative effect of an accounting change in the accompanying
consolidated statement of operations. In calculating the impairment
charge, the fair value of the impaired reporting units underlying the
segments were estimated using either a discounted cash flow
methodology, recent comparable transactions or a combination thereof.
The FAS 142 goodwill impairment is associated solely with goodwill
resulting from the Merger. The amount of the impairment primarily
reflects the decline in the Company's stock price since the Merger was
announced and valued for accounting purposes in January of 2000. Prior
to performing the review for impairment, FAS 142 required that all
goodwill deemed to be related to the entity as a whole be assigned to
all of the Company's reporting units, including the reporting units of
the acquirer. This differs from the previous accounting rules where
goodwill was assigned only to the businesses of the company acquired.
As a result, a portion of the goodwill generated in the Merger has
been reallocated to the AOL segment.
A summary of changes in the Company's goodwill during the first
nine months of 2002, and total assets at September 30, 2002, by
business segment is as follows:
*T
Total
Goodwill Assets
-------------------------------------------------------
January Acquisitions & Sept. Sept.
1, 2002(1) Adjustments(2) Impairments(3) 30, 30,
2002 2002
--------- -------------- ------------ ------- --------
AOL $ 27,729 $ 8,551 $ - $36,280 $ 41,369
Cable 33,259 183 (22,976) 10,466 48,172
Filmed
Entertainment(4) 9,110 (107) (4,091) 4,912 15,839
Networks(5) 33,562 (54) (13,077) 20,431 31,808
Music 5,477 31 (4,796) 712 7,533
Publishing 18,283 (137) (9,259) 8,887 14,089
Corporate - - - - 2,078
Total $127,420 $ 8,467 $(54,199) $81,688 $160,888
_____________
(1) Reflects the reallocation of goodwill to the AOL reporting
unit under FAS 142.
(2) Adjustments primarily relate to the Company's preliminary
purchase price allocation for several acquisitions.
Specifically, the ultimate goodwill associated with certain
acquisitions (including IPC, Business 2.0, Synapse, AOL
Europe, and This Old House) continues to be adjusted as the
value of the assets and liabilities (including merger
liabilities) acquired are finalized.
(3) The impairment charge does not include approximately $36
million related to goodwill impairments associated with equity
investees.
(4) Includes impairments at Warner Bros. of $2.851 billion and at
the Turner filmed entertainment businesses of $1.240 billion.
(5) Includes impairments at the Turner cable networks of $10.933
billion, HBO of $1.933 billion and The WB Network of $211
million.
*T
While the Company's overall goodwill impairment analysis under FAS
142 will not be completed until the fourth quarter, based on the
current market capitalization of AOL Time Warner as implied by the
Company's stock price, lower than expected performance at the AOL
segment, and current market conditions in the Cable industry,
management believes that it is probable that a substantial overall
goodwill impairment has occurred as of September 30, 2002. At this
time, management is unable to reasonably estimate the magnitude of
such an impairment. The factors that will affect the magnitude of
impairment include management's revised operating plan of the AOL
segment, the results of the Company's overall current budgeting and
long-term plan process, and a valuation of assets (including
unrecognized intangible assets) and liabilities, all of which will be
completed in the fourth quarter. Additionally, the magnitude of any
impairment will also take into consideration AOL Time Warner's overall
market capitalization as well as the extent to which the stock price
of comparable companies in the Cable industry continue to experience a
sustained decline in values. Any write-off would be noncash in nature
and, therefore, is not expected to affect the Company's liquidity or
result in the non-compliance of any debt covenants, including the
Company's covenant to maintain at least $50 billion of net worth
contained in the Company's primary credit facilities.
Investment Write-Downs
The United States economy has experienced a broad decline in the
public equity markets, including investments held in the Company's
portfolio. Similarly, the Company experienced significant declines in
the value of certain privately held investments, restricted securities
and investments accounted for using the equity method of accounting.
As a result, the Company recorded noncash pretax charges to reduce the
carrying value of certain investments that experienced
other-than-temporary declines of approximately $733 million in the
third quarter of 2002 and $1.678 billion for the nine months ended
September 30, 2002, which are included in other expense, net, in the
accompanying consolidated statement of operations. The Company
recorded noncash pretax charges of $147 million for the third quarter
of 2001 and $821 million for the first nine months of 2001 on both a
pro forma and historical basis, which are included in other expense,
net, in the accompanying consolidated statement of operations. In
addition, the 2001 second quarter charge was almost entirely offset by
pretax gains related to derivative instruments and the sale of certain
securities.
Included in the noncash pretax charges noted above for the three
months ended September 30, 2002 is a charge of approximately $505
million relating to the Company's investment in Hughes Electronics
Corp. ("Hughes") and a charge of approximately $106 million relating
to the Company's investment in America Online Latin America, Inc.
("AOL Latin America") for declines determined to be other than
temporary.
In addition, included in the noncash pretax charges noted above
for the three and nine months ended September 30, 2002 is a charge of
approximately $24 million and $796 million, respectively, to reduce
AOL Time Warner's investment in Time Warner Telecom Inc. ("Time Warner
Telecom"), a 44%-owned equity investee. Time Warner Telecom is a
leading fiber facilities-based provider of metropolitan and regional
optical broadband networks and services to business customers. The
value of the Time Warner Telecom investment was adjusted upward in the
Merger by over $2 billion to its estimated fair value. Since the date
of the Merger, Time Warner Telecom's share price has declined
significantly, resulting in impairment charges of approximately $1.2
billion in the fourth quarter of 2001 and approximately $796 million
for the first nine months of 2002.
Sale of Columbia House
The Columbia House Company Partnerships ("Columbia House") was a
50-50 joint venture between AOL Time Warner and Sony Corporation of
America ("Sony"). In June 2002, AOL Time Warner and Sony reached a
definitive agreement to each sell 85% of its 50% interest in Columbia
House to Blackstone Capital Partners III LP ("Blackstone"), an
affiliate of The Blackstone Group, a private investment bank. Under
the terms of the sale agreement, the Company received proceeds of
approximately $125 million in cash and a subordinated note receivable
from Blackstone with a face amount of approximately $35 million. The
sale has resulted in the Company recognizing a pretax gain of
approximately $59 million, which is included in other expense, net, in
the accompanying consolidated statement of operations. In addition,
the Company has deferred an approximate $28 million gain on the sale.
The deferred gain primarily relates to the estimated fair value of the
portion of the proceeds received as a note receivable from Blackstone,
which will be deferred until such time as the realization of such note
becomes more fully assured. As a result of the sale, the Company's
interest in Columbia House has been reduced to 7.5%. As part of the
transaction, AOL Time Warner will continue to license music and video
product to Columbia House for a five-year period.
Gain on Investment in TiVo
During the second quarter of 2002, approximately 1.6 million
shares of preferred stock of TiVo Inc. ("TiVo") held by the Company
were redeemed. As a part of this transaction, the Company also sold
certain rights and licenses for developed technology to TiVo. In
return, the Company received proceeds of approximately $44 million of
cash and recognized a gain of approximately $31 million, which is
included in other expense, net, in the accompanying consolidated
statement of operations.
Merger and Restructuring Costs
Merger and restructuring costs consist of special charges related
to mergers and restructurings, which are required to be expensed in
accordance with generally accepted accounting principles. During the
three and nine month periods of 2002, the Company incurred other
restructuring costs of $77 million and $184 million, respectively,
related to various contractual terminations and obligations, including
certain contractual employee termination benefits. During the three
and nine month periods of 2001, on both a pro forma and historical
basis, $134 million and $205 million, respectively, of merger costs
were expensed as incurred as they either related to the operations of
the acquirer, including the AOL operations with respect to the Merger,
or otherwise did not qualify as a liability or cost assumed in a
purchase business combination, including the Merger. These costs are
included in "merger and restructuring costs" in the accompanying
consolidated statement of operations.
Included in the restructuring charge for the three and nine month
periods of 2002 was $67 million and $131 million, respectively,
related to lease obligations of the AOL segment for network modems
that will no longer be used because network providers are upgrading
their networks to newer technology. Specifically, under certain
existing agreements with network providers, AOL is leasing the modems
used in providing network services. In the first and third quarters,
plans were established under which network providers would upgrade and
replace the AOL supplied modems. Accordingly, the Company accrued the
remaining lease obligations, less estimated recoveries, for the period
that these modems will no longer be in use.
Note 3: Net Income (Loss) per Common Share
Basic net income (loss) per common share is based upon the net
income (loss) applicable to common shares and the weighted average of
common shares outstanding during the period. Diluted net income (loss)
per common share adjusts for the effect of stock options and other
potentially dilutive financial instruments only in the periods in
which such effect would have been dilutive. As discussed more fully in
Note 2, net income (loss) per common share has been affected by
certain significant unusual and nonrecurring items recognized in each
period. In addition, beginning in the third quarter of 2002, the
Company has reported the results of the Advance/Newhouse Systems as a
discontinued operation for all periods presented.
The aggregate net effect of excluding the impact of the
significant and nonrecurring items and the discontinued operation for
the three month period ended September 30, 2002, would be to increase
basic and diluted income (loss) from continuing operations per common
share by $0.11, from $(0.01) to $0.10. For the nine month period ended
September 30, 2002, the aggregate net effect would be to increase
basic and diluted income from continuing operations per common share
before cumulative effect of accounting change by $0.24, from $0.07 to
$0.31.
On a pro forma basis for the three month period ended September
30, 2001, if these items were excluded from reported results, the
aggregate net effect would be to increase basic and diluted income
from continuing operations per common share by $0.04 from $0.09 to
$0.13 (a decrease in basic and diluted loss from continuing operations
per common share of $0.04 from $0.22 to $0.18 on a historical basis.).
On a pro forma basis for the nine month period ended September 30,
2001, the aggregate net effect would be to increase basic income from
continuing operations per common share by $0.14, from $0.21 to $0.35
and diluted income from continuing operations per common share by
$0.14, from $0.20 to $0.34 (a decrease in basic and diluted loss from
continuing operations per common share of $0.13 from $0.69 to $0.56 on
a historical basis).
Note 4: Diluted Cash Earnings per Share
Diluted cash earnings per share is defined as pretax income (loss)
from continuing operations excluding the effect of noncash
amortization expense for consolidated and unconsolidated entities,
less cash paid for taxes and is calculated using weighted average
shares outstanding after considering the dilutive effect of all
outstanding options and dilutive securities. As described more fully
in Note 2, diluted cash earnings per share has been affected by
certain significant unusual and nonrecurring items recognized in each
period. If these items were excluded from reported results in 2002,
the aggregate net effect would be to increase diluted cash earnings
per common share by $0.18, from $0.01 to $0.19, for the three months
ended September 30, 2002 and by $0.39, from $0.21 to $0.60, for the
nine months ended September 30, 2002. On a pro forma basis, if these
items were excluded from reported results in 2001, the aggregate net
effect would be to increase diluted cash earnings per common share by
$0.07 from $0.17 to $0.24 (an increase of $0.08 from $0.22 to $0.30 on
a historical basis) for the three month period ended September 30,
2001. On a pro forma basis for the nine month period ended September
30, 2001, the aggregate net effect would be to increase diluted cash
earnings per common share by $0.22, from $0.41 to $0.63 (an increase
in diluted cash earnings per common share of $0.22, from $0.62 to
$0.84, on a historical basis).
Note 5: Free Cash Flow from Continuing Operations
AOL Time Warner evaluates operating performance based on several
factors, including free cash flow, from continuing operations, which
is defined as cash provided by continuing operations after deducting
capital expenditures and product development costs from continuing
operations, principal payments on capital leases, dividend payments
and partnership distributions. The comparability of AOL Time Warner's
free cash flow from continuing operations has been affected by certain
significant unusual and nonrecurring items in each period.
Specifically, AOL Time Warner's free cash flow from continuing
operations has been affected by the cash impact of significant and
nonrecurring items described in Note 2. In addition, free cash flow
from continuing operations has been affected by payments made in
settling other merger and restructuring liabilities. If these items
were excluded from reported free cash flow from continuing operations
in 2002, the aggregate net effect would be to increase free cash flow
from continuing operations by $163 million, from $1.200 billion to
$1.363 billion, for the three months ended September 30, 2002 and by
$565 million, from $3.434 billion to $3.999 billion, for the nine
months ended September 30, 2002. For the three month period ended
September 30, 2001, the aggregate net effect would be to increase free
cash flow from continuing operations by $217 million, from $820
million to $1.037 billion, on a pro forma basis (an increase in free
cash flow from continuing operations by $193 million, from $1.108
billion to $1.301 billion, on a historical basis). For the nine month
period ended September 30, 2001, the aggregate net effect would be to
increase free cash flow from continuing operations by $1.030 billion,
from $565 million to $1.595 billion, on a pro forma basis (an increase
in free cash flow from continuing operations by $981 million, from
$1.500 billion to $2.481 billion, on a historical basis).
Note 6: Intercompany Transactions
In the normal course of business, the AOL Time Warner segments
enter into transactions with one another. The most common types of
intercompany transactions include:
-- The Filmed Entertainment segment generating content revenue 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 and commerce revenue by cross-promoting the
products and services of all AOL Time Warner segments.
These intercompany transactions are recorded by each segment at
fair value as if the transactions were with third parties and,
therefore, impact segment performance. While intercompany 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. Revenues recognized by AOL Time Warner's segments and
eliminated as intercompany transactions in deriving consolidated
revenues are as follows:
*T
Three Months Ended Nine Months Ended
September 30, September 30,
Intercompany Revenues: 2002 2001 2002 2001
AOL $ 68 $ 40 $ 223 $ 90
Cable 37 11 103 32
Filmed Entertainment 381 208 684 576
Networks 146 133 414 402
Music 130 62 318 187
Publishing 34 8 59 26
Total Intercompany Revenues $ 796 $ 462 $1,801 $1,313
Included in the total intercompany revenues above are intercompany
advertising and commerce revenues, as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
Intercompany Advertising 2002 2001 2002 2001
and Commerce Revenues:
AOL $ 37 $ 40 $ 141 $ 90
Cable 31 11 89 32
Filmed Entertainment - - - -
Networks 36 38 113 115
Music - - - -
Publishing 34 8 59 26
Total Intercompany Advertising
and Commerce Revenues $ 138 $ 97 $ 402 $ 263
AOL TIME WARNER INC.
SUPPLEMENTAL FINANCIAL INFORMATION
(millions, except per share amounts)
(unaudited)
Calculation of Reported and Normalized Basic and
Diluted Income (Loss) Per Common Share(a)
Three Months Ended September 30,
2002 2001 2001
Historical Pro Forma Historical
Income (loss) before discontinued
operations and cumulative effect
of accounting change $ (55) $ 394 $ (987)
-------- -------- --------
Adjustments for significant and
nonrecurring items:
Merger and restructuring costs 77 134 134
Gain on sale of certain investments - - -
Loss on writedown of investments 733 196 196
-------- -------- --------
Pretax impact of adjustments 810 330 330
-------- -------- --------
Normalized income (loss) before income
tax impact of adjustments 755 724 (657)
-------- -------- --------
Income tax impact of adjustments (324) (132) (132)
-------- -------- --------
Normalized net income (loss) $ 431 $ 592 $ (789)
======== ======== ========
Average common shares outstanding - for
basic net income (loss) per common share 4,464.2 4,439.9 4,439.9
======== ======== ========
Average common shares outstanding - for
diluted net income (loss) per common
share 4,507.0 4,583.8 4,583.8
======== ======== ========
Basic income (loss) per common share
before discontinued operations and
cumulative effect of
accounting change $ (0.01) $ 0.09 $ (0.22)
======== ======== ========
Diluted income (loss) per common share
before discontinued operations and
cumulative effect
of accounting change $ (0.01) $ 0.09 $ (0.22)
======== ======== ========
Normalized basic income (loss) per
common share $ 0.10 $ 0.13 $ (0.18)
======== ======== ========
Normalized diluted income (loss) per
common share $ 0.10 $ 0.13 $ (0.18)
======== ======== ========
Nine Months Ended September 30,
2002 2001 2001
Historical Pro Forma Historical
Income (loss) before discontinued
operations and cumulative effect
of accounting change $ 331 $ 934 $ (3,074)
-------- -------- --------
Adjustments for significant and
nonrecurring items:
Merger and restructuring costs 184 205 205
Gain on sale of certain investments (90) - -
Loss on writedown of investments 1,678 816 816
-------- -------- --------
Pretax impact of adjustments 1,772 1,021 1,021
-------- -------- --------
Normalized income (loss) before income
tax impact of adjustments 2,103 1,955 (2,053)
-------- -------- --------
Income tax impact of adjustments (709) (408) (408)
-------- -------- --------
Normalized net income (loss) $1,394 $ 1,547 $ (2,461)
======== ======== ========
Average common shares outstanding - for
basic net income (loss) per common share 4,449.2 4,429.2 4,429.2
======== ======== ========
Average common shares outstanding - for
diluted net income (loss) per
common share 4,523.1 4,593.8 4,593.8
======== ======== ========
Basic income (loss) per common share
before discontinued operations and
cumulative effect of
accounting change $ 0.07 $ 0.21 $ (0.69)
======== ======== ========
Diluted income (loss) per common share
before discontinued operations and
cumulative effect
of accounting change $ 0.07 $ 0.20 $ (0.69)
======== ======== ========
Normalized basic income (loss) per
common share $ 0.31 $ 0.35 $ (0.56)
======== ======== ========
Normalized diluted income (loss) per
common share $ 0.31 $ 0.34 $ (0.56)
======== ======== ========
(a) Amounts presented herein exclude the impact of the approximate
$54 billion cumulative effect of an accounting change
recognized in the first quarter of 2002 and the impact of
discontinued operations.
AOL TIME WARNER INC.
SUPPLEMENTAL FINANCIAL INFORMATION - (Continued)
(millions, except per share amounts)
(unaudited)
Calculation of Reported and Normalized
Diluted Cash Earnings Per Share(a)
Three Months Ended September 30,
2002 2001 2001
Historical Pro Forma Historical
Income (loss) before income taxes,
discontinued operations and
cumulative effect of
accounting change $ (80) $ 660 $ (813)
-------- -------- --------
Amortization of goodwill and other
intangible assets 181 155 1,784
Amortization of equity method investee
goodwill and intangible assets 2 21 120
Cash taxes paid (70) (59) (59)
-------- -------- --------
Cash earnings 33 777 1,032
-------- -------- --------
Pretax adjustments for significant and
nonrecurring items(b) 810 330 330
-------- -------- --------
Normalized cash earnings $ 843 $ 1,107 $ 1,362
======== ======== ========
Average common shares outstanding- basic 4,464.2 4,439.9 4,439.9
Dilutive effect of stock options 42.8 143.9 143.9
-------- -------- --------
Average common shares outstanding -
diluted(c) 4,507.0 4,583.8 4,583.8
======== ======== ========
Diluted cash earnings per common share $ 0.01 $ 0.17 $ 0.22
======== ======== ========
Normalized diluted cash earnings per
common share $ 0.19 $ 0.24 $ 0.30
======== ======== ========
Nine Months Ended September 30,
2002 2001 2001
Historical Pro Forma Historical
Income (loss) before income taxes,
discontinued operations and
cumulative effect of
accounting change $ 610 $ 1,632 $ (2,624)
-------- -------- --------
Amortization of goodwill and other
intangible assets 520 494 5,318
Amortization of equity method investee
goodwill and intangible assets 9 21 406
Cash taxes paid (180) (263) (263)
-------- -------- --------
Cash earnings 959 1,884 2,837
-------- -------- --------
Pretax adjustments for significant and
nonrecurring items(b) 1,772 1,021 1,021
-------- -------- --------
Normalized cash earnings $ 2,731 $ 2,905 $ 3,858
======== ======== ========
Average common shares outstanding- basic 4,449.2 4,429.2 4,429.2
Dilutive effect of stock options 73.9 164.6 164.6
-------- -------- --------
Average common shares outstanding -
diluted(c) 4,523.1 4,593.8 4,593.8
======== ======== ========
Diluted cash earnings per common share $ 0.21 $ 0.41 $ 0.62
======== ======== ========
Normalized diluted cash earnings per
common share $ 0.60 $ 0.63 $ 0.84
======== ======== ========
(a) Amounts presented herein exclude the impact of the approximate
$54 billion cumulative effect of an accounting change
recognized in the first quarter of 2002 and the results from
discontinued operations.
(b) Adjustments to diluted cash earnings per share are the same as
the adjustments to basic and diluted earnings per share. See
itemized pretax impact of adjustments in "Calculation of
Reported and Normalized Basic and Diluted Income (Loss) Per
Common Share."
(c) Diluted average common shares outstanding assumes the exercise
of dilutive stock options.
AOL TIME WARNER INC.
SUPPLEMENTAL FINANCIAL INFORMATION - (Continued)
(millions, except per share amounts)
(unaudited)
Calculation of Reported and Normalized Free Cash Flow (Deficit)
Three Months Ended September 30,
2002 2001 2001
Historical Pro Forma Historical
Operating cash flow $1,997 $1,701 $1,967
Less discontinued operations:
Net (income) loss (112) (1) 10
Other changes 57 (111) (122)
------ ------ ------
Operating cash flow from continuing operations 1,942 1,589 1,855
Capital expenditures and product development
costs from continuing operations (724) (769) (747)
Principal payments on capital leases from
continuing operations (18) - -
Dividends paid and partnership distributions
from continuing operations - - -
------ ------ ------
Free cash flow from continuing operations 1,200 820 1,108
Adjustments for significant and nonrecurring
items(a) 163 217 193
------ ------ ------
Normalized free cash flow from
continuing operations $1,363 $1,037 $1,301
====== ====== ======
Nine Months Ended September 30,
2002 2001 2001
Historical Pro Forma Historical
Operating cash flow $ 5,925 $3,356 $4,230
Less discontinued operations:
Net (income) loss (113) (3) 29
Other changes (265) (361) (393)
------ ------ ------
Operating cash flow from continuing
operations 5,547 2,992 3,866
Capital expenditures and product
development costs from continuing operations (2,078) (2,423) (2,362)
Principal payments on capital leases from
continuing operations (35) - -
Dividends paid and partnership
distributions from continuing operations - (4) (4)
Free cash flow from continuing operations 3,434 565 1,500
Adjustments for significant and
nonrecurring items(a) 565 1,030 981
Normalized free cash flow from
continuing operations $ 3,999 $1,595 $2,481
(a) For a discussion of the adjustments to free cash flow, please
see Note 5.
*T
--30--sdg/ny* mem/ny
CONTACT: AOL Time Warner Inc.
Edward Adler (Corporate Communications)
212/484-6630
or
Tricia Primrose (Corporate Communications)
212/484-7450
or
John Martin (Investor Relations)
212/484-6579
or
Jim Burtson (Investor Relations)
212/484-8719
KEYWORD: NEW YORK
INDUSTRY KEYWORD: ENTERTAINMENT INTERNET CABLE MUSIC SOFTWARE
PUBLISHING TELEVISION/RADIO EARNINGS CONFERENCE CALLS ADVISORY
SOURCE: AOL Time Warner Inc.
COPYRIGHT 2002 Business Wire
COPYRIGHT 2008 Gale, Cengage Learning
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