Lost: $99B, and Ted

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Conceding a massive $99 billion loss for 2002, AOL Time Warner Inc.'s strategy of conservative expectations reached the extreme last week, when the company declared that 2003 would be a no-growth year.

It could also be the year of no vice chairman, as the man who held that job, Ted Turner, announced he was resigning at the annual shareholders meeting in May — the same time that former chairman Steve Case hands that title over to CEO Richard Parsons.

AOL has been pounded for failing to hit lofty goals. So Parsons, who was named CEO last May, has been intent on not making promises he can't keep.

"Despite 2002's success, we think 2003 will be a challenging year," Parsons told analysts during a conference last Wednesday. With 15 percent to 25 percent declines expected in the America Online Internet unit this year, as well as slower cable-advertising sales and continued difficulties at Warner Music Group, revenue should grow less than 10 percent this year and cash flow growth should essentially be flat.

Stock took hit

AOL Time Warner stock plunged more than 14 percent ($1.96) on Jan. 30, to $12 each.

The company also opted to write down its assets by $45 billion in the fourth quarter, mainly reflecting the continued deterioration of the AOL unit.

Combined with a $54-billion write-down taken in the first quarter of 2002, the $99-billion loss is thought to be the largest in U.S. corporate history. The write-down surprised analysts, who thought the charge would be between $10 billion and $18 billion for the quarter.

AOL said $33 billion of the write-down was due to goodwill impairment at AOL; $10.5 billion at its cable unit; $4 billion at filmed entertainment; and $646 million at Warner Music.

The AOL unit continued to struggle, reporting its first subscriber loss in years. Revenue and cash flow were also down — 8 percent and 11.2 percent, respectively.

Time Warner Cable had revenue growth of 12 percent and cash flow growth of 13 percent, while the cable networks' cash flow rose 46 percent.

But Parsons said cable growth only would hit the high single-digits or low double-digits in 2003, "which is slower than cable's recent history."

UBS Warburg cable debt and equity analyst Aryeh Bourkoff called the cable guidance "somewhat disappointing," given that such MSOs as Cox Communications Inc. are predicting cash flow growth of 14 percent to 15 percent this year.

Parsons also laid out a plan to reduce AOL Time Warner's total debt from its current $26 billion to $20 billion by the end of 2004.

For this year, the target is a debt-to-cash flow ratio of 2.25 to 2.75, suggesting debt would be reduced to $21 billion to $25 billion.

AOL recently raised $800 million by selling its 8.4 percent stake (about 80 million shares) in Hughes Electronics Corp.

Cash for Comcast

Parsons said proceeds from the planned initial public offering of Time Warner Cable in the second quarter would pay all or a portion of a cash obligation to Comcast Corp. But later this year, AOL Time Warner is obligated to pay Vivendi Universal S.A. about $800 million for its share of AOL Europe.

In restructuring its Time Warner Entertainment partnership last year, AOL Time Warner agreed to pay Comcast $2.1 billion in cash, $1.5 billion in AOL Time Warner stock and give it 21 percent of the IPO.

AOL Time Warner has been widely expected to sell its 50 percent stakes in Comedy Central and Court TV, as well as its professional sports teams: baseball's Atlanta Braves, basketball's Atlanta Hawks and hockey's Atlanta Thrashers.

Several analysts have estimated the value of the company's interests in the two cable networks at about $2 billion. The sports teams could fetch a combined $757 million, according to a Forbes
estimate.

Some published reports last week speculated Turner would be interested in buying the Braves and Cable News Network, but AOL Time Warner officials dismissed the rumors.

"Ted, in his letter to Dick Parsons, made it very clear where his intentions lie going forward," said AOL Time Warner spokeswoman Tricia Primrose.

Turner was one of the last architects of the AOL Time Warner merger, a $106 billion union that just three years ago was expected to usher in a new era of Internet and old-media synergy.

As the America Online unit has faltered, so have the men who helped engineer the deal. Last May, former AOL Time Warner and Time Warner Inc. CEO Gerald Levin stepped down amid intense pressure from investors. Former AOL chief operating officer Bob Pittman was forced out in July. In December, AOL chairman Steve Case said he would resign at the company's annual meeting in May.

In a statement, Turner said he had been thinking of leaving AOL Time Warner for some time to devote more energies to philanthropy.

"I have not come to this decision lightly," Turner said in a statement. "As you know, this company has been a significant part of my life for over fifty years. I have the deepest respect for you, the senior management and my fellow members of the board. With this team in place, I am optimistic that the company will be able to move forward and reach its true potential."

It was unclear whether Turner would remain on the board. Primrose said Parsons would like Turner to stay as a board member, but added the two executives are slated to meet soon to discuss it.

Leaving the board of directors would free him to sell a large amount of his stock in the company. Turner currently owns about 148.4 million shares of AOL Time Warner stock, worth about $2 billion.

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