AOL Time Warner Reports Results for First Quarter 2002.Business Editors NEW YORK--(BUSINESS WIRE)--April 24, 2002 AOL (A division of Time Warner, Inc., New York, NY, www.aol.com) The world's largest online information service with access to the Internet, e-mail, chat rooms and a variety of databases and services. Time Warner Inc. (NYSE NYSE See: New York Stock Exchange :AOL)-- Unless otherwise specified, AOL Time Warner's results discussed below have been adjusted to normalize normalize to convert a set of data by, for example, converting them to logarithms or reciprocals so that their previous non-normal distribution is converted to a normal one. out the effect of merger and restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). costs, as well as unusual or non-recurring items that are discussed in detail in the accompanying ac·com·pa·ny v. ac·com·pa·nied, ac·com·pa·ny·ing, ac·com·pa·nies v.tr. 1. To be or go with as a companion. 2. footnotes. Supplemental financial information is attached that provides the Company's reported results 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 As a matter of form or for the sake of form. Used to describe accounting, financial, and other statements or conclusions based upon assumed or anticipated facts. The phrase pro forma basis assuming that the acquisitions of AOL Europe Europe (y  r`əp), 6th largest continent, c.4,000,000 sq mi (10,360,000 sq km) including adjacent islands (1992 est. pop. 512,000,000). and IPC Media IPC Media the UK's leading consumer magazine and digital publisher, with an unrivalled portfolio of brands, selling over 350 million copies each year. It was formed as International Publishing Company and the adoption of
the new accounting standard on Goodwill and Other Intangible Assets Intangible AssetAn asset that is not physical in nature. Notes: Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. had occurred on January January: see month. 1, 2001. AOL Time Warner Reports Results for First Quarter 2002 Revenues Increase 4% to $9.8 Billion; Normalized EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become Grows 3% to $2.1 Billion; Normalized Free Cash Flow up 174% to $1.3 Billion Subscription Revenue Growth Remains Strong at 14%, Led by AOL and Cable AOL Time Warner Inc. (NYSE:AOL) today reported financial results for its first quarter ended March 31, 2002. Revenues for the quarter increased 4% over the same period in 2001 to $9.8 billion. Subscription revenues increased 14% to $4.7 billion, reflecting strong subscriber subscriber, n the person, usually the employee, who represents the family unit in relation to the prepayment plan. Other family members are dependents. Also called certificate holders or enrollees. growth in the Company's AOL and Cable businesses. Content and Other revenues were essentially flat at $3.2 billion, primarily because of robust theatrical results in the current year, offset by strong prior-year syndication See syndication format. sales. Advertising and Commerce revenues declined 13% to $1.8 billion, reflecting weakness in the overall advertising market and difficult comparisons against last year. EBITDA for the quarter increased 3% to $2.05 billion, up from $1.98 billion in 2001. Cash EPS (Encapsulated PostScript) A PostScript file format used to transfer a graphic image between applications and platforms. EPS files contain PostScript code as well as an optional preview image in TIFF, WMF, PICT or EPSI, the latter being an ASCII-only format. for the quarter increased 13% to $0.18, compared to $0.16 a year earlier, as a result of the increase in EBITDA, lower interest expense and lower tax payments, which more than offset increased depreciation expense and losses from equity investments. EBITDA margin for the first quarter of 2002 was flat at 21%, compared with the first quarter of 2001. Free Cash Flow was $1.3 billion for the quarter, up 174% from $472 million in the first quarter of 2001. The increase in Free Cash Flow was due principally to strong cash flow from theatrical releases and improved overall working capital, resulting in part from the receipt of certain cash payments earlier in the year than expected. Consolidated con·sol·i·date v. con·sol·i·dat·ed, con·sol·i·dat·ing, con·sol·i·dates v.tr. 1. To unite into one system or whole; combine: Reported Results Before the cumulative effect of the adoption of FAS 142, the Company reported a net loss of $1 million, or break-even per basic common share in the first quarter of 2002 (which includes certain nonrecurring Non`re`cur´ring a. 1. Nonrecurrent; as, the costs of a layoff are considered as a nonrecurring expense s>. items totaling $688 million of pretax losses pretax loss A loss reported before tax benefits are considered. ). This compares to a reported net loss of $1.4 billion, or $0.31 loss per basic common share, in the same quarter of 2001 (which includes certain non-recurring items totaling $691 million of pretax losses, and goodwill and intangible amortization of approximately $1.8 billion which did not recur in 2002 due to the adoption of FAS 142). The first-quarter adoption of FAS 142 resulted in a one-time one-time adj. 1. or one·time a. Occurring or undertaken only once: a one-time winner in 1995. b. , non-cash charge Non-Cash Charge A charge off, made by a company against earnings, that does not require an initial outlay of cash. Notes: Non-cash charges are typically against the depreciation, amortization, and depletion accounts on a company's balance sheet. that reduced the carrying value Carrying Value Also know as "book value," it is a company's total assets minus intangible assets and liabilities, such as debt. Notes: This is different than market value, as it can be higher or lower depending on the circumstances. of the Company's goodwill by approximately $54 billion. After the effect of this accounting change, the Company incurred a net loss of $54.2 billion for the quarter, or a loss of $12.25 per basic common share. Progress in Key Areas of Growth Chief Executive Officer-elect Dick Parsons Parsons, city (1990 pop. 11,924), Labette co., SE Kans.; inc. 1871. It is a shipping point for dairy products, grain, and livestock. Manufactures include ammunition, wire and paper products, plastics, and appliances. said: "In this quarter, we made important progress in areas of our business that will drive the future growth of AOL Time Warner. We expanded our base of subscribers to nearly 150 million relationships, seven million more than a year ago. We're we're Contraction of we are. we're we are also continuing to expand our broadband broadband Term describing the radiation from a source that produces a broad, continuous spectrum of frequencies (contrasted with a laser, which produces a single frequency or very narrow range of frequencies). offerings, which are speeding the delivery of next-generation video, digital and interactive services to consumers. We achieved impressive results in theatrical releases, anchored by our franchise films, and we look forward to continued strong performance there as we progress through the year. In addition, I'm I'm Contraction of I am. Our Living Language Speakers of some scattered varieties of American English sometimes use I'm instead of I've or I have in present perfect constructions, as in pleased with the pace of integration among our international acquisitions, IPC Media and AOL Europe. "Overall, except for online advertising, the performance of our businesses remains at least as strong as we expected when we provided our earlier outlook, and we anticipate that they will collectively drive growth this year. The weakness of the Internet advertising Delivering ads to Internet users via Web sites, e-mail, ad-supported software and Internet-enabled cellphones. Also called an "ad network," Internet advertising organizations act as a middleman between the advertiser and the Web sites and software publishers that display the ads. business is still a challenge, however, and we have taken decisive steps to address it. Bob Pittman Pittman may refer to: People
Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the ." Chief Operating Officer-elect Bob Pittman said: "America Online continues to be the clear leader in an emerging growth industry. We have strong consumer loyalty, with more people online for more of the day than ever before. Looking ahead, the key to AOL's future success is what drove its past success - delivering what consumers want. We have an obvious challenge in the advertising side of the business and turning that around is my number one priority." Business Outlook The Company reaffirmed that it expects full-year revenue growth to increase in the 5%-8% range. Because of ongoing weakness in its online advertising business, the Company now expects full-year EBITDA growth to be in the 5%-9% range. For the second quarter of 2002, the Company expects revenue growth to be in the mid-single digits and EBITDA to be flat when compared with the same period in 2001. Performance of Divisions The schedules below reflect AOL Time Warner's performance for the first quarter (in millions):
Normalized Reported
Actual Pro Forma Actual Actual
2002 2001 2002 2001
------ --------- ------ ------
Revenues(1):
AOL $2,297 $2,302 $2,297 $2,108
Cable 2,012 1,693 2,012 1,693
Filmed Entertainment 2,136 2,212 2,136 2,212
Networks 1,786 1,699 1,786 1,699
Music 947 904 947 904
Publishing 1,081 1,051 1,081 929
Intersegment Eliminations (495) (428) (495) (428)
-------- ------- ----- -------
Total Revenues $9,764 $9,433 $9,764 $9,117
-------------- ====== ====== ====== ======
EBITDA:
AOL $ 433 $ 507 $ 433 $ 684
Cable 841 768 841 768
Filmed Entertainment 181 113 181 113
Networks 431 449 431 449
Music 96 94 96 94
Publishing 145 127 145 113
Corporate (79) (74) (79) (74)
Merger and restructuring
costs - - (107) (71)
Intersegment Eliminations 2 (1) 2 (1)
------- ---------- ------- ----------
Total EBITDA $2,050 $1,983 $1,943 $2,075
------------ ====== ====== ====== ======
(1) Revenues for 2001 reflect certain income statement reclassifications related to the adoption of new accounting guidance, which resulted in net increases of approximately $37 million in both revenue and expenses for the first quarter of 2001. For additional detail on these reclassifications, see the accompanying notes to this release. America Online America Online's EBITDA declined 15% on essentially flat revenue. AOL's revenue benefited from increases in Subscriptions, which were more than offset by declines in Advertising and Commerce, and in Content and Other. Subscription growth remained robust, with revenues increasing 19%. Advertising and Commerce revenues decreased by 31% in the quarter, reflecting continued softness in the online advertising market and difficult comparisons against strong revenue growth in the first quarter of 2001. Within the Advertising and Commerce category, the declines in advertising were partially offset by increased intercompany advertising and improvements in online commerce. Content and Other revenues declined 44% in the quarter to $79 million, primarily as a result of the termination of the iPlanet The brand name for software from the Sun-Netscape Alliance. Most Netscape products were renamed iPlanet after the joint venture was organized. See Sun-Netscape Alliance. agreement. EBITDA results reflected the decline in high-margin advertising revenues and the end of the iPlanet agreement, which were partially offset by increases in revenues and cost-efficiencies in AOL Europe's operations. Both the AOL membership base and the average time members spend online continue to grow. The AOL service added 1.4 million members worldwide in the quarter, to end the period at 34.6 million, or 5.8 million more than a year ago. This membership total includes 26.1 million in the U.S., 5.9 million in AOL Europe, and 2.6 million throughout the rest of the world. During the quarter, AOL members in the U.S. spent an average of 71 minutes online per day. AOL continued to expand the availability of the AOL High Speed Broadband service See broadband and broadband service provider. this quarter. This service is now available in 30 Time Warner Cable This article or section needs sources or references that appear in reliable, third-party publications. Alone, primary sources and sources affiliated with the subject of this article are not sufficient for an accurate encyclopedia article. markets and is expected to be available in the remaining nine by the end of the summer. AOL High Speed Broadband service is also available through DSL DSL in full Digital Subscriber Line Broadband digital communications connection that operates over standard copper telephone wires. It requires a DSL modem, which splits transmissions into two frequency bands: the lower frequencies for voice (ordinary and satellite partnerships. AOL Music extended its leadership as the top music destination on the Internet and served as the online home for successful marketing campaigns for leading record labels and artists, including a promotion that drew 2.5 million listeners to selections from Alanis Morissette's "Under Rug rug: see carpet. Swept" and helped the album debut at number one on the Soundscan SoundScan™ Osteoporosis An ultrasound used to assess bone density and thickness of cortical bone. See Bone densitometry. charts. AOL Music also webcast Clive CLIVE Computer-aided Learning in Veterinary Education. A consortium of six veterinary schools in the United Kingdom providing computer based learning in veterinary undergraduates courses. Davis' pre-Grammy Awards gala exclusively for AOL High Speed Broadband subscribers. Cable Cable's EBITDA was up 10% in the quarter on a 19% increase in revenues. Revenue growth reflected gains in both the Subscription and Advertising and Commerce categories. Subscription revenues grew 16%, driven by increased digital and high-speed high-speed adj. 1. Operated or designed for operation at high speed: a high-speed food processor. 2. Taking place at high speed: a high-speed chase. 3. data subscribers, as well as higher basic cable rates. Advertising and Commerce revenues rose 60% due to increased advertising from programmers This is a list of programmers notable for their contributions to software, either as original author or architect, or for later additions. See also: Game programmer, List of computer scientists promoting channel launches and higher intercompany advertising, as well as a 12% increase in general advertising sales. The EBITDA gains reflect the revenue increases, which were partially offset by higher programming expenses, costs associated with the rollout of new advanced digital and high-speed data services and development spending in the Company's new Interactive Video division. Basic cable subscribers increased at an annual rate of 0.8%. Time Warner Cable remains the leading provider in the U.S. of advanced video services and during the quarter, it added 265,000 net digital subscribers, for a total of 3.6 million. This is an increase of 1.5 million digital subscribers, or 68% from the same period last year. As the leading U.S. broadband provider, Time Warner Cable added 278,000 net high-speed data subscribers this quarter, for a total of 2.2 million. This is an increase of 1.0 million high-speed data subscribers, or 86%, since the same period last year. At the end of the quarter, digital subscribers represented 28% of basic cable subscribers while high-speed data subscribers represented 11% of eligible homes passed. To date, the Company has launched video-on-demand The ability to deliver a movie, sports event or other video program to a TV set whenever the customer requests it. Video-on-demand (VOD) typically refers to free and paid programs from the cable TV companies or the telephone companies that offer video over DSL lines. services in 12 of its markets and subscription-video-on-demand in three. Filmed Entertainment Filmed Entertainment's EBITDA increased 60% for the quarter despite a revenue decline of 3%. Revenue decreases occurred in Content and Other revenues, as well as in Advertising and Commerce. The 1% decrease in Content and Other revenues reflected slight declines in home video revenues this quarter and the strength of television syndication in the same period last year, when the second cycle syndication rights to Seinfeld
BROS Benefits and Retirement Operations Section (King County, Washington) BROS Barnes and Richmond Operatic Society (London, UK) . Studio Stores last year. For the quarter, EBITDA grew significantly on the continued strong performance of highly profitable films released in the fourth quarter of 2001. Warner Bros. and New Line achieved a combined domestic market share of 26% this quarter -- the highest in the industry. The studios also set new international box office records in the quarter. Strong theatrical results were driven by the outstanding carry-over The designation of the process by which net operating loss for one year may be applied, as provided by federal tax law, to each of several taxable years following the taxable year of such loss. performance of Harry Potter A potter is someone who makes pottery. Potter may also refer to: People
The Company's studios earned five Oscars, including four for New Line's The Lord of the Rings and a Best Actor Academy Award for Denzel Washington Denzel Hayes Washington, Jr. (born December 28, 1954) is a two-time Academy Award and Golden Globe Award-winning American actor and director. He has garnered much critical acclaim for his portrayals of several real-life figures, such as Steve Biko, Malcolm X, Rubin "Hurricane" in Warner Bros.' Training Day. Networks Networks' EBITDA decreased 4% in the quarter on revenue growth of 5%. Revenue gains were driven by strong subscription additions and increased rates, as well as increases in Content and Other revenue, which were partially offset by lower Advertising and Commerce revenue. Subscription revenue gains of 9% were led by the HBO Hyperbaric oxygen therapy (HBO) A form of oxygen therapy in which the patient breathes oxygen in a pressurized chamber. Mentioned in: Ozone Therapy and Cinemax pay services, and by the TNT TNT: see trinitrotoluene. TNT in full trinitrotoluene Pale yellow, solid organic compound made by adding nitrate (−NO2) groups to toluene. , CNN CNN or Cable News Network Subsidiary company of Turner Broadcasting Systems. It was created by Ted Turner in 1980 to present 24-hour live news broadcasts, using satellites to transmit reports from news bureaus around the world. , Turner Classic Movies, TBS TBS Tablespoon TBS Tokyo Broadcasting System, Inc. TBS Treasury Board Secretariat (Canada) TBS Tris-Buffered Saline TBS Tris Buffered Saline TBS Turn Based Strategy (games) and Cartoon Network For Cartoon Network outside of the United States, see . Cartoon Network is a cable television network created by Turner Broadcasting which primarily shows animated programming. cable networks. Advertising and Commerce declines of 4% were driven by the overall softness of the advertising market. Content and Other revenue increased 15%, primarily due to higher home video sales of HBO's original programming. The EBITDA decrease reflects reduced high-margin advertising revenue and increased programming, marketing and newsgathering news·gath·er·ing adj. Of, relating to, or involving the research and reportage of news: a worldwide newsgathering operation. news costs, partially offset by increases in Subscription as well as Content and Other revenues. In the first quarter, the revitalized re·vi·tal·ize tr.v. re·vi·tal·ized, re·vi·tal·iz·ing, re·vi·tal·iz·es To impart new life or vigor to: plans to revitalize inner-city neighborhoods; tried to revitalize a flagging economy. CNN saw dramatic audience gains versus the same period last year -- up 50% in ratings, 57% in household delivery, 55% in total viewers VIEWERS. Persons appointed by the courts to see and examine certain matters, and make a report of the facts together with their opinion to the court. In practice they are usually appointed to lay out roads and the like. Vide Experts. and 111% in adults 18-34, all in total day programming. The revamped CNN Headline HEADLINE Hybrid Electronic Access and Delivery in the Library Networked Environment News has experienced a 29% increase in total viewers compared to the same time period in 2001. TBS Superstation su·per·sta·tion n. A television or radio station that broadcasts to a nationwide audience by satellite, cable, or both. and TNT were the leading basic cable networks among key adult demographics The attributes of people in a particular geographic area. Used for marketing purposes, population, ethnic origins, religion, spoken language, income and age range are examples of demographic data. this quarter, ranking in the top three among adults 18-34 and 18-49 in primetime. Cartoon Network finished the quarter with its highest-ever primetime delivery of kids 2-11 and posted a 20% increase in total day viewers on average versus the same period last year. The WB, the leading network among female teens, has the fastest-growing program on television -- Gilmore Girls Gilmore Girls is an American television drama/comedy created by Amy Sherman-Palladino and starring Lauren Graham and Alexis Bledel. The series premiered on The WB on October 5, 2000 and ended on May 15, 2007, with its seventh season, which aired on The CW Television Network. , from Warner Bros. Television Warner Bros. Television is the television production and distribution arm of Time Warner's Warner Bros. Entertainment and The CW Television Network (in which Warner has a 50% ownership stake). , which is up 44% in total viewers over last year's season-to-date delivery. Smallville Smallville is a generic nickname for any small town. Smallville may also refer to:
HBO's quality original programming won six Golden Globe Awards, the most of any TV network. Additionally, HBO documentaries won two Academy Awards, with Murder on a Sunday Morning Sunday Morning may refer to:
Music Music's EBITDA increased 2% from the prior year on revenue increases of 5%. Revenue and EBITDA growth reflected improved performance at the music labels worldwide, which was offset in part by unfavorable currency exchange rates. Warner Music Group Warner Music Group (WMG) is one of the four major record labels. Warner Music Group also has a publishing arm, Warner/Chappell Music, which dates back to 1929, when Jack Warner, president of Warner Bros. Pictures Inc. continues to improve its competitive position. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Soundscan, Warner Music Group's domestic album market share through March 31 was 18.0%, up from 15.7% in the same period last year. Top worldwide sellers in the quarter include new releases from Alanis Morissette and Brandy brandy [for brandywine, from Du.,=burnt, i.e., distilled, wine], strong alcoholic spirit distilled from wine or from marc, the residue of the wine press. The most noted brandy is cognac, made from white grapes in the Charente district of France. as well as strong carryover carryover n. in taxation accounting, using a tax year's deductions, business losses or credits to apply to the following year's tax return to reduce the tax liability. (See: carryback) sales from Linkin Park, Enya, P.O.D., Laura Pausini and The Lord of the Rings soundtrack. Grammy Grammy award for musical achievement. [Am. Cult.: Misc.] See : Music Grammy awarded by the National Academy of Recording Arts and Sciences for the best in the recording field. [Am. Hist.: Misc.] See : Prize winners included Enya's A Day Without Rain for Best New Age Album, Eric ERIC Educational Research Information Clearinghouse ERIC Educational Resources Information Center ERIC ERISA Industry Committee ERIC Epidemiologic Research and Information Center (Durham, NC) Clapton's Reptile reptile, name for the dry-skinned, usually scaly, cold-blooded vertebrates (see Chordata) of the order Reptilia. Reptiles are found in a variety of habitats throughout the warm and temperate regions (except on some islands), with the greatest variety in the tropics. for Best Pop Instrumental Performance, Linkin Park's Crawling for Best Hard Rock Performance, Missy Elliott's Get Ur Freak On for Best Rap Solo Performance, Yolanda Yolanda can refer to:
Couple dance from the Dominican Republic or Haiti, danced throughout Latin America. Originally a folk dance, it has become a ballroom dance, where it is danced with a limping step, the weight always on the same foot. Varieties include the jaleo and juangomero. Album and Brain in a Box's The Science Fiction Collection for Best Boxed Recording Package. Publishing Publishing's EBITDA grew 14% in the quarter on revenue gains of 3%. Revenue growth reflected increases in Advertising and Commerce as well as Content and Other revenues, which were partially offset by a decline in Subscription revenues. Subscription revenues were down 8% from the previous year, primarily due to fewer publication days in the quarter, which resulted in the production of fewer weekly magazine issues. Advertising and Commerce revenues grew 3%, as continued softness in the advertising market and lower revenues from Time Life's direct marketing business were more than offset by new revenue from Synapse synapse (sĭn`ăps), junction between various signal-transmitter cells, either between two neurons or between a neuron and a muscle or gland. A nerve impulse reaches the synapse through the axon, or transmitting end, of a nerve cell, or neuron. , which was acquired in December December: see month. of 2001. Content and Other revenues were up 24%, primarily driven by the carryover success of 2001 bestsellers and the strength of new releases at the AOL Time Warner Book Group. EBITDA results reflected the Commerce and Content revenue gains and cost savings related to the integration of IPC Media into the Company's operations. Time Inc. posted a 25.0% share of the advertising market this quarter, up from 23.4% in the same period last year, according to the Publishers Information Bureau. This represents Time Inc.'s best first-quarter market share in more than a decade. Three Time Inc. titles were included in the top ten of Adweek's annual "Hot List" for 2002: Teen People ranked 2nd, In Style 5th, and Cooking Light 7th. Underscoring the Company's ability to build publishing franchises, five of the magazines in the "10 Under 40" category (top-ten titles with revenues under $40 million) were Time Inc. publications: People en Espanol ranked 2nd, Real Simple 3rd, TransWorld Skateboarding TRANSWORLD SKATEboarding is a skateboarding magazine, website, and production company owned by Bonnier Corporation. Founded in 1983, TWS was a response to Thrasher Magazine and specifically to the December 1982 article ‘Skate and Destroy’ written by C.R. 5th, Sports Illustrated Sports Illustrated is the largest weekly American sports magazine owned by media conglomerate Time Warner. It has over 3 million subscribers and is read by 23 million adults each week, including over 18 million men, 19% of the adult males in the country. for Kids 6th, and Coastal Living 7th. AOL Time Warner Book Group had 26 New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of Times bestsellers during the first quarter, including 11 new releases and 15 continuing bestsellers from 2001. Popular new releases this quarter included 2nd Chance and First to Die by James Patterson
About AOL Time Warner AOL Time Warner is the world's first Internet-powered media and communications company Communications Company is a communications unit of the United States Marine Corps. They are part of Combat Logistics Regiment 37 , 3rd Marine Logistics Group (3MLG) and III Marine Expeditionary Force (III MEF). The unit is based out of the Marine Corps Base Camp Smedley D. , whose industry-leading businesses include interactive services, cable systems, publishing, music, networks and filmed entertainment. The Company's earnings conference call can be heard live on the Internet at 4:30 pm ET on Wednesday Wednesday: see week. , April 24. To listen to the call, visit www.aoltimewarner.com/investors or AOL Keyword (1) A word used in a text search. (2) A word in a text document that is used in an index to best describe the contents of the document. (3) A reserved word in a programming or command language. 1. : IR. Caution Concerning Forward-Looking Statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. This document includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995. These statements are based on management's current expectations or beliefs, and are subject to uncertainty and changes in circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or . Actual results may vary materially from those expressed or implied by the statements herein due to changes in economic, business, competitive, technological and/or and/or conj. Used to indicate that either or both of the items connected by it are involved. Usage Note: And/or is widely used in legal and business writing. regulatory reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. 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 Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. in the section entitled en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: "Caution Concerning Forward-Looking Statements." 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.
AOL TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
2002 2001
Historical Historical
---------- ----------
ASSETS (millions, except
per share amounts)
Current assets
Cash and equivalents $ 857 $ 719
Receivables, less allowances of
$2.036 and $1.889 billion 4,904 6,054
Inventories 1,900 1,791
Prepaid expenses and other
current assets 1,875 1,710
-------- --------
Total current assets 9,536 10,274
Noncurrent inventories and film costs 3,519 3,490
Investments, including
available-for-sale securities 6,178 6,886
Property, plant and equipment 12,850 12,684
Intangible assets subject to amortization 7,419 7,289
Intangible assets not subject to amortization 37,728 37,708
Goodwill 80,178 127,424
Other assets 2,949 2,804
-------- --------
Total assets $160,357 $208,559
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,105 $ 2,257
Participations payable 1,342 1,253
Royalties and programming costs payable 1,555 1,515
Deferred revenue 1,636 1,456
Debt due within one year 102 48
Other current liabilities 5,799 6,443
-------- --------
Total current liabilities 12,539 12,972
Long-term debt 28,380 22,792
Deferred income taxes 11,173 11,260
Deferred revenue 1,024 1,054
Other liabilities 4,867 4,819
Minority interests 4,407 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, 4.276 and
4.258 billion shares outstanding 42 42
Paid-in capital 155,336 155,172
Accumulated other comprehensive income, net 21 49
Retained earnings (57,434) (3,194)
-------- --------
Total shareholders' equity 97,967 152,071
-------- --------
Total liabilities and shareholders' equity $160,357 $208,559
======== ========
See accompanying notes.
AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31,
(Unaudited)
2002 2001 2001
Historical Pro Forma(a) Historical
---------- --------- ----------
(millions, except per share amounts)
Revenues:
Subscriptions $ 4,740 $ 4,150 $ 3,889
Advertising and commerce 1,825 2,097 2,036
Content and other 3,199 3,186 3,192
-------- -------- ---------
Total revenues 9,764 9,433 9,117
Costs of revenues (5,830) (5,534) (5,047)
Selling, general and
administrative (2,452) (2,371) (2,371)
Amortization of goodwill and
other intangible assets (166) (166) (1,775)
Merger and restructuring costs (107) (71) (71)
-------- -------- ---------
Operating income (loss) 1,209 1,291 (147)
Interest expense, net (379) (435) (319)
Other expense, net (698) (728) (872)
Minority interest expense (126) (121) (104)
-------- -------- ---------
Income (loss) before income
taxes and cumulative effect
of accounting change 6 7 (1,442)
Income tax benefit (provision) (7) (28) 73
-------- -------- ---------
Loss before cumulative effect
of accounting change (1) (21) (1,369)
Cumulative effect of accounting
change (54,239) - -
-------- -------- ---------
Net loss applicable to
common shares $(54,240) $ (21) $ (1,369)
======== ======== =========
Basic and diluted income (loss)
per common share before
cumulative effect of
accounting change $ - $ - $ (0.31)
Cumulative effect of
accounting change (12.25) - -
-------- -------- ---------
Basic and diluted net loss
per common share $ (12.25) $ - $ (0.31)
======== ======== =========
Diluted cash earnings per
common share before
cumulative effect of
accounting change $ 0.03 $ 0.01 $ 0.08
======== ======== =========
Average basic common shares 4,429.3 4,412.7 4,412.7
======== ======== =========
Average diluted common shares
for cash earnings per share 4,534.2 4,591.6 4,591.6
======== ======== =========
(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 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
Three Months Ended March 31,
(Unaudited)
2002 2001 2001
Historical Pro Forma(a) Historical
---------- --------- ----------
(millions, except per share amounts)
OPERATIONS
Net loss $(54,240) $ (21) $ (1,369)
Adjustments for noncash
and nonoperating items:
Cumulative effect of
accounting change 54,239 - -
Depreciation and amortization 734 621 2,222
Amortization of film costs 558 626 626
Loss on writedown of investments 590 620 620
Net gain on sale of investments - (3) (3)
Equity in losses of investee
companies after distributions 113 78 221
Changes in operating assets and
liabilities, net of acquisitions (207) (1,117) (1,341)
-------- -------- ---------
Cash provided by operations 1,787 804 976
-------- -------- ---------
INVESTING ACTIVITIES
Acquisition of Time Warner Inc.
cash and equivalents - 690 690
Investments and acquisitions,
net of cash acquired (5,728) (1,007) (973)
Capital expenditures and product
development costs (663) (913) (906)
Investment proceeds 23 1,649 1,649
-------- -------- ---------
Cash provided (used) by
investing activities (6,368) 419 460
-------- -------- ---------
FINANCING ACTIVITIES
Borrowings 6,201 2,326 2,247
Debt repayments (1,232) (4,091) (4,091)
Redemption of redeemable
preferred securities of
subsidiaries (255) (575) (575)
Proceeds from exercise of stock
option and dividend
reimbursement plans 147 277 277
Current period repurchases of
common stock (102) (615) (615)
Dividends paid and partnership
distributions (17) (21) (21)
Principal payments on capital
leases (7) - -
Other (16) 3 -
-------- -------- ---------
Cash provided (used) by
financing activities 4,719 (2,696) (2,778)
-------- -------- ---------
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS 138 (1,473) (1,342)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 719 2,801 2,610
-------- -------- ---------
CASH AND EQUIVALENTS AT
END OF PERIOD $ 857 $ 1,328 $ 1,268
======== ======== =========
FREE CASH FLOW (DEFICIT) $ 1,100 $ (130) $ 49
======== ======== =========
(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 and FAS 142 had been
applied at the beginning of 2001 (Note 1).
See accompanying notes.
AOL TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements The combined financial statements of a parent company and its subsidiaries. Notes: Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge 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 first fully integrated, Internet-powered media and communications company. The Company was formed in connection with the merger of America Online, Inc. ("America Online") and Time Warner Inc. ("Time Warner"), which was consummated con·sum·mate tr.v. con·sum·mat·ed, con·sum·mat·ing, con·sum·mates 1. a. To bring to completion or fruition; conclude: consummate a business transaction. b. on January 11, 2001 (the "Merger"). As a result of the Merger, America Online and Time Warner each became a wholly owned subsidiary Wholly Owned Subsidiary A subsidiary whose parent company owns 100% of its common stock. Notes: In other words, the parent company owns the company outright and there are no minority owners. 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 recorded music n → música grabada and music publishing The contractual relationship between a songwriter or music composer and a music publisher, whereby the writer assigns part or all of his or her music copyrights to the publisher in exchange for the publisher's commercial exploitation of the music. ; and Publishing, consisting principally of interests in magazine publishing, book publishing book publishing. The term publishing means, in the broadest sense, making something publicly known. Usually it refers to the issuing of printed materials, such as books, magazines, periodicals, and the like. and direct marketing. A majority of the Company's interests in 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 TWE Test of Written English TWE ThinkWave Educator (teacher productivity application) TWE That Was Easy TWE tap water enema TWE Threat Warning Equipment TWE Transitional Work Experience TWE Triangle Wind Ensemble "). AOL Time Warner owns general and limited partnership interests in TWE consisting of 74.49% of the pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share. In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them. priority capital ("Series A Capital") and residual Residual See:Residual value 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 are held by MediaOne MediaOne was a cable company created by U S WEST in 1995. The cable service started as a division of U S WEST Media Group. In time the service also included pay-per-view, and a self-branded high-speed cable modem internet service named Hiway1 ("Highway One"). TWE Holdings, Inc., a subsidiary of AT&T Corp. Due to the Company's 100% ownership of the Series B Capital, AOL Time Warner's economic interest in TWE exceeds 74.49%. Basis of Presentation 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 have been adjusted for the items discussed in the following paragraphs. -- 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. 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 Having reference to things that happened in the past, prior to the occurrence of the act in question. A retroactive or retrospective law is one that takes away or impairs vested rights acquired under existing laws, creates new obligations, imposes new duties, or attaches a restatement Restatement A revision in a company's earlier financial statements. Notes: The need for restating financial figures can result from fraud, misrepresentation, or a simple clerical error. of all periods presented to reflect the new accounting provisions; therefore, these adjustments impact both pro forma and historical results. These adjustments are discussed below. -- 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. 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. 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 INDEFINITE. That which is undefined; uncertain. INDEFINITE, NUMBER. A number which may be increased or diminished at pleasure. 2. When a corporation is composed of an indefinite number of persons, any number of them consisting of a majority of those useful life. Instead, FAS 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be reviewed for impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. upon adoption of FAS 142 (January 1, 2002) and annually thereafter. The Company will perform its annual impairment review during the fourth quarter of each year, commencing in the fourth quarter of 2002. 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 Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. 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 Noncash charge A cost, such as depreciation, depletion, and amortization, that does not involve any cash outflow. That is, this is treated as an accounting expense -- not a real expense that demands cash. of approximately $54 billion to reduce the carrying value of its goodwill. Such charge is nonoperational Adj. 1. nonoperational - (military) not involved in military operations inactive armed forces, armed services, military, military machine, war machine - the military forces of a nation; "their military is the largest in the region"; "the military machine is in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations See Income statement. . In calculating the impairment charge, the fair value of the impaired See assistive technology. reporting units underlying the segments were estimated using either a discounted cash flow methodology or recent comparable transactions. 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 as·sign tr.v. as·signed, as·sign·ing, as·signs 1. To set apart for a particular purpose; designate: assigned a day for the inspection. 2. 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 quarter, and total assets at March 31, 2002, by business segment is as follows (in millions):
Total
Goodwill Assets
------------------------------------------- -------
Acquisi-
Jan. 1, tions & March 31, March 31,
2002(1) Adjust- Impair- 2002 2002
ments(2) ments(5)
-------- ------- -------- -------- --------
AOL $ 27,729 $ 7,036 $ - $ 34,765 $ 41,160
Cable 33,263 - (22,980) 10,283 48,350
Filmed
Entertainment(3) 9,110 (92) (4,091) 4,927 15,736
Networks(4) 33,562 22 (13,077) 20,507 31,642
Music 5,477 13 (4,796) 694 7,431
Publishing 18,283 (22) (9,259) 9,002 14,240
Corporate - - - - 1,798
-------- ------- -------- -------- --------
Total $127,424 $ 6,957 $(54,203) $ 80,178 $160,357
======== ======= ======== ======== ========
(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) Includes impairments at Warner Bros. $(2,851) and at the
Turner filmed entertainment businesses $(1,240).
(4) Includes impairments at Turner $(10,933), HBO $(1,933) and The
WB Network $(211).
(5) The impairment charge does not include approximately
$36 related to goodwill impairments associated with equity
investees.
Investment Write-Downs The United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. economy has experienced a broad decline in the public equity markets, particularly in technology stocks, 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 pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern charges to reduce the carrying value of certain investments that experienced other-than-temporary declines of approximately $581 million in the first quarter of 2002 and $620 million in the first quarter of 2001 on both a pro forma and historical basis, which are included in other expense, net, in the accompanying consolidated statement of operations. Included in the 2002 charge is approximately $571 million to reduce AOL Time Warner's investment in Time Warner Telecom Time Warner Telecom NASDAQ: TWTC is headquartered in Littleton, Colorado. The company provides managed network services, specializing in Ethernet and transport data networking, Internet access, local and long distance voice, VoIP and security, to enterprise Inc. ("Time Warner Telecom") for a decline deemed to be other than temporary. The value of the Time Warner Telecom investment was adjusted upward in the Merger by over $2 billion to its estimated fair value. During 2001, Time Warner Telecom's share price declined significantly, resulting in an impairment charge of approximately $1.2 billion in the fourth quarter of 2001. Since December 31, 2001, there has been a further decline in the fair value of AOL Time Warner's investment in Time Warner Telecom; thereby resulting in the additional charge of approximately $571 million in the first quarter of 2002, representing a further decline from the Merger-adjusted value previously noted. 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 The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting . During the first quarter of 2001, on both a pro forma and historical basis, $71 million 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. During the first quarter of 2002, the Company has incurred other restructuring costs of $107 million related to various contractual terminations and obligations, including certain contractual employee termination benefits. These costs are included in "merger and restructuring costs" in the accompanying consolidated statement of operations. Included in the 2002 restructuring charge restructuring charge The expense of reorganizing a company's operations. A restructuring charge is an infrequent expense that generally results from asset writedowns or facility closings. is $64 million related to lease obligations of the AOL segment for network modems A modem shared by all users in a network. See network access server. that will no longer be used as network providers upgrade their networks to newer technology. Specifically, under certain existing agreements with network providers, AOL is leasing the modems used in providing network services. During the first quarter, a plan was established under which a network provider would upgrade and replace the AOL supplied modems. Accordingly, the Company accrued ac·crue v. ac·crued, ac·cru·ing, ac·crues v.intr. 1. To come to one as a gain, addition, or increment: interest accruing in my savings account. 2. the remaining lease obligations, less estimated recoveries, for the period that these modems will no longer be in use. In addition to the lease costs referred to above, there is one remaining network arrangement that continues to use AOL supplied modems, in which AOL has a remaining modem lease obligation of $70 million. AOL is currently in discussions with the network provider regarding the use of AOL supplied modems. If the network provider of this remaining network arrangement should similarly decide to replace the AOL modems, the Company could be required to recognize an additional restructuring charge in subsequent periods for the portion of the remaining lease obligation, less estimated recoveries, related to the period the AOL modems would not 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 di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. 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. For 2002, if these items were excluded from reported results, the aggregate net effect would be to increase basic and diluted income per common share before cumulative effect of accounting change by $0.09 from breakeven breakeven 1. The level of output or sales necessary to cover fixed expenses. Companies in industries that have high fixed costs and, consequently, high breakevens, such as automobile and steel manufacturing, are likely to exhibit large fluctuations to $0.09. On a pro forma basis for 2001, if these items were excluded from reported results, the aggregate net effect would be to increase basic and diluted net income per common share by $0.09 from breakeven to $0.09 (a decrease in basic and diluted net loss per common share of $0.09 from $0.31 to $0.22 on a historical basis). Note 4: Diluted Cash Earnings per Share Before Cumulative Effect of Accounting Change Diluted cash earnings per share is defined as pretax income pretax income Reported income before the deduction of income taxes. Pretax income is sometimes considered a better measure of a firm's performance than aftertax income because taxes in one period may be influenced by activities in earlier periods. (loss) 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 Dilutive effect Result of a transaction that decreases earnings per common share (EPS). 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. For 2002, if these items were excluded from reported results, the aggregate net effect would be to increase diluted cash earnings per common share before cumulative effect of accounting change by $0.15 from $0.03 to $0.18. On a pro forma basis for 2001, if these items were excluded from reported results, the aggregate net effect would be to increase diluted cash earnings per common share by $0.15 from $0.01 to $0.16 (an increase in diluted cash earnings per common share of $0.15 from $0.08 to $0.23 on a historical basis). Note 5: Free Cash Flow AOL Time Warner evaluates the operating performance based on several factors including free cash flow, which is defined as cash provided by operations after deducting capital expenditures, principal payments on capital leases, dividend payments and partnership distributions. The comparability of AOL Time Warner's free cash flow has been affected by certain significant unusual and nonrecurring items in each period. Specifically, AOL Time Warner's free cash flow has been impacted by the cash impact of significant and nonrecurring items described in Note 2. In addition, free cash flow has been impacted by payments made in settling other merger and restructuring liabilities. If these items were excluded from reported free cash flow, the aggregate net effect would be to increase free cash flow by $195 million from $1.100 billion to $1.295 billion in 2002 and increase free cash flow by $602 million from a free cash flow deficit of $130 million to free cash flow of $472 million on a pro forma basis in 2001 (an increase in free cash flow by $602 million from $49 million to $651 million on a historical basis). Note 6: Intercompany Transactions Intercompany transaction Transaction carried out between two units of the same corporation. 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 Counterparty The other participant, including intermediaries, in a swap or contract. to the transaction) are eliminated in consolidation and, therefore, do not themselves impact consolidated results. Revenues recognized by AOL Time Warner's segments on all intercompany transactions are as follows:
Three Months Ended
March 31
Total Intercompany Revenues: 2002 2001
---- ----
AOL $54 $21
Cable 35 3
Filmed Entertainment 170 181
Networks 150 159
Music 76 57
Publishing 10 7
---- ----
Total Intercompany Revenues $495 $428
==== ====
Included in the total intercompany revenues above are intercompany
advertising and commerce revenues, as follows:
Total Intercompany Advertising Three Months Ended
and Commerce Revenues: March 31
2002 2001
---- ----
AOL $54 $21
Cable 32 3
Filmed Entertainment - -
Networks 35 40
Music - -
Publishing 10 7
---- ----
Total Intercompany Advertising
and Commerce Revenues $131 $71
==== ====
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 March 31,
2002 2001 2001
Historical Pro Forma Historical
---------- --------- ----------
Loss before cumulative effect
of accounting change $ (1) $ (21) $(1,369)
------- ------- -------
Adjustments for significant
and nonrecurring items:
Merger and restructuring costs 107 71 71
Loss on writedown of investments 581 620 620
------- ------- -------
Pretax impact of adjustments 688 691 691
------- ------- -------
Normalized income (loss) before
income tax impact of adjustments 687 670 (678)
Income tax impact of adjustments (275) (276) (276)
------- ------- -------
Normalized income (loss) $ 412 $ 394 $ (954)
======= ======= =======
Average common shares
outstanding - for basic and
diluted loss
per common share 4,429.3 4,412.7 4,412.7
======= ======= =======
Basic and diluted income (loss)
per common share before
cumulative effect of
accounting change $ - $ - $(0.31)
======= ======= =======
Normalized basic and diluted
income (loss) per common share $0.09 $0.09 $(0.22)
======= ======= =======
(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.
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 March 31,
2002 2001 2001
Historical Pro Forma Historical
---------- --------- ----------
Income (loss) before income
taxes and cumulative effect
of accounting change $ 6 $ 7 $(1,442)
------- ------- -------
Amortization of goodwill and
other intangible assets 166 166 1,775
Amortization of equity method
investee goodwill and
intangible assets 5 - 143
Cash taxes paid (59) (122) (122)
------- ------- -------
Cash earnings 118 51 354
------- ------- -------
Pretax adjustments for
significant and nonrecurring
items(b) 688 691 691
------- ------- -------
Normalized cash earnings $ 806 $ 742 $ 1,045
======= ======= =======
Average common shares
outstanding - basic 4,429.3 4,412.7 4,412.7
Dilutive effect of stock options 104.9 178.9 178.9
------- ------- -------
Average common shares
outstanding - diluted(c) 4,534.2 4,591.6 4,591.6
======= ======= =======
Diluted cash earnings
per common share $ 0.03 $ 0.01 $ 0.08
======= ======= =======
Normalized diluted cash
earnings per common share $ 0.18 $ 0.16 $ 0.23
======= ======= =======
Calculation of Reported and Normalized Free Cash Flow (Deficit)
Three Months Ended March 31,
2002 2001 2001
Historical Pro Forma Historical
---------- --------- ----------
Cash flow from operations $ 1,787 $ 804 $ 976
Capital expenditures and
product development costs (663) (913) (906)
Dividends paid and partnership
distributions (17) (21) (21)
Principal payments on capital leases (7) - -
------- ------- -------
Free cash flow (deficit) 1,100 (130) 49
------- ------- -------
Adjustments for significant
and nonrecurring
items(d) 195 602 602
------- ------- -------
Normalized free cash flow $ 1,295 $ 472 $ 651
======= ======= =======
(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.
(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.
(d) For a discussion of the adjustments to free cash flow, please
see Note 5.
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