AOL Time Warner Reports Second Quarter 2003 Results.Business Editors NEW YORK--(BUSINESS WIRE)--July 23, 2003 The presentation of 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.'s historical financial performance reflects the adoption by the SEC of Regulation G and other rules affecting the use and disclosure of non-GAAP financial measures. Pursuant to recent SEC guidance on the application of Regulation G and the use of non-GAAP financial measures, going forward, the Company no longer will refer to "Operating Income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. (Loss) before Depreciation and Amortization" as "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 ." In addition, unless otherwise noted, the Company's financial results described in this release, such as Operating Income (Loss), Operating Income (Loss) before Depreciation and Amortization, and Free Cash Flow, have not been adjusted for items that may affect their comparability, including merger and restructuring charges 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. , impairments of goodwill and intangible assets Intangible Asset An 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. and the gains or losses from asset disposals. AOL Time Warner Inc. (NYSE NYSE See: New York Stock Exchange :AOL) today reported financial results for its second quarter ended June June: see month. 30, 2003. Revenues for the quarter increased 6% over the same period in 2002 to $10.8 billion, led by increases at the Filmed Entertainment, Networks and Cable divisions. Operating Income before Depreciation and Amortization decreased 4% to $2.2 billion, including a total of $277 million in non-cash impairments of goodwill and intangible assets, offset partially by a $43 million gain on an asset sale. Excluding these impairments and the gain, Operating Income before Depreciation and Amortization increased 6% to $2.4 billion, reflecting double-digit dou·ble-dig·it adj. Being between 10 and 99 percent: double-digit inflation. increases at the Networks, Cable and Filmed Entertainment businesses, offset in part by declines at the America Online See AOL. division. Operating Income declined 15% to $1.3 billion, further reduced by higher levels of depreciation and amortization. For the first six months of 2003, the Company generated $3.8 billion in Cash Flow from Operations Cash flow from operations A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses , and Free Cash Flow totaled $2.5 billion. Free Cash Flow benefited from the favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. timing of working capital requirements Capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. and approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $350 million of net cash received through the settlements of certain litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. . At the end of the quarter, the Company's net debt totaled $24.2 billion, versus $26.3 billion at March 31, 2003. The reduction in net debt reflected proceeds of $1.225 billion received during the quarter from the sale of a 50% ownership stake in the Comedy Central cable TV network and the aforementioned a·fore·men·tioned adj. Mentioned previously. n. The one or ones mentioned previously. aforementioned Adjective mentioned before Adj. 1. net benefit from certain litigation settlements, as well as the generation of significant Free Cash Flow. This decrease was offset partially during the quarter by $813 million of incremental Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. borrowings for the repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. of all non-voting non-voting adj non-voting shares → azioni fpl senza diritto di voto preferred shares Preferred shares Preferred shares give investors a fixed dividend from the company's earnings and entitle them to be paid before common shareholders. See: Preferred stock. in 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). .Chairman and Chief Executive Officer 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: "Our solid results in this quarter and the first half of the year give us confidence that we can deliver on all of our 2003 financial objectives. During the second half of the year, we will continue to focus on key priorities, especially reducing our absolute debt levels through Free Cash Flow generation and other de-leveraging initiatives -- including another $1 billion from last week's agreement to sell Warner Music's DVD/CD manufacturing and physical distribution businesses. At the same time, we'll we'll Contraction of we will. we'll we will or we shall we'll will ~shall look to prudently pru·dent adj. 1. Wise in handling practical matters; exercising good judgment or common sense. 2. Careful in regard to one's own interests; provident. 3. Careful about one's conduct; circumspect. invest in our businesses to keep them strong, and extend their already leading competitive positions. Our goal for the remainder of this year is to keep laying the foundation that will enable us to exit 2003 with more momentum than we had when we entered it, with an eye toward achieving strong, sustainable growth next year and beyond." 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 The Company reported Net Income of $1.1 billion, or $0.24 per basic and $0.23 per 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. common share, respectively, for the second quarter of 2003. The Net Income in 2003 includes $277 million of pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern non-cash impairments of goodwill and intangible assets at the Networks and Publishing divisions, a $43 million pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta gain on a Filmed Entertainment asset sale, $12 million of merger and restructuring charges, $542 million of pre-tax gains related to certain investments, principally related to the sale of Comedy Central, a pre-tax gain of approximately $760 million associated with the Microsoft (Microsoft Corporation, Redmond, WA, www.microsoft.com) The most successful and influential software company. Microsoft's software and Intel's hardware pioneered the PC and revolutionized the computer industry. settlement, and $151 million of non-cash investment charges, due primarily to AOL Japan and NTV-Germany. This compares to Net Income from continuing operations continuing operations Parts of a business that are expected to be maintained as an ongoing segment of an overall business operation. Income and losses from continuing operations are reported separately if any segments have been discontinued during the of $394 million, or $0.09 per basic and diluted common share before discontinued operations Discontinued operations Divisions of a business that have been sold or written off and that no longer are maintained by the business. for the three months ended June 30, 2002, including $364 million of pre-tax, non-cash investment charges and $90 million in gains related to the sale of certain investments. After discontinued operations, the Company recorded Net Income of $396 million, or $0.09 per basic and diluted common share, for the three months ended June 30, 2002. Performance of Divisions The schedules below reflect AOL Time Warner's performance for the three months and six months ended June 30 by line of business (in millions):
Three Months and Six Months Ended June 30:
Three Months Six Months
Ended June 30, Ended June 30,
Revenues: 2003 2002 2003 2002
----------- ----------- ----------- -----------
AOL $ 2,132 $ 2,266 $ 4,329 $ 4,557
Cable 1,923 1,762 3,765 3,445
Filmed Entertainment 2,757 2,386 5,121 4,522
Networks 2,155 1,957 4,247 3,743
Music 1,051 972 1,965 1,919
Publishing 1,421 1,396 2,573 2,477
Intersegment
Eliminations (621) (536) (1,184) (1,053)
----------- ----------- ----------- -----------
Total Revenues $ 10,818 $ 10,203 $ 20,816 $ 19,610
============== =========== =========== =========== ===========
Operating Income:
AOL $ 210 $ 274 $ 404 $ 448
Cable 401 378 760 756
Filmed
Entertainment (a) 330 262 513 376
Networks (b) 303 370 755 759
Music 6 29 (8) 49
Publishing (c) 164 282 245 375
Corporate (122) (86) (231) (199)
Intersegment
Eliminations (7) 11 (2) 13
----------- ----------- ----------- -----------
Total Operating Income $ 1,285 $ 1,520 $ 2,436 $ 2,577
====================== =========== =========== =========== ===========
Operating Income
before Depreciation
and Amortization:
AOL $ 431 $ 474 $ 835 $ 817
Cable 752 675 1,443 1,327
Filmed
Entertainment (a) 407 328 658 509
Networks (b) 359 420 859 851
Music 105 102 192 193
Publishing (c) 230 337 378 482
Corporate (112) (80) (213) (186)
Intersegment
Eliminations (7) 11 (2) 13
----------- ----------- ----------- -----------
Total Operating Income
Before Depreciation
and Amortization $ 2,165 $ 2,267 $ 4,150 $ 4,006
====================== =========== =========== =========== ===========
(a) In 2003, includes a $43 million gain related to the sale of a
consolidated theater chain in the UK.
(b) In 2003, includes a $178 million impairment of intangible assets
related to the winter sports teams.
(c) In 2003, includes a $99 million impairment of goodwill and
intangible assets related to the AOL Time Warner Book Group.
Presented below is a discussion of AOL Time Warner's business segments for the second quarter of 2003, unless otherwise noted. America Online America America [for Amerigo Vespucci], the lands of the Western Hemisphere—North America, Central (or Middle) America, and South America. The world map published in 1507 by Martin Waldseemüller is the first known cartographic use of the name. Online's Operating Income before Depreciation and Amortization decreased 9% in the quarter on revenues that declined 6%. Operating Income decreased 23%. Growth in America Online's Subscription revenues was more than offset by declines in Advertising and Other revenues. Subscription revenues grew 6%, principally due to strong gains at AOL Europe, which benefited primarily from favorable foreign currency exchange rates ($71 million), year-over-year membership growth and higher pricing, as well as a modest increase in the US that reflected the impact of a year-over-year increase in the number of 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). subscribers. This growth more than offset the effect of declines in US narrowband In communications, transmission rates up to T1 speeds (1.544 Mbps). The upper limit is moving target. At one time, narrowband meant 150 bps (that is 150 bits per second!). Then, the upper limit became 2,400 bps. Later, it moved to 64 Kbps. Contrast with wideband and broadband. membership. Advertising revenues decreased by 48%, as a result of the reduction in the benefits from prior-period contract sales of approximately $140 million, as well as lower intercompany revenues. Other revenues declined 62%, due mainly to AOL's previously announced strategy to reduce the promotion of its merchandise business. The decrease in Operating Income before Depreciation and Amortization versus the year-ago period reflects overall expense reductions being more than offset by lower revenues. During the quarter, America Online had lower Advertising revenues and increased expenses relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc its broadband initiatives, which were partially offset by improved results at AOL Europe and lower domestic narrowband network costs. Operating Income was further affected by higher depreciation due mainly to the continuing impact of increased ownership of network assets. At June 30, the AOL service had 25.3 million members in the US, a decrease of 1.2 million from the same quarter last year (a decline of 846,000 compared to the quarter ended March 31, 2003). Approximately 45% of this quarterly sequential One after the other in some consecutive order such as by name or number. decline reflects the Company's identification and removal from the 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. base of non-paying Adj. 1. non-paying - paying nothing; "non-paying guests"; "non-paying bidders on eBay" unpaid - not paid; "unpaid wages"; "an unpaid bill" members, consisting principally of those with service violations and members failing to appropriately complete the registration and payment authorization The right or permission to use a system resource; the process of granting access. See access control. process. At June 30, the AOL service had 6.2 million members in Europe, an increase of 238,000 versus the year-ago quarter (a decline of 52,000 compared to the quarter ended March 31, 2003). Cable Cable's Operating Income before Depreciation and Amortization climbed 11% in the quarter on a 9% increase in revenues. Operating Income increased 6%. Subscription revenues grew a strong 13%, driven by higher basic cable rates and increased basic, 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. Advertising revenues declined 31%, due to decreases in advertising purchased by programming vendors to promote new and existing channels and in intercompany advertising, offset partially by a 13% increase in other third-party advertising. The increase in Operating Income before Depreciation and Amortization reflected primarily the increase in subscription revenues and the improved profitability of the high-speed data business, offset partly by the decline in high-margin advertising and higher programming costs. Operating Income was further affected by an increase in depreciation expense stemming primarily from the cumulative investment in customer premise equipment (digital converters and modems). Basic cable subscribers increased at an annual rate of 0.9%. 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. added 136,000 net digital video subscribers during the quarter to reach a total of 4.1 million, representing 37% of basic cable subscribers. Time Warner Cable added 170,000 net residential high-speed data subscribers this quarter for a total of 2.9 million, representing 16% of eligible homes passed. Filmed Entertainment Filmed Entertainment's Revenues were up 16% in the quarter. Operating Income before Depreciation and Amortization rose $79 million (or 24%), including a $43 million gain from an asset sale. Excluding this gain, Operating Income before Depreciation and Amortization climbed 11%. Operating Income grew 26%. The increase in revenues was driven by worldwide theatrical success, led by Warner Bros BROS Brothers BROS Benefits and Retirement Operations Section (King County, Washington) BROS Barnes and Richmond Operatic Society (London, UK) . Pictures' The Matrix Reloaded, as well as continued worldwide growth in DVD DVD: see digital versatile disc. DVD in full digital video disc or digital versatile disc Type of optical disc. The DVD represents the second generation of compact-disc (CD) technology. revenues and increases in television revenues related mainly to Seinfeld
The growth in Operating Income before Depreciation and Amortization as well as Operating Income reflected the revenue increases and improved margin contribution from the theatrical business, as well as the $43 million gain from the sale of Warner Bros. Entertainment's consolidated theater chain in the UK. Released May 15, The Matrix Reloaded has generated over $700 million in worldwide box office to date - already making it the third highest-grossing film in the history of Warner Bros. Warner Home Video Warner Home Video is the home video unit of Warner Bros. Home Entertainment Group, a division of Warner Bros. Entertainment, Inc. It was founded in 1978 as WCI Home Video (for Warner Communications, Inc.). It was re-named Warner Home Video in 1980. ranked #1 in the US for the six months ended June 30 in combined DVD and VHS (Video Home System) A half-inch, analog videocassette recorder (VCR) format introduced by JVC in 1976 to compete with Sony's Betamax, introduced a year earlier. sales and rentals - led by Warner Bros.' Harry Potter A potter is someone who makes pottery. Potter may also refer to: People
For the six months ended June 30, Warner Bros. Pictures and New Line generated $572 million and $239 million, respectively, in domestic box office - combining for an industry share of 19.6% - and Warner Bros. Pictures also ranked first in international box office having generated nearly $1.0 billion. 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). will produce a record 27 series (13 returning and 14 new programs) for the Fall 2003-2004 primetime schedule, supplying two or more shows to each of the six broadcast networks. In addition, Telepictures Telepictures is an American television syndication firm established in 1978 by Michael Garin. The company syndicated the Rankin-Bass library's holdings from 1974 to 1988. Under Telepictures' ownership, Rankin-Bass produced new and successful animated series; for example, Productions will have two broadcast network primetime series on the air this Fall. Last week, Warner Bros. Television received 38 Primetime Emmy Emmy awarded annually for best achievements in television programing and performance. [TV: Misc.] See : Prize nominations, led by the "The West Wing" with 15 nominations, including Outstanding Drama (which it has won the last three years), as well as "Friends" with 11 nominations, including Outstanding Comedy (which it won last year). Networks Network's Revenues were up 10% in the quarter. Operating Income before Depreciation and Amortization decreased $61 million (or 15%), including a non-cash 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. charge of $178 million related to the winter sports winter sports: see bobsledding; curling; hockey, ice; ice dancing; ice skating; skiing; snowshoes; tobogganing. teams: the NHL's Atlanta Thrashers The Atlanta Thrashers are a professional ice hockey team based in Atlanta, Georgia. They are members of the Southeast Division of the Eastern Conference of the National Hockey League (NHL). Their home arena is Philips Arena. and NBA's Atlanta Atlanta (ətlăn`tə, ăt–), city (1990 pop. 394,017), state capital and seat of Fulton co., NW Ga., on the Chattahoochee R. and Peachtree Creek, near the Appalachian foothills; inc. 1847. Hawks Hawks , Howard Winchester 1896-1977. American filmmaker whose works include His Girl Friday (1940) and The Big Sleep (1946). . Excluding this impairment charge, Operating Income before Depreciation and Amortization increased 28%. Operating Income decreased 18%. Subscription, Advertising and Content revenues all increased during the quarter. Subscription revenue gains of 6% resulted from an increase in subscribers and subscription rates at the Turner networks and HBO Hyperbaric oxygen therapy (HBO) A form of oxygen therapy in which the patient breathes oxygen in a pressurized chamber. Mentioned in: Ozone Therapy . Advertising revenues increased a strong 17%, with a 16% increase at the Turner networks and 23% at The WB, both due primarily to higher CPMs and ratings as well as higher revenues related to additional NBA NBA abbr. 1. National Basketball Association 2. National Boxing Association NBA (US) n abbr (= National Basketball Association) → Basketball-Dachverband (= playoff games Noun 1. playoff game - one game in the series of games constituting a playoff game - a single play of a sport or other contest; "the game lasted two hours" playoff - any final competition to determine a championship on TNT TNT: see trinitrotoluene. TNT in full trinitrotoluene Pale yellow, solid organic compound made by adding nitrate (−NO2) groups to toluene. . Content revenues increased 15%, mainly reflecting higher ancillary Subordinate; aiding. A legal proceeding that is not the primary dispute but which aids the judgment rendered in or the outcome of the main action. A descriptive term that denotes a legal claim, the existence of which is dependent upon or reasonably linked to a main claim. sales of HBO programming. Operating Income before Depreciation and Amortization as well as Operating Income benefited from revenue increases, particularly high-margin advertising, and from lower marketing spend and the absence of comparable reserves 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. in 2002 related to receivables Receivables An asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. Receivables are recorded by a company's accountants and reported on the balance sheet, and they and include all debts owed from a cable system operator. These gains were more than offset by the aforementioned $178 million impairment of the winter sports teams' intangible assets, which were originally recorded at the time of the America Online-Time Warner merger, and increases in entertainment and news programming costs. For the quarter, TNT was the #1 basic cable network among adults 18-49 and 25-54 in both primetime and total day, while the 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) Superstation su·per·sta·tion n. A television or radio station that broadcasts to a nationwide audience by satellite, cable, or both. ranked #1 among adults 18-34 and #2 among adults 18-49 in total day. Over the 2002-2003 season, The WB delivered the largest gains of any broadcast network across all 18-34 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. and adults 18-49, while maintaining the youngest median age on broadcast network television. HBO last week received a record 109 Primetime Emmy nominations -- the most of any other network for the third year in a row. Six Feet Under topped HBO's list of nominees with 16 nominations, the most nominations of any show on TV this season. Music Warner Music Group's Operating Income before Depreciation and Amortization rose 3% in the quarter on a revenue increase of 8%. Operating Income decreased from $29 million to $6 million. The revenue increase was driven mainly by increased shipments of new and 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) recorded music recorded music n → música grabada releases and favorable foreign currency exchange rates ($49 million). The modest increase in Operating Income before Depreciation and Amortization was due to improved results at Warner Music's manufacturing and domestic recorded music operations. Those improved results more than offset the recording of a $6 million restructuring charge and lower results in its 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. business and international recorded music operations, due in part to higher royalty advance write-offs. The increase in Operating Income before Depreciation and Amortization was more than offset by an increase in depreciation expense relating to DVD manufacturing expansion and a year-over-year increase in the amortization expense associated with a reduction in the amortization period of the recorded music catalog catalog, descriptive list, on cards or in a book, of the contents of a library. Assurbanipal's library at Nineveh was cataloged on shelves of slate. The first known subject catalog was compiled by Callimachus at the Alexandrian Library in the 3d cent. B.C. and publishing copyrights. For the quarter, Warner Music improved its competitive position despite difficult industry trends. 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 SoundScan™ Osteoporosis An ultrasound used to assess bone density and thickness of cortical bone. See Bone densitometry. , Warner Music's domestic album share through June 30 was 18.9% - ranking second among all music companies - and up from 17.0% at year-end year-end also year·end n. The end of a year. adj. Occurring or done at the end of the year: a year-end audit. Noun 1. 2002. Top worldwide sellers in the quarter included such artists as Linkin Park, Cher Cher, department, France Cher (shĕr), department (1990 pop. 332,000), central France, in Berry. Chief cities are Vierzon and Bourges, the capital. Cher, river, France Cher, river, c. , Fleetwood Fleetwood, town (1991 pop. 27,899), Lancashire, NW England, on Morecambe Bay at the mouth of the Wyre estuary. Fleetwood, a port, trades and has a ferry service with the Isle of Man and Belfast. Mac, Madonna Madonna (Madonna Louise Ciccone) (mədŏn`ə, chĭkō`nē), 1958–, American pop singer and actress, b. Bay City, Mich. She trained as a dancer at the Univ. and Staind Staind (IPA: /steɪnd/) is an American alternative metal group[1][2] from Springfield, Massachusetts, United States. - whose albums all reached Soundscan's top five. Publishing Publishing's Revenues were up 2% in the quarter. Operating Income before Depreciation and Amortization decreased $107 million (or 32%), including a non-cash impairment charge of $99 million at the AOL Time Warner Book Group. Excluding this charge, Operating Income before Depreciation and Amortization decreased 2%. Operating Income, including the $99 million charge, decreased $118 million (or 42%). Revenue growth reflected modest increases in Advertising and Content revenues. Advertising revenues grew 2%, led by gains at Real Simple, Southern Living, Cooking Light and Parenting, which more than offset declines at news and business magazines. The Content revenues increase was driven by strong sales at the AOL Time Warner Book Group. Other revenues slightly decreased, related primarily to declines at Time Life, offset in part by an increase at Southern Living At HOME. Operating Income before Depreciation and Amortization decreased primarily as a result of the aforementioned $99 million charge related to the impairment of the AOL Time Warner Book Group's goodwill and intangible assets originally recorded at the time of the America Online-Time Warner merger. In addition, the results also included a $17 million year-over-year decline at Time Life (including a $6 million restructuring charge), offset principally by the increase in advertising revenues and a reduction in employee benefit accruals Accruals Accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense. . Operating Income was further affected by the increased amortization associated with the acquisition of 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. . Based on Publishers Information Bureau (PIB See NIST binary. ) data, Time Inc.'s 2003 industry-leading share of overall domestic advertising through June 30 was 24.7%. Time Inc. earned two National Magazine Awards this spring - Parenting for General Excellence and 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 Profile Writing. The AOL Time Warner Book Group added 11 titles to the 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 list this quarter, bringing the year-to-date Year-to-date (YTD) The period beginning at the start of the calendar year up to the current date. total to 32. Popular new titles included James James, person in the Bible James, in the Gospel of St. Luke, kinsman of St. Jude. The original does not specify the relationship. James, rivers, United States James. Patterson's The Lake House and Nicholas Nicholas, Russian grand duke Nicholas (Nikolai Nikolayevich) (nyĭkəlī` nyĭkəlī`əvĭch), 1856–1929, Russian grand duke and army officer; first cousin of Czar Alexander III and grandson of Czar Sparks' The Guardian, as well as the mass market releases of Patterson's The Beach House and Nelson DeMille's Up Country. Update on SEC Investigation The SEC continues to investigate a range of transactions principally involving the Company's America Online unit. In its 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. , filed in March of this year, the Company disclosed that, with respect to two related transactions between America Online and Bertelsmann For the foundation, see . Bertelsmann AG is a transnational media corporation founded in 1835, based in Gütersloh, Germany. The company operates in 63 countries and employs over 100,000 workers (as of June 30, 2007). In 2006 the company reported a € 19. , A.G., the staff of the SEC had expressed a preliminary view that the accounting for those transactions was not correct. Since that time, the SEC staff has reviewed those transactions further, and the Office of the Chief Accountant of the SEC has recently informed the Company that it has concluded that the accounting for these transactions is not correct. Based on their knowledge and understanding of the facts of these transactions, the Company and its auditors AUDITORS, practice. Persons lawfully appointed to examine and digest accounts referred to them, take down the evidence in writing, which may be lawfully offered in relation to such accounts, and prepare materials on which a decree or judgment may be made; and to report the whole, together continue to believe that the accounting for those transactions is appropriate, but it is possible that the Company may learn additional information as a result of its own review, discussions with the SEC 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. the SEC's ongoing investigation that would lead the Company to reconsider re·con·sid·er v. re·con·sid·ered, re·con·sid·er·ing, re·con·sid·ers v.tr. 1. To consider again, especially with intent to alter or modify a previous decision. 2. its views of the accounting for these transactions. For a more detailed discussion of this matter, please see Note 1 of the 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 , included as part of this release. Use of Operating Income (Loss) before Depreciation and Amortization and Use of Free Cash Flow The Company utilizes Operating Income (Loss) before Depreciation and Amortization, among other measures, to evaluate the performance of its businesses. Operating Income (Loss) before Depreciation and Amortization is considered an important indicator of the operational strength of the Company's businesses. Operating Income (Loss) before Depreciation and Amortization eliminates the uneven effect across all business segments of considerable amounts of non-cash depreciation of tangible assets Tangible Asset An asset that has a physical form such as machinery, buildings and land. Notes: This is the opposite of an intangible asset such as a patent or trademark. Whether an asset is tangible or intangible isn't inherently good or bad. and amortization of certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized Capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives longer than one year. tangible and intangible assets used in generating revenues in the Company's businesses. Management evaluates the costs of such tangible and intangible assets through other financial measures such as capital expenditures and investment spending. The Company also utilizes Free Cash Flow to evaluate the performance of its businesses. Free Cash Flow is defined as cash provided by continuing operations less capital expenditures and product development costs, principal payments on capital leases, dividends paid and partnership distributions, if any. Free Cash Flow is considered to be an important indicator of the Company's ability to service its debt and make strategic investments. Both Operating Income (Loss) before Depreciation and Amortization and Free Cash Flow should be considered in addition to, not as a substitute for the Company's Operating Income (Loss), Net Income (Loss) and various cash flow measures (e.g., Cash Provided by Operations), respectively, as well as other measures of financial performance reported 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 principles generally accepted in 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. . 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 10 am ET on Wednesday Wednesday: see week. , July July: see month. 23. 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 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 other factors affecting the operation of the businesses of AOL Time Warner Inc. 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 its most recent quarterly report on Form 10-Q Form 10-Q See 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.
AOL TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
2003 2002
------------ ------------
(millions, except
ASSETS per share amounts)
Current assets
Cash and equivalents $ 2,074 $ 1,730
Receivables, less allowances of $2.283 and
$2.379 billion 4,578 5,667
Inventories 1,964 1,896
Prepaid expenses and other current assets 1,996 1,862
------------ ------------
Total current assets 10,612 11,155
Noncurrent inventories and film costs 3,173 3,351
Investments, including available-for-sale
securities 4,083 5,138
Property, plant and equipment 12,114 12,150
Intangible assets subject to amortization 7,123 7,061
Intangible assets not subject to
amortization 40,146 37,145
Goodwill 39,101 36,986
Other assets 2,304 2,464
------------ ------------
Total assets $ 118,656 $ 115,450
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,902 $ 2,459
Participations payable 1,777 1,689
Royalties and programming costs payable 1,560 1,495
Deferred revenue 1,196 1,209
Debt due within one year 419 155
Other current liabilities 5,838 6,388
------------ ------------
Total current liabilities 12,692 13,395
Long-term debt 25,898 27,354
Deferred income taxes 12,868 10,823
Deferred revenue 988 990
Other liabilities 4,888 5,023
Minority interests 5,323 5,048
Shareholders' equity
Convertible Preferred Stock, $0.10 par value,
1 share authorized, issued and outstanding,
$0.10 liquidation preference 1,500 -
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, 4.338 and 4.305 billion shares
outstanding 43 43
Paid-in capital 155,388 155,134
Accumulated other comprehensive loss, net (460) (428)
Retained earnings (100,474) (101,934)
------------ ------------
Total shareholders' equity 55,999 52,817
------------ ------------
Total liabilities and shareholders' equity $ 118,656 $ 115,450
============ ============
See accompanying notes.
AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(millions, except per share amounts)
Revenues:
Subscriptions $ 5,118 $ 4,747 $ 10,053 $ 9,214
Advertising 1,678 1,679 3,016 3,087
Content 3,556 3,194 6,809 6,125
Other 466 583 938 1,184
----------- ----------- ----------- -----------
Total revenues 10,818 10,203 20,816 19,610
Costs of revenues (6,265) (5,965) (12,269) (11,628)
Selling, general and
administrative (2,811) (2,543) (5,435) (4,959)
Merger and
restructuring costs (12) - (36) (107)
Amortization of
intangible assets (211) (175) (406) (339)
Impairment of goodwill
and intangible assets (277) - (277) -
Gain on disposal of
assets 43 - 43 -
----------- ----------- ----------- -----------
Operating income 1,285 1,520 2,436 2,577
Interest expense, net (473) (441) (941) (817)
Other income
(expense), net 1,103 (331) 1,169 (986)
Minority interest
expense (60) (53) (116) (84)
----------- ----------- ----------- -----------
Income (loss) before
income taxes,
discontinued
operations and
cumulative effect of
accounting change 1,855 695 2,548 690
Income tax provision (791) (301) (1,088) (304)
----------- ----------- ----------- -----------
Income (loss) before
discontinued
operations and
cumulative effect of
accounting change 1,064 394 1,460 386
Discontinued
operations, net of
tax - 2 - 1
----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of
accounting change 1,064 396 1,460 387
Cumulative effect of
accounting change - - - (54,235)
----------- ----------- ----------- -----------
Net income (loss) $ 1,064 $ 396 $ 1,460 $ (53,848)
=========== =========== =========== ===========
Basic income (loss)
per common share
before discontinued
operations and
cumulative effect of
accounting change $ 0.24 $ 0.09 $ 0.33 $ 0.09
Discontinued
operations - - - -
Cumulative effect of
accounting change - - - (12.21)
----------- ----------- ----------- -----------
Basic net income
(loss) per common
share $ 0.24 $ 0.09 $ 0.33 $ (12.12)
=========== =========== =========== ===========
Diluted income (loss)
per common share
before discontinued
operations and
cumulative effect of
accounting change $ 0.23 $ 0.09 $ 0.32 $ 0.09
Discontinued
operations - - - -
Cumulative effect of
accounting change - - - (12.21)
----------- ----------- ----------- -----------
Diluted net income
(loss) per common
share $ 0.23 $ 0.09 $ 0.32 $ (12.12)
=========== =========== =========== ===========
Average basic common
shares 4,500.5 4,454.1 4,491.8 4,441.7
=========== =========== =========== ===========
Average diluted common
shares 4,648.9 4,528.2 4,586.8 4,531.2
=========== =========== =========== ===========
See accompanying notes.
AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
(Unaudited)
2003 2002
---------- ----------
(millions)
OPERATIONS
Net income (loss) $ 1,460 $ (53,848)
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change - 54,235
Depreciation and amortization 1,714 1,429
Impairment of goodwill and other intangible
assets 277 -
Amortization of film costs 1,346 1,067
Loss on writedown of investments 186 952
Gain on sale of investments (694) (94)
Equity in losses of investee companies
after distributions 69 141
Changes in operating assets and liabilities, net
of acquisitions (563) (276)
Adjustments relating to discontinued operations - 322
---------- ----------
Cash provided by operations 3,795 3,928
---------- ----------
INVESTING ACTIVITIES
Investments in available-for-sale securities (2) (4)
Other investments and acquisitions, net of cash
acquired (386) (5,828)
Capital expenditures and product development
costs from continuing
operations (1,263) (1,354)
Capital expenditures from discontinued
operations - (169)
Investment proceeds from available-for-sale
securities 911 70
Other investment proceeds 1,377 151
---------- ----------
Cash provided (used) by investing activities 637 (7,134)
---------- ----------
FINANCING ACTIVITIES
Borrowings 1,843 13,406
Debt repayments (5,216) (8,980)
Redemption of redeemable preferred securities of
subsidiaries (813) (255)
Proceeds from exercise of stock option and
dividend reimbursement plans 191 215
Current period repurchases of common stock - (102)
Dividends paid and partnership distributions
from discontinued operations, net - (47)
Principal payments on capital leases (67) (17)
Other (26) 6
---------- ----------
Cash provided (used) by financing activities (4,088) 4,226
---------- ----------
INCREASE IN CASH AND EQUIVALENTS 344 1,020
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,730 719
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 2,074 $ 1,739
========== ==========
See accompanying notes.
AOL TIME WARNER INC.
RECONCILIATION OF OPERATING INCOME BEFORE DEPRECIATION
AND AMORTIZATION TO OPERATING INCOME (LOSS)
(millions, unaudited)
Three Months Ended June 30, 2003
Operating
income
before
Depreciation Operating
and income
Amortization Depreciation Amortization (loss)
------------ ------------ ------------ ------------
AOL $ 431 $ (177) $ (44) $ 210
Cable 752 (349) (2) 401
Filmed
Entertainment (a) 407 (23) (54) 330
Networks (b) 359 (47) (9) 303
Music 105 (38) (61) 6
Publishing (c) 230 (25) (41) 164
Corporate (112) (10) - (122)
Intersegment
elimination (7) - - (7)
------------ ------------ ------------ ------------
Total $ 2,165 $ (669) $ (211) $ 1,285
============ ============ ============ ============
Three Months Ended June 30, 2002
Operating
income
before
Depreciation Operating
and income
Amortization Depreciation Amortization (loss)
------------ ------------ ------------ ------------
AOL $ 474 $ (159) $ (41) $ 274
Cable 675 (295) (2) 378
Filmed
Entertainment 328 (19) (47) 262
Networks 420 (42) (8) 370
Music 102 (28) (45) 29
Publishing 337 (23) (32) 282
Corporate (80) (6) - (86)
Intersegment
elimination 11 - - 11
------------ ------------ ------------ ------------
Total $ 2,267 $ (572) $ (175) $ 1,520
============ ============ ============ ============
(a) Operating income before depreciation and amortization and
operating income (loss) includes a $43 million gain related to the
sale of a consolidated theater chain in the U.K.
(b) Operating income before depreciation and amortization and
operating income (loss) includes a $178 million impairment of
intangible assets related to the Winter Sports teams.
(c) Operating income before depreciation and amortization and
operating income (loss) includes a $99 million impairment of
goodwill and other intangibles related to the AOLTW Book Group.
AOL TIME WARNER INC.
RECONCILIATION OF OPERATING INCOME BEFORE DEPRECIATION
AND AMORTIZATION TO OPERATING INCOME (LOSS)
(millions, unaudited)
Six Months Ended June 30, 2003
Operating
income
before
Depreciation Operating
and income
Amortization Depreciation Amortization (loss)
------------ ------------ ------------ ------------
AOL $ 835 $ (348) $ (83) $ 404
Cable 1,443 (679) (4) 760
Filmed
Entertainment (a) 658 (43) (102) 513
Networks (b) 859 (92) (12) 755
Music 192 (76) (124) (8)
Publishing (c) 378 (52) (81) 245
Corporate (213) (18) - (231)
Intersegment
elimination (2) - - (2)
------------ ------------ ------------ ------------
Total $ 4,150 $ (1,308) $ (406) $ 2,436
============ ============ ============ ============
Six Months Ended June 30, 2002
Operating
income
before
Depreciation Operating
and income
Amortization Depreciation Amortization (loss)
------------ ------------ ------------ ------------
AOL $ 817 $ (287) $ (82) $ 448
Cable 1,327 (569) (2) 756
Filmed
Entertainment 509 (38) (95) 376
Networks 851 (81) (11) 759
Music 193 (56) (88) 49
Publishing 482 (46) (61) 375
Corporate (186) (13) - (199)
Intersegment
elimination 13 - - 13
------------ ------------ ------------ ------------
Total $ 4,006 $ (1,090) $ (339) $ 2,577
============ ============ ============ ============
(a) Operating income before depreciation and amortization and
operating income (loss) includes a $43 million gain related to the
sale of a consolidated theater chain in the U.K.
(b) Operating income before depreciation and amortization and
operating income (loss) includes a $178 million impairment of
intangible assets related to the Winter Sports teams.
(c) Operating income before depreciation and amortization and
operating income (loss) includes a $99 million impairment of
goodwill and other intangibles related to the AOLTW Book Group.
AOL TIME WARNER INC.
SUPPLEMENTAL FINANCIAL INFORMATION
RECONCILIATION OF CASH PROVIDED BY OPERATIONS TO FREE CASH FLOW FROM
CONTINUING OPERATIONS
(millions, unaudited)
AOL Time Warner evaluates operating performance based on several
factors, including free cash flow from continuing operations, which
excludes the impact of discontinued operations and is defined as cash
provided by operations less capital expenditures and product
development costs, principal payments on capital leases, dividends
paid and partnership distributions, if any.
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Cash provided by
operations $ 2,250 $ 2,169 $ 3,795 $ 3,928
Less discontinued
operations:
Net income - (2) - (1)
Other changes - (165) - (322)
---------- ---------- ---------- ----------
Cash provided by
continuing operations 2,250 2,002 3,795 3,605
Capital expenditures and
product development costs
from continuing
operations (709) (765) (1,263) (1,354)
Principal payments on
capital leases from
continuing operations (36) (10) (67) (17)
---------- ---------- ---------- ----------
Free cash flow from
continuing operations $ 1,505 $ 1,227 $ 2,465 $ 2,234
========== ========== ========== ==========
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. AOL Time Warner classifies its business interests into six fundamental areas: AOL, consisting principally of interactive 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, music publishing and DVD manufacturing 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. Basis of Presentation Use of Operating Income (Loss) before Depreciation and Amortization and Free Cash Flow The Company utilizes Operating Income (Loss) before Depreciation and Amortization, among other measures, to evaluate the performance of its businesses. Operating Income (Loss) before Depreciation and Amortization is considered an important indicator of the operational strength of the Company's businesses. Operating Income (Loss) before Depreciation and Amortization eliminates the uneven effect across all business segments of considerable amounts of non-cash depreciation of tangible assets and amortization of certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the costs of certain capitalized tangible and intangible assets used in generating revenues in the Company's businesses. Management evaluates the costs of such tangible and intangible assets through other financial measures such as capital expenditures and investment spending. The Company also utilizes Free Cash Flow to evaluate the performance of its businesses. Free Cash Flow is defined as cash provided by continuing operations less capital expenditures and product development costs, principal payments on capital leases, dividends paid and partnership distributions, if any. Free Cash Flow is considered to be an important indicator of the Company's ability to service its debt and make strategic investments. Both Operating Income (Loss) before Depreciation and Amortization and Free Cash Flow should be considered in addition to, not as a substitute for the Company's Operating Income (Loss), Net Income (Loss) and various cash flow measures (e.g., Cash Provided by Operations), respectively, as well as other measures of financial performance reported in accordance with accounting principles generally accepted in the United States. Update on Status of Government Investigations In its Annual Report on Form 10-K for the fiscal year ended December December: see month. 31, 2002 (the "2002 Form 10-K"), which was filed with the Securities and Exchange Commission ("SEC") on March 28, 2003, the Company disclosed that the staff of the SEC had recently informed the Company that, based on information provided to the SEC by the Company, it was the preliminary view of the SEC staff that the Company's accounting for two related transactions between America Online and Bertelsmann, A.G. should be adjusted. For a description of those transactions, see Management's Discussion and Analysis Management's discussion and analysis (MD&A) A report from management to shareholders that accompanies the firm's financial statements in the annual report. It explains the period's financial results and enables management to discuss topics that may not be apparent in the financial of Results of Operations and Financial Condition and Note 17 to the financial statements in the Company's 2002 Form 10-K. At that time, the Company further disclosed that it had provided the SEC a written explanation of the basis for the Company's accounting for these transactions and the reasons why both the Company and its auditors continued to believe that these transactions had been accounted for correctly. The staff of the SEC has continued to review the Company's accounting for these transactions, including the Company's written and oral submissions to the SEC. Recently, the Office of the Chief Accountant of the SEC informed the Company that it has concluded that the accounting for these transactions is incorrect. Specifically, in the view of the Office of the Chief Accountant, the Company should have allocated some portion of the $400 million paid by Bertelsmann, A.G. to America Online for advertising, which was run by the Company and recognized as revenue, as consideration for the Company's decision to relinquish its option to pay Bertelsmann in stock for its interests in AOL Europe, and therefore should have been reflected as a reduction in the purchase price for Bertelsmann's interest in AOL Europe, rather than as advertising revenue. In addition, the Division of Enforcement of the SEC continues to investigate the facts and circumstances of the negotiation and performance of these agreements with Bertelsmann, including the value of advertising provided thereunder. Based upon its knowledge and understanding of the facts of these transactions, the Company and its auditors continue to believe its accounting for these transactions is appropriate. It is possible, however, that the Company may learn information as a result of its ongoing review, discussions with the SEC, and/or the SEC's ongoing investigation that would lead the Company to reconsider its views of the accounting for these transactions. It is also possible that 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 the Company's financial statements with respect to these transactions may be necessary. In light of the conclusion of the SEC staff that the accounting for the Bertelsmann transactions is incorrect, it is likely that the SEC would not declare TO DECLARE. To make known or publish. By tho constitution of the United States, congress have power to declare war. In this sense the word, declare, signifies, not merely to make it known that war exists, but also to make war and to carry it on. 4 Dall. 37; 1 Story, Const. Sec. effective any registration statement of the Company or its affiliates, such as the potential initial public offering of Time Warner Cable Inc., until this matter is resolved. As previously disclosed, the SEC also continues to investigate a range of other transactions principally involving the Company's America Online unit. The Company intends to continue its efforts to cooperate with both the SEC and the Department of Justice investigations to resolve these matters. It is not yet possible to predict the outcome of these investigations, but it is possible that further restatement of the Company's financial statements may be necessary. It is also possible that, so long as there are other unresolved Not completed; not finished; not linked together. See resolve. issues associated with the Company's financial statements, the effectiveness of any registration statement of the Company or its affiliates may be delayed. Note 2: 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 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). On March 31, 2003, AOL Time Warner and Comcast Comcast Corporation, (NASDAQ: CMCSA) is the largest[1] cable television (CATV) company and the second largest Internet service provider in the United States. Corp. ("Comcast") completed the restructuring of Time Warner Entertainment Company, L.P. ("TWE") (the "TWE Restructuring"). As a result of the TWE Restructuring, AOL Time Warner acquired complete ownership of TWE's content businesses, including Warner Bros., Home Box Office, and TWE's interests in The WB Network, Comedy Partners ("Comedy Central") and the Courtroom Television Network The Courtroom Television Network (Court TV) is a cable network devoted to explaining law to the layperson. Founded in 1991, this novel venture in television programming was a long shot: few thought a twenty-four-hour-a-day, seven-day-a-week diet of live trials and legal analysis would ("Court TV"). Additionally, all of AOL Time Warner's interests in cable, including those that were wholly-owned and those that were held through TWE, are now controlled by a new subsidiary of AOL Time Warner called Time Warner Cable Inc. ("TWC TWC The Weather Channel TWC Time-Warner Cable TWC Texas Workforce Commission (also seen as TWFC) TWC The Wellness Community TWC The Washington Center TWC Teachers & Writers Collaborative TWC Trustworthy Computing Inc."). As part of the restructuring, AOL Time Warner received a 79% economic interest in TWC Inc.'s cable systems. TWE is now a subsidiary of TWC Inc. In exchange for its previous stake in TWE, Comcast: (i) received AOL Time Warner preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. , which will be converted into $1.5 billion of AOL Time Warner common stock; (ii) received a 21.0% economic interest in TWC Inc.'s cable systems; and (iii) was relieved re·lieve tr.v. re·lieved, re·liev·ing, re·lieves 1. To cause a lessening or alleviation of: relieved all his symptoms; relieved the tension. 2. of $2.1 billion of pre-existing Adj. 1. pre-existing - existing previously or before something; "variations on pre-existent musical themes" pre-existent, preexistent, preexisting antecedent - preceding in time or order debt at one of its subsidiaries, which was assumed by TWC Inc. as part of the restructuring. Comcast's 21.0% economic interest in TWC Inc.'s cable business, is held through a 17.9% direct ownership interest in TWC Inc. (representing a 10.7% voting interest Voting interest in business and accounting is a percentage of voting stock owned. This notion is different from economic interest that refers to a percentage of all the equity issued, including preferred stock, warrants, and so on. ) and a limited partnership interest in TWE representing a 4.7% residual Residual See:Residual value equity interest. AOL Time Warner's 79% economic interest in TWC Inc.'s cable business is held through an 82.1% ownership interest in TWC Inc. (representing an 89.3% voting interest) and a partnership interest in TWE representing a 1% residual equity interest. AOL Time Warner also holds a $2.4 billion manditorily redeemable Redeemable Eligible for redemption under the terms of an indenture. preferred equity interest in TWE. The additional ownership interests acquired by AOL Time Warner in the TWE Restructuring have been accounted for as a step acquisition and are reflected 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. balance sheet as of June 30, 2003. Note 3: Other Transactions and Items Affecting Comparability
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Items that impact operating
income: (millions)
Merger and restructuring
costs $ (12) $ - $ (36) $ (107)
Impairment of goodwill and
intangible assets (277) - (277) -
Gain on disposal of assets 43 - 43 -
------ ----- ------ ------
Impact on operating income (246) - (270) (107)
------ ----- ------ ------
Items that impact other
income (expense), net:
Microsoft Settlement 760 - 760 -
Investment Gains 542 90 651 90
Loss on writedown of
investments (151) (364) (174) (945)
------ ------ ------ ------
Impact on other income
(expense), net 1,151 (274) 1,237 (855)
------ ------ ------ ------
Pretax impact 905 (274) 967 (962)
Income tax impact (381) 110 (406) 385
------ ------ ------ ------
After-tax impact $ 524 $ (164) $ 561 $ (577)
====== ====== ====== ======
Merger and Restructuring Costs Merger and restructuring costs consist of charges related to mergers, employee terminations and exit activities, which are expensed in accordance with accounting principles generally accepted in the United States. During the three months ended June 30, 2003, the Company incurred restructuring costs related to various employee and contractual terminations of $12 million, including $6 million at Publishing and $6 million at Music. During the six months ended June 30, 2003, the Company incurred restructuring costs related to various employee and contractual terminations of $36 million, including $4 million at AOL, $8 million at Networks, $6 million at Music and $18 million at Publishing. During the six months ended June 30, 2002, the Company incurred restructuring costs of $107 million, including $75 million at AOL, $5 million at Music and $27 million at Corporate. These costs are included in "merger and restructuring costs" in the accompanying consolidated statement of operations See Income statement. . Impairment of Goodwill and Intangible Assets During the second quarter of 2003, the Company recorded a $178 million intangible asset impairment charge related to the Winter Sports Teams at the Networks segment and also recorded a $99 million goodwill and intangible asset impairment charge at the Publishing segment related to the AOL Time Warner Book Group. These impairments were recognized as a result of fair value information obtained during the quarter through negotiations with third parties about the potential disposition of these businesses. These amounts are included in operating income in the accompanying 2003 consolidated statement of operations. Gain on Disposal of Assets During the second quarter of 2003, the Company recognized a $43 million gain on the sale of its interest in a UK theater chain, which had previously been consolidated by the Filmed Entertainment segment. This gain is included in operating income in the accompanying 2003 consolidated statement of operations. Microsoft Settlement On January January: see month. 22, 2002, Netscape Communications Corporation (company) Netscape Communications Corporation - (Formlerly "Mosaic Communications Corporation", MCC) A company set up in April 1994 by Dr. James H. Clark and Marc Andreessen <marca@netcom. ("Netscape (1) (Netscape Communications Corporation, Mountain View, CA, www.netscape.com) Part of America Online (AOL), Netscape specializes in Web software, including the Netscape Web browser. ") sued Microsoft Corporation (company) Microsoft Corporation - The biggest supplier of operating systems and other software for IBM PC compatibles. Software products include MS-DOS, Microsoft Windows, Windows NT, Microsoft Access, LAN Manager, MS Client, SQL Server, Open Data Base Connectivity (ODBC), MS Mail, ("Microsoft") in the U.S. District Court for the District of Columbia District of Columbia, federal district (2000 pop. 572,059, a 5.7% decrease in population since the 1990 census), 69 sq mi (179 sq km), on the east bank of the Potomac River, coextensive with the city of Washington, D.C. (the capital of the United States). for antitrust Antitrust The antitrust laws apply to virtually all industries and to every level of business, including manufacturing, transportation, distribution, and marketing. They prohibit a variety of practices that restrain trade. violations under Sections 1 and 2 of the Sherman Sherman, city (1990 pop. 31,601), seat of Grayson co., N Tex., near the Red River; inc. 1858. Originally on a stagecoach route, it is a highway and railroad junction. Manufactures include electronic equipment, processed foods, military equipment, and metal products. Act, as well as for other common law violations. On May 29, 2003, Microsoft and AOL Time Warner announced an agreement to settle the pending litigation between Microsoft and Netscape and to collaborate on long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. digital media initiatives that will accelerate the adoption of digital content (the "Microsoft Settlement"). As part of the settlement, Microsoft agreed to pay $750 million to AOL Time Warner and AOL Time Warner agreed to release Microsoft from the Netscape action and related antitrust claims. In addition, Microsoft agreed to a variety of steps designed to ensure that Microsoft and AOL products work better with each other, including providing AOL with seven years of dedicated support by Microsoft engineers who have access to Windows source code, to help AOL with compatibility and other engineering efforts. The digital media initiative also established a long-term, nonexclusive license agreement allowing AOL Time Warner the right but not obligation to use Microsoft's entire Windows Media Microsoft's audio and video framework for Windows, which embraces playback, encoding and streaming. Windows Media Player is the digital jukebox and media player that comes with every version of Windows. 9 Series digital media platform, as well as successor Microsoft digital rights management software. Microsoft also agreed to provide AOL with a new distribution channel for its software to certain PC users worldwide. Finally, as part of this settlement, Microsoft agreed to release AOL Time Warner from the obligation to reimburse re·im·burse tr.v. re·im·bursed, re·im·burs·ing, re·im·burs·es 1. To repay (money spent); refund. 2. To pay back or compensate (another party) for money spent or losses incurred. Microsoft's attorneys fees in connection with an arbitration arbitration Process of resolving a dispute or a grievance outside a court system by presenting it for decision to an impartial third party. Both sides in the dispute usually must agree in advance to the choice of arbitrator and certify that they will abide by the ruling under a 1996 distribution agreement. In determining the gain recognized in connection with the Microsoft Settlement, the Company evaluated the fair value of all elements received in addition to the cash payment of $750 million. The Company has preliminarily estimated the value of the noncash elements received in connection with the Microsoft Settlement aggregated approximately $10 million. Accordingly, the total gain recognized by AOL Time Warner as a result of the Microsoft Settlement is approximately $760 million, which is included in "Other income (expense), net," in the Company's consolidated statement of operations for the three and six months ended June 30, 2003. Investment Gains During the three months ended June 30, 2003, the Company recognized gains Recognized Gain The amount of gain reported for income tax purposes. Notes: You can defer recognizing some gains until the following year(s). See also: Capital Gain, Capital Loss, Deferred Income Tax, Drought Sale, Exempt Income, Exemption, Gain, Recognized Loss on the sale of certain investments of $542 million, including a $513 million gain from the sale of the Company's interest in Comedy Central and a $14 million gain on the sale of the Company's equity interest in an international theater chain. For the six months ended June 30, 2003, in addition to the gains discussed above, the Company recognized $109 million of gains, including the $50 million gain from the sale of the Company's interest in Hughes Electronics Corp. ("Hughes") and a gain of $35 million on the sale of the Company's equity interest in another international theater chain. For the three and six months ended June 30, 2002, the Company recognized investment gains of $90 million, including a $59 million gain from the sale of a portion of the Company's interest in The Columbia Columbia, cities, United States Columbia (kəlŭm`bēə). 1 City (1990 pop. 75,883), Howard co., central Md., between Washington, D.C., and Baltimore. House Company Partnerships and a $31 million gain on the redemption of approximately 1.6 million shares of preferred stock of TiVo Inc. These gains are included in "Other income (expense), net" in the accompanying consolidated statement of operations. Investment Write-Downs The Company has experienced declines in the value of certain publicly traded and privately held investments, restricted securities and investments accounted for using the equity method of accounting. As a result, the Company has recorded non-cash pretax charges to reduce 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 certain investments that experienced other-than-temporary declines in value and to reflect market fluctuations in equity derivative In finance, an equity derivative is a class of financial instruments whose value is at least partly derived from one or more underlying equity securities. Market participants trade equity derivatives in order to transfer or transform certain risks associated with the instruments. For the three and six months ended June 30, 2003, non-cash charges 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. to reflect other-than-temporary declines in the Company's investments were $151 million and $174 million, respectively. These amounts were comprised of $160 million and $187 million, respectively, to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value, offset in part by $9 million and $13 million, respectively, of gains to reflect market fluctuations in equity derivative instruments. Included in the 2003 charge was a writedown writedown A reduction in the value of an asset carried on a firm's financial statements. For example, the firm's accountants, believing the inventory is overvalued, may decide to take a writedown by reducing inventory valuation. of $77 million of the Company's 40.3% interest in AOL Japan and a $71 million writedown of the Company's 49.8% interest in NTV-Germany. For the three and six months ended June 30, 2002, non-cash charges to reflect other-than-temporary declines in the Company's investments were $364 million and $945 million, respectively. These amounts were comprised of $363 million and $953 million, respectively, to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value, and a loss of $1 million and income of $8 million, respectively, to reflect market fluctuations in equity derivative instruments. Included in the noncash pretax charges noted above for the three and six months ended June 30, 2002 are charges of approximately $201 million and $772 million, respectively, 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., a 44%-owned equity investee, and approximately $101 million in the second quarter relating to an investment in Gateway, Inc. for declines deemed to be other than temporary. These write downs are included in "Other income (expense), net" in the accompanying consolidated statement of operations. Note 4: 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; -- The AOL, Cable, Networks and Publishing segments generating advertising revenue by cross-promoting the products and services of all AOL Time Warner segments; and -- The Music segment generating other revenue by manufacturing DVDs for the Filmed Entertainment segment. -- The AOL segment generates Other revenue by providing the Cable segment's customers access to the AOL Transit Data Network (ATDN ATDN AOL Transit Data Network ATDN Any Time Day or Night ATDN Advanced Technology Demonstration Network (Darpa) ATDN Amazon Tree Diversity Network ) for high-speed access to the Internet Internet 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 . These intercompany transactions are recorded by each segment at fair value as if the transactions were with third parties and, therefore, generally 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 and eliminated as
intercompany transactions in deriving consolidated revenues are as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
(millions)
Intercompany Revenues
AOL $ 18 $ 75 $ 68 $ 155
Cable 19 36 35 66
Filmed Entertainment 267 133 444 303
Networks 147 135 299 268
Music 151 143 300 236
Publishing 19 14 38 25
----- ----- ----- -----
Total intercompany
revenues $ 621 $ 536 $1,184 $1,053
===== ===== ===== =====
Included in the total intercompany revenues above are intercompany
advertising revenues, as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
(millions)
Intercompany Advertising
Revenues
AOL $ 2 $ 50 $ 35 $ 104
Cable 2 31 4 58
Filmed Entertainment - - - -
Networks 30 37 54 77
Music - - - -
Publishing 10 14 29 25
----- ----- ----- -----
Total intercompany
advertising revenues $ 44 $ 132 $ 122 $ 264
===== ===== ===== =====
During the quarter, there was a change in the application of AOL's policy for intercompany advertising barter barter: see exchange. barter Direct exchange of goods or services without the use of money or any other intervening medium of exchange. Barter is conducted either according to established rates of exchange or by bargaining. transactions, which reduced both the amount of intercompany advertising revenues and advertising expenses recognized by AOL during the quarter by approximately $30 million. This change, however, had no impact on AOL's operating income or its operating income before depreciation and amortization. In addition, because intercompany transactions are eliminated on a consolidated basis, this change in policy did not impact the Company's consolidated results of operations. Note 5: Cable Capital Expenditures and Subscriber Statistics Capital Expenditures
The Cable segment's capital expenditures from continuing operations
are comprised of the following categories:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
(millions)
Customer premise
equipment $ 193 $ 224 $ 371 $ 423
Scaleable infrastructure 41 46 66 86
Line extensions 50 46 89 84
Upgrade/rebuild 60 49 98 88
Support capital 83 92 149 134
----- ----- ----- -----
Total capital
expenditures $ 427 $ 457 $ 773 $ 815
===== ===== ===== =====
Cable Subscriber Statistics At the AOL Time Warner Cable segment, total customer relationships, representing the number of customers that receive at least one level of service, increased by 3% to approximately 11.3 million as of June 30, 2003 compared to approximately 11 million as of June 30, 2002 and revenue generating units, representing the total of all analog video The original video recording method that stores continuous waves of red, green and blue intensities. In analog video, the number of rows is fixed. There are no real columns, and the maximum detail is determined by the frequency response of the analog system. , digital video, high-speed data and telephony Meaning "sound over distance," it refers to electronically transmitting the human voice. In the beginning, telephony dealt only with analog signals in the circuit-switched networks of the telephone companies. customers, increased by 13% to approximately 18 million as of June 30, 2003 compared to approximately 16 million as of June 30, 2002. The Company's subscriber amounts include subscribers at both consolidated entities and investees accounted for under the equity method of accounting that are managed by the Company. |
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