AOL Said to Take $10 Billion Charge

AOL Time Warner is preparing to take another major charge against earnings, up to $10 billion, the Washington Post reported Thursday, citing unnamed sources.

The charge, related to ongoing deterioration in the value of its America Online unit, is expected to be disclosed on Jan. 29th when the media giant releases its annual earnings report.

Back in October, AOL Time Warner officials had disclosed the possibility of additional asset impairment charges during the company’s third quarter earnings discussion. Its annual update on possible charges was not expected to be complete until the fourth quarter.

An AOL Time Warner spokesperson did not comment on the Post story, but said the charge “would be a non-cash, non operational charge that would not affect (cash earnings) or the operations of our business.”

Last year, AOL Time Warner recorded a $54 billion write-down when it released its 2001 annual report, a charge considered at the time to be the largest asset impairment write-off in corporate history.

Because of new accounting rules for measuring goodwill — the difference between the fair value of an acquisition and the price paid — AOL Time Warner said at the time it would take the one-time, non-cash charge to reflect the lowered valuation of the cost of merging ISP America Online with Time Warner Entertainment.

News of another asset-impairment charge, possibly up to $10 billion, comes as AOL tries to put a difficult year behind it and continue pushing to build new e-commerce initiatives to replace an expected 50 percent drop in advertising revenue in 2003 as older, long-term ad contracts run their course.

In early December, AOL Time Warner officials said they expect AOL’s full-year 2002 total revenues to come in between $8.8 billion and $9 billion, with advertising and commerce revenues expected to be between $1.5 billion and $1.6 billion.

As a result, AOL officials said they expect overall revenues to be essentially flat in 2003 compared with 2002 and expect cash earnings for the past year to fall by between 15 percent to 25 percent year over year.

During remarks Thursday at a Salomon Smith Barney investment conference in California, Wayne Pace, AOL Time Warner’s chief financial officer, stuck to the company’s guidance. He called 2003 a year of resetting for AOL, but predicted a return to growth for the ISP in 2004.

“We think that AOL long term is a growth business,” he said during a question and answer portion of his remarks. AOL Time Warner is not interested in just “milking the cash” out of AOL and moving on, he said of the unit, which has been struggling to regain its footing after a sharp decline in advertising and commerce revenues leftover from the dot-com boom years of the late 1990s.

The company expects to see a decline of about $500 million worth of advertising/commerce revenues through 2003, he said, “that we think will be partially offset by moderate new sales agreements.”

In addition, AOL will have a “relentless focus on cost management” in 2003, which includes a top-to-bottom review by AOL management of the ISP’s costs, including about $1 billion the unit spends on marketing, he said.

The latest news of another charge to reflect the lowered value of the unit is expected to not only revive the debate over whether AOL will be spun off or left in the AOL Time Warner corporate fold, but also what kind of valuation AOL should be assigned as part of the AOL Time Warner share price.

However, investors appeared to have already digested the new asset-impairment charge news, as AOL Time Warner shares edged up by about 1.2 percent to $14.05 in mid-afternoon trading Thursday.

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