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AOL Posts Record $54.2-Billion Loss

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TIMES STAFF WRITER

AOL Time Warner’s problems continued Wednesday as the company posted the biggest quarterly loss in U.S. corporate history at $54.2 billion, or $12.25 a share.

The company also warned that cash flow will fall short of expectations this year because of a slowdown in ad sales at its America Online Internet unit.

AOL Time Warner had forecast the loss earlier this year. The loss was due to a change in accounting rules governing how companies account for mergers. The $54.2-billion write-down on AOL Time Warner’s balance sheet, however, did not involve cash losses and has no effect on operations.

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The previous record for quarterly loss was $41.8 billion by fiber- optic concern JDS Uniphase Corp.

Nonetheless, the AOL Time Warner loss reflects how badly the biggest media merger has failed to live up to expectations when it was announced two years ago. Investors have battered the stock to new lows, slashing AOL Time Warner’s total stock market value by more than $100 billion.

“Had this been managed more effectively, the situation would not be so bleak,” said analyst Jeffrey Logsdon of Gerard Klauer Mattison in Los Angeles. “They’re in the penalty box for a while.”

As a result of AOL’s problems in its Internet business, the company said earnings before interest, taxes, depreciation and amortization, or EBITDA, will rise at a slower rate than previously projected, from 5% to 9% rather than the 8% to 12% Wall Street had expected. EBITDA, a measure of cash flow, is a key gauge Wall Street uses for media companies.

America Online continues to be a drag on the company. AOL Time Warner said it continues to see a steep drop in online advertising, which historically generates high profit margins. In the last year, AOL’s online ad sales suffered a 31% drop; ad sales fell 10% for the entire company.

AOL Time Warner announced its results Wednesday after the stock market closed. Its stock edged up 19 cents to $19.30 on the New York Stock Exchange.

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Without the huge accounting loss, AOL Time Warner’s results would have been flat with a loss of $1 million, compared with a $1.4-billion loss a year earlier. The company said cash flow rose 3% to $2.05 billion in the quarter, or 18 cents a share, and beat the 14 cents a share Wall Street analysts had projected. A year earlier, AOL Time Warner had cash flow of 16 cents.

Some areas of the company had stellar results. Its film unit was boosted by results from the Warner Bros. film “Harry Potter and the Sorcerer’s Stone” and New Line Cinema’s “Lord of the Rings: the Fellowship of the Ring.” The two films combined have grossed more than $1.7 billion worldwide at the box office.

The company also blamed some of America Online’s lagging results on the demise of its IPlanet E-Commerce Solutions, a software alliance with Sun Microsystems Inc. formed after AOL bought Netscape Communications Corp. three years ago.

Richard Parsons, who will take over next month from Gerald Levin as chief executive of AOL Time Warner, in a conference call vowed to reverse the slide.

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AOL Time Warner’s Record Loss

Sweeping new accounting rules have forced media and technology companies to post huge financial losses in the last year.

On Wednesday, AOL Time Warner posted a $54.2-billion quarterly loss, the largest in U.S. corporate history.

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Under new accounting rules, companies are required to reduce the amount of “goodwill” on their books--or the difference between the price of assets a company purchased and their fair market value.

In recent years, many companies used their soaring stock prices to buy other companies. In 2000, when Internet access provider America Online said that it would buy entertainment conglomerate Time Warner, the two companies’ combined stock market value was $290 billion. Today, AOL Time Warner’s stock is worth $86 billion.

Here is AOL Time Warner’s breakdown of its goodwill losses:

Business line Amount of loss (in billions)

Cable business $23.0

Networks (includes Turner, HBO and the WB network) 13.1

Publishing 9.3

Music 4.8

Filmed entertainment 4.1

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