As 2001 drew to a close it became clear that the long-term financial targets AOL Time Warner set in early 2000 were increasingly unreachable due to the continued economic and advertising slump. In revising its earnings outlook last week, AOL Time Warner executives confirmed what Wall Street already knew ? not even the world's largest media company is immune to the harsh effects of the economic slowdown.

The company cut its earnings outlook for 2002, said it would fall short of its earlier projections for 2001 and said it will take an astonishingly large noncash charge of between $40 and $60 billion against first-quarter earnings to comply with a new accounting rule.

The company also confirmed it would ante up $6.75 billion in cash to buy out Bertelsmann's 49% stake in AOL Europe.

AOL TW's new conservative, even pessimistic, stance is a sharp contrast to the upbeat outlook the company maintained until shortly after the terrorist attacks last September. Commenting on the revised forecasts, AOL TW CEO-elect Richard Parsons said on a conference call with analysts that the company assumed there would be no economic recovery this year.

?Last year we made certain economic assumptions, then ran into a major advertising recession,? Parsons said. AOL TW set high expectations for itself but was penalized by investors when it failed to meet those targets, Parsons added, despite the progress the company made in areas such as rolling out broadband services, adding subscribers and setting in place a management team, he added.

Between July and September, AOL's stock fell from $53 to the low $30s and hit $29.25 in the wake of the terror attacks. Because some on Wall Street expected worse news from the media company last week, shares fell just 68 cents, or about 2%, the day after Monday evening's announcement.

Although the company is not counting on the economy's recovery this year, if it does turn upward AOL TW could benefit in coming years, Parsons said.

As for this year, if the company is to significantly outperform its forecasts, it ?would require faster than expected economic recovery and faster than expected advertising recovery,? says Spencer Wang, a media analyst at ABN Amro. ?Ad spending and economic growth are critical drivers,? he adds. Overall advertising spending fell about 3% last year.

Despite the soft economy, Parsons said the company would continue to be aggressive this year in an effort to gain market share and improve its competitive position.

For example, Time Warner Cable will continue to invest in video-on-demand ? the service should be in front of the majority of the multiple system operator's homes this year ? subscription video-on-demand, cable telephony and multiple Internet service providers.

The introduction of AOL's high-speed Internet access service, AOL Broadband, has not in fact cannibalized the company's competing Road Runner service, executives said. Parsons said he is ?hopeful and optimistic? that TWC will seal a deal with another MSO this year to offer AOL Broadband.

Voice services over cable are in the final phases of testing, and the company plans to introduce that service later this year.

Previewing its fourth-quarter and year-end results, AOL TW said it expects growth in 2001 earnings before interest, taxes, depreciation and amortization, or EBITDA, the most closely watched financial metric for big media companies, of about 18%, to just under $10 billion, and revenue growth of about 5%, to $38 billion. The 2001 results exclude charges of $1.5 billion to $1.8 billion related to declines in the company's investment portfolio and $50 million in merger-related costs. The new targets are down sharply from the 30% growth in full-year EBITDA the company projected at the outset of its merger, a target that was reduced to 20% last September.

More details are expected when AOL releases its earnings Jan. 30.

AOL TW also lowered its 2002 outlook for EBITDA growth to the 8% to 12% range, echoing downward revisions by several analysts in recent weeks. Wang at ABN Amro said the revised guidance was below his estimate of 14% EBITDA growth, but better than ABN Amro's worst case scenario, which called for EBITDA growth this year in the 5% to 10% range.

AOL TW's first-quarter net earnings may turn out to be among the worst in corporate history due to a charge of as much as $60 billion, but because it is an extraordinary noncash charge, it is not used in calculating the company's valuation.

AOL is taking the charge in order to comply with a new accounting rule related to the amortization of ?goodwill,? or the difference between the price a company pays in an acquisition and the stated book value of the assets bought. Premiums paid in an acquisition may account for such intangible assets as brand names. The new rules state that goodwill can no longer be accounted for over a period of years. Rather, companies must write down the goodwill to the assets' current fair-market value.

The write-down reflects the ?overall declines in market value since the AOL Time Warner merger was announced,? the company said.

To comply with the new rule, which takes effect this quarter, other big media companies are also expected to take charges against first-quarter earnings.

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