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Aol discloses sec probe { July 25 2002 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A59973-2002Jul24.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A59973-2002Jul24.html
AOL Time Warner Discloses SEC Probe
By Alec Klein
Washington Post Staff Writer
Thursday, July 25, 2002; Page A01
AOL Time Warner Inc. disclosed yesterday that the Securities and Exchange Commission has launched a probe into its accounting practices after questions were raised about how the company generated revenue through a series of unconventional deals.
The world's largest media company said that its accounting was proper and that all the transactions were approved by its outside auditor. But its chief executive and chief financial officer vowed to give investors a better understanding of the business, beginning yesterday with more detailed disclosures about its online division, including its advertising and commerce revenue, as part of AOL Time Warner's announcement of second-quarter financial results.
The company performed slightly better than analysts had expected, reporting a 10 percent gain in revenue, driven in large part by its content businesses, including its movie-making division, and its cable television network.
The Dulles-based online division, however, remains a concern as its advertising and commerce revenue continued to drop and its subscription growth rate came in short of analysts' expectations.
As part of yesterday's earnings announcement, chief executive Richard D. Parsons said AOL Time Warner contacted the SEC after the company received a series of questions from The Washington Post about its business practices both before and after America Online's January 2001 acquisition of Time Warner.
"After the [Post] articles came out [last week], the SEC informed us that they are conducting a fact-finding inquiry," Parsons said in a conference call with Wall Street analysts and the media.
Parsons said "investor trust" is "fundamental to our future," and he promised the company would fully cooperate with the authorities. John Heine, an SEC spokesman, declined to comment.
The company disclosed the SEC inquiry after the close of markets. AOL Time Warner shares finished at $11.40, down 15 cents, or 1 percent, in New York Stock Exchange trading. In after-hours trading, shares fell as low as $10.49.
AOL stock is hovering at its lowest levels since October 1998. Shares are down about 76 percent since the merger was completed.
The company has moved to restore investor confidence in recent days. On the day Robert W. Pittman, under pressure, announced his resignation as chief operating officer last week, the company overhauled its corporate structure, making the online division a part of a unit that also includes Time Inc., Time Warner Cable and the AOL Time Warner Book Group.
The reorganization is a stunning turn of events for the Internet division, which acquired Time Warner about a year and a half ago in what was then considered a triumph of new media over old media. The online division now is being overseen by Don Logan, a longtime Time Warner hand.
He is part of a new team Parsons put in place to reinvigorate the company's growth. For the three-month period ended June 30, the New York company reported net income of $394 million (9 cents a share), compared with a net loss of $734 million (17 cents) in the same period a year ago. If, however, current accounting standards on goodwill were in effect in the year-earlier period, it would have shown not a loss but a gain of $592 million, or 13 cents a share. That would mean this year's results would be 33 percent lower.
Excluding one-time items, AOL Time Warner reported a per-share profit of 24 cents, flat compared with the year-earlier period. Those results were 2 cents more than analysts' expectations, a survey by investment research firm First Call/Thomson Financial showed.
Quarterly revenue rose 10 percent, to $10.58 billion, exceeding analysts' target of $10.02 billion.
The online division, however, continues to struggle. During the quarter, advertising and commerce revenue fell 42 percent. Wayne H. Pace, the chief financial officer, said the online division generated $412 million in ad and commerce revenue, of which $342 million came directly from ad revenue.
Pace said he is comfortable with the company's accounting and disclosure practices, but he said he wants AOL Time Warner to be "on the leading edge" of disclosures.
The SEC probe disclosed yesterday is not AOL's first. In May 2000, the SEC alleged that AOL violated securities laws by issuing inaccurate financial reports during 1994, 1995 and 1996 related to how AOL booked its marketing expenses. AOL denied any wrongdoing but paid a $3.5 million fine -- then the biggest amount in history -- and restated three years of earnings as part of an SEC settlement.
Now, the SEC is reviewing how AOL Time Warner booked revenue. The Post examined a number of the online division's advertising and commerce deals, focusing on several transactions that added up to $270 million. That represented a small portion of AOL's nearly $5 billion in ad and commerce revenue during the period reviewed, July 2000 through March 2002.
AOL Time Warner's chief executive said that all of the deals examined by The Post had been reviewed by AOL Time Warner's outside auditor, Ernst & Young LLP, which confirmed the company followed accounting rules in booking the deals. Parsons also said he plans to swear to the accuracy of the company's financial statements under a requirement being imposed on executives as of Aug. 14.
Parsons, however, said that adhering to generally accepted accounting principles "may not be enough" in today's climate, an apparent allusion to financial scandals unfolding across corporate America today. As a result, Parsons said, the company is working to simplify its structure and provide investors with additional information about its financial results.
Parsons faces investor unrest on several fronts: At least eight class-action lawsuits have been filed in the past five business days alleging that AOL Time Warner officials made false and misleading statements about the company's business and financial condition and how it generated advertising and commerce revenue as a result of unconventional transactions.
Now, in light of the SEC probe, analysts remain concerned about the company's prospects.
"The SEC inquiry is troublesome to me," said Jordan Rohan, an analyst at SoundView Technology Group in Old Greenwich, Conn. He said the inquiry could make it difficult for AOL Time Warner to conduct business and seek deals with other companies. For now, he said the company's prospects are "still murky."
© 2002 The Washington Post Company
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