AOL says it's being probed by SEC

NEW YORK (CBS.MW) -- Shares of AOL Time Warner fell as much as 8.8 percent after hours Wednesday as the company reported that the Securities and Exchange Commission is investigating its accounting.

Shares of AOL, the world's largest media company, dropped as low as $10.40 in after-hours trading, following the second-best one-day gain ever recorded for the Dow Jones Industrial Average.

AOL Time Warner also reported its second-quarter earnings after Wednesday's close, with a profit of $394 million that surpassed Wall Street's estimates. Revenue rose to $10.6 billion.

During a conference call with analysts, AOL Chief Executive Richard Parsons said the SEC is conducting a "fact-finding" investigation into the way the company's America Online unit booked certain advertising transactions.

Parsons said AOL would "cooperate fully" with the government's investigation, which was triggered by a Washington Post series that looked into unusual accounting practices. These included solving legal disputes by having agreements to purchase online ads as a way to help meet Wall Street's forecasts for three quarters spread over 2000 and 2001.

AOL's EBITDA (or earnings before interest, taxes, depreciation and amortization) were in line with forecasts, $2.46 billion versus projections of $2.41 billion.

AOL's film division was a strong performer. The company is optimistic about its upcoming major release on Friday, the third installment of the "Austin Powers" comedy series, starring Mike Myers.

Analysts are taking a cautious stance about AOL's prospects. The company is so large that "there always seems to be something wrong somewhere," said Jordan Rohan, analyst with SoundView Technology in Old Greenwich, Conn., after the earnings release. Rohan said he is maintaining his company's "neutral" investment rating on AOL.

During the conference call, AOL Chief Financial Officer Wayne Pace added that the company is "very comfortable" with its accounting methods. The executives said Ernst & Young, AOL's auditor, signed off on the company's results.

Parsons kept his forecasts for the third quarter conservative, saying online advertising would continue to be weak. His cautious tone marked a sharp contrast with the bold proclamations made by former CEO Gerald Levin and other executives in such calls in the past.

In Wednesday's earnings report, AOL posted a profit of 24 cents a share, compared with 32 cents a share and $9.2 billion in revenue for last year's second quarter. This year's quarterly per-share figure was 2 cents better than the Thomson Financial/First Call consensus estimate.

Net income came to $394 million, or 9 cents a share. In last year's second quarter, the company had a loss of $374 million, or 17 cents a share.

During the regular trading session, AOL shares dropped 15 cents, or 1.3 percent, to $11.40 on a day when the Dow Jones Industrial Average exploded in a historic leap of 488.88 points, or 6.3 percent, to 8,191.29.

The latest report marked the second consecutive quarter that AOL released its earnings results in the shadow of bad news.

Last week, Robert Pittman, was forced out as the company's chief operating officer. Three months ago, AOL's announcement followed news that the company had reported the biggest quarterly loss in corporate history.

Further, on Tuesday, AOL rushed to deny a published report that Chairman Steve Case would step down over differences with Parsons' decision to replace Pittman with Time Warner executives Jeff Bewkes of HBO and Don Logan of Time Inc. AOL said Case supported the move and planned to stay at the company.

For his part, Parsons has had a difficult time impressing Wall Street since he replaced Gerald Levin, an architect of the merger that created AOL Time Warner. AOL's stock has dropped some 39 percent since he replaced Levin.

Wall Street is unconvinced that Parsons can enact a plan that will revive the America Online unit, concoct a growth strategy overall and promote cooperation between the warring America Online and Time Warner factions

On a long-term basis, analysts have said AOL's stock, which has fallen 73 percent in the past year, could be bottoming.

The stock "could double" in the next 12 months, said David Joyce, an analyst with Miami-based Guzman & Co. He expects the company's troubled America Online unit to show improvement as the online advertising business picks up.

A year ago, the America Online division produced 23 percent of the parent's revenue.

July 8 announcement from AOLTimewarner page:

NEW YORK, NY, -- AOL Time Warner Inc. (NYSE: AOL) today announced that it has successfully closed two new, long-term revolving credit facilities with $10 billion in aggregate availability to replace two bank credit facilities maturing later this year and to maintain its strong liquidity position. These revolving credit facilities are part of the Company's overall diverse corporate funding program that includes significant free cash flow from operations, bank credit facilities, commercial paper programs in the US and Europe, asset securitization programs and access to the capital markets.
The Company said that its new $6 billion, 5-year revolving credit facility and $4 billion, 364-day revolving credit facility (with a two-year term-out option) were arranged through a syndicate of 27 financial institutions that provided almost $12 billion of commitments for the facilities. The five agents for the credit facilities are ABN AMRO Bank, Bank of America, BNP Paribas, Citibank, and JP Morgan Chase Bank.

I never understood the AOL business model. Basically, they 'gave themselves away' as a marketing scheme and cornered the 'newbie' internet market... They didn't do anything to resuscitate their brand once the 'net became 'sophisticated'; if anything they happily let their brand languish. There were no meaningful software updates (their email protocols are god-awful, useless to anyone serious about communication), and there was no vision about their brand, let alone their core business. They became a laughingstock.

Yet they still raked in (if you can believe them) more than $350 million per month in subscriptions per month.

Weighted by their (seemingly ill-advised) buy of TimeWarner, they continue to slide as dissatisfied users bail en-masse.

I can't see that they have anywhere to go but down...

Basically, they 'gave themselves away' as a marketing scheme and cornered the 'newbie' internet market...
...
They became a laughingstock.

They always were a laughingstock. Where do you think the term endless September came from?

"PROBED"?

How tall are the government agents, and what color?

What size are the eyes?

Do they actually speak to you or just scare the hell out of you from a distance with ESP or thought transference ability ?

Do they dress like the old grey-clad Marxists?

Have they promised you things that seem to be too good to be true?

Should be an investigation, but by whom?

Now the goose bumps occur...

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