AOL Time Warner target of U.S. probe


Despite a Wall Street rally, AOL stock widened its losses after hours, meaning it is now down 67 percent this year

NEW YORK (CNN/Money) -- AOL Time Warner CEO Richard Parsons said that the Securities and Exchange Commission is conducting a fact-finding inquiry into accounting at the world's biggest media company.

The confirmation of the probe came as the company posted a second-quarter profit Wednesday compared with a year-ago loss.

Strength in the media company's cable and movie businesses offset weakness in its Internet unit.

Shares of AOL Time Warner tumbled 80 cents, or 7 percent, after hours, widening their year-to-date losses to 67 percent.

That's despite a rally on Wall Street (full roundup). Asian stocks are rising on Thursday (market open).

Parsons, speaking on a conference call, defended the company's accounting, saying allegations raised in a Washington Post report last week about boosting sales via unconventional deals were without merit.

Ernst & Young singed off on books

He said that the company's accountants, Ernst & Young, signed off on the accounting at the time of the transactions and then again when the issue was brought up.

Parsons said that AOL Time Warner called the SEC prior to the Post articles appearing. Apparently reporters from the newspaper had called the company seeking comment.

"After the articles came out, the SEC informed us that they are conducting a fact-finding inquiry,'' he said.

The SEC declined to comment.

The company's Internet unit, America Online, saw sales drop 11 percent due to weak online advertising market.

Movies boosted Warner Brothers

But AOL Time Warner credited releases of films, including "Harry Potter and the Sorcerer's Stone" and "Ocean's Eleven," with helping its Warner Brothers unit and other divisions.

New York-based America Online reported net earnings of $394 million, or 9 cents a share, for the quarter, compared with a loss of $734 million, or 17 cents a share, a year earlier. Sales rose 10 percent to $10.6 billion.

"Overall, I'm pleased with the results from most of our businesses," Parsons said.

On a cash basis, excluding one-time charges and other costs, earnings per share came in at 24 cents, the company said, topping average Wall Street forecasts of 22 cents a share, according to First Call, which tracks analysts' forecasts.

Looking ahead, the company said cash flow -- a measure of pretax earnings excluding depreciation, interest and other expenses -- will fall at the lower end of its previously announced range for the full year.

Revenue growth seen near upper end

But the company, which owns HBO, Time magazine, Warner Bros. studios and CNN, among other properties, expects its 2002 revenue growth to come in at the upper end of its 5 to 8 percent range.

Amid the worst bear market in a generation, few stocks have disappointed as much as AOL, which has tumbled 78 percent from its 52-week high.

Robert Pittman, who came from the AOL side of the company, resigned under pressure last week as chief operating officer.

A series of management changes made that day gave more power to Time Warner veterans, although Time Warner was bought by AOL.

That purchase, announced in early 2000 at the height of the bull market and completed a year later, came with the promise of double-digit growth as the merged company's Internet and media properties cross-marketed each other.

AOL growth slowed sharply

But the burst of the Internet bubble all but killed online advertising, and subscriber growth at AOL slowed sharply.

Those aren't the only hurdles facing the company, which has also suffered from as investors burned by Enron and WorldCom flee companies with complicated balance sheets.

In the company's latest results, revenue at the AOL unit fell to $2.27 billion, down from $2.33 billion a year earlier.

"The AOL division actually came in worse than expected," Fred Moran, who covers AOL for Jefferies & Co, told CNN.

Wayne Pace, the company's chief financial officer, said that may continue.

"We expect to see advertising revenue slow in the second half of the year," said Pace, who said the company has $7 billion in available funding.

Box office records

AOL added 492,000 new members in the quarter, bringing total net members to 35.1 million worldwide.

Sales in the film divisions rose 26 percent. The movie units, Warner Bros. and New Line Cinema, each set its own all-time domestic box office record with $540 million and $373 million, respectively, the company said.

As for television, last week Warner Bros. Television received 43 Emmy nominations, while HBO earned 93 Emmy nominations.

Sales at Warner Music Group, whose artists include the Goo Goo Dolls and Alanis Morissette, gained 4 percent.

CNN's total daily audience gained 67 percent over last year.

Executives on Wednesday did not address questions about a possible AOL spinoff and the likelihood of a spinoff of the cable operations as part of a deal to unwind its Time Warner Entertainment.

Instead, Parsons, the CEO who replaced Gerald Levin in May, focused on what he hopes are better times ahead for the company. "I'm confident we are making the right moves," he said. "We have all the pieces we need to succeed."