AOL TO RESTATE TWO YEARS OF FINANCIAL RESULTS

Cites $190 Million Overstatement of Advertising and Commerce Revenue

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NEW YORK (AdAge.com) -- AOL Time Warner posted somewhat improved third-quarter results and announced it will restate results for the last two years to eliminate $190 million in overstated advertising and commerce revenue.

The restatement will include results at its America Online unit for the quarters ended Sept. 30, 2000, through June 30, 2002, eliminating $168 million of its advertising and commerce revenues for the period, or 1% of the division's revenue and 3.4% of its ad/commerce revenue. The remaining $22 million in revenue involved AOL transactions where advertising was delivered by other AOL Time Warner units.

Slightly more than half of the revenue overstatement occurred since January 2001, when America Online acquired Time Warner. The restatement will reduce net income for the affected quarters by $46 million.

Federal investigations
The restatement was part of a review of accounts from past quarters started after the U.S. Department of Justice and Securities and Exchange Commission began investigations of the company's accounting practices.

The "extensive review" included transactions covering more than 70% of America Online's advertising and commerce

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revenue for the period and the adjustments include the three transactions that triggered the federal probe, plus others, said CEO Richard Parsons.

In a conference call with analysts after the market close, Mr. Parsons refused to give more "texture" on the accounting review, citing pending litigation and the ongoing investigations. "We have taken and we continue to take those matter very seriously," he said.

AOL Time Warner released its results after the market closed. The stock closed at $13.53, up 3 cents. It moved up in after-market trading this evening to $14.38.

For the third quarter, the company reported net income of $57 million or 1 cent a share for the quarter, compared to a loss of $997 million or 22 cents a share in the year-ago period. Earnings before interest, taxes, depreciation and amortization -- or Ebitda, a measure of operating results before deducting those expenses -- declined 1% to $2.2 billion.

Revenue for the quarter rose 10% to $9.98 billion from $9.1 billion, with increases at every unit except America Online.

Advertising revenue down
Subscription revenue grew a strong 21.4% to $4.8 billion from $3.97 billion. But advertising and commerce revenue was down 9.7% for the quarter to $1.7 billion from $1.88 billion, with weak results at America Online and better than expected results at other units, said Wayne Pace, chief financial officer.

America Online's ad and commerce revenue dropped 48% in the quarter, mainly due to a weak online advertising and less carry-over from prior-period contracts. Meanwhile, AOL Time Warner's TV networks increased ad revenue 7% for the quarter, thanks to improvement in cable advertising and higher rates at the WB network. Additionally, its publishing unit grew advertising 13%, largely thanks to the contribution of Synapse, a subscription marketing company it acquired last December.

Mr. Pace said traditional media is expected to grow well next year with America Online "the only variable." He said the company expects strong fourth-quarter performance from every division except America Online. Management reaffirmed its previous forecast of 5% to 8% revenue growth for the full year and Ebitda in the low end of the 5% to 9% range it had previously forecast.

'Bear with us'
But executives deflected many specific questions about AOL. Mr. Parsons asked analysts to "bear with us" until an analyst day scheduled for Dec. 3, where the new America Online management is expected to unveil turnaround plans and a new broadband offering.

AOL Time Warner continues to be a big advertiser using its own media. AOL Time Warner divisions recorded $138 million in ad/commerce revenue, or 8.1% of their total ad/commerce revenue, from siblings. That's up from $97 million, or 5.2% of total ad/commerce revenue, in the same quarter last year. Divisions report that revenue, but the parent subtracts it from its total reported revenue.

Meanwhile, AOL Time Warner readied the market for another large writedown of goodwill, reflecting the declining market value of assets on its balance sheet. AOL Time Warner took a $54 billion goodwill writedown in the first quarter-the largest in history, setting the stage for a massive net loss this year-and said it believes an additional "substantial overall goodwill impairment" had occurred as of Sept. 30. It will complete a goodwill analysis this quarter. It said any goodwill writeoff won't affect its loan covenants, including one requiring it to keep its net worth -- the difference between assets and liabilities -- above $50 billion. Net worth as of Sept. 30 was $98 billion, down from $152 billion on Dec. 31.

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