AOL Keyword: Impairment

Company will lower revenue for two-year period by nearly $200 million; says "substantial goodwill impairment" coming. Plus: new round of credit downgrades likely, SEC wants bigger MD&As, and workers say they don't trust their employers so much.

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Management at AOL Time Warner Inc. said late Wednesday the company will restate revenues downward for the eight quarters ended June 30, 2002 stemming from advertising and commerce transactions at its America Online division. The adjustment will lower AOL’s revenue for the two-year period by $190 million.

The adjustments represent just 1 percent of the AOL division’s total revenues for the eight quarters.

Back in August, AOL said it may have overstated $49 million in advertising and e-commerce revenues at its AOL unit.

Management at the media giant added it does not expect any further restatements as a result of its review. It also said it will continue to cooperate with separate investigations being conducted by the SEC and the Department of Justice.

“Even though the total amount of the restatement represents a small portion of America Online’s total revenues during the period, we have taken, and do take, this matter very seriously,” said chief executive officer Dick Parsons. “This restatement will not affect the company’s committed liquidity, which includes over $8 billion of cash and unused bank facilities.”

AOL management said it has been conducting an internal review of advertising and commerce transactions at the America Online division under the direction of its chief financial officer.

At the same time that it announced the revenue restatement, AOL management warned it will probably report “a substantial overall goodwill impairment” when it completes its impairment analysis under FAS 142 at the end of the fourth quarter.

The anticipated impairment is “based on current market conditions and lower than expected performance at the America Online division,” AOL’s management stated.

The company also indicated it could not reasonably estimate the magnitude of the impairment at this point in time.

“The factors that will affect the magnitude of impairment include management’s revised operating plan of the America Online division, the results of the company’s overall current budgeting and long-term planning process, and a valuation of assets and liabilities,” AOL management noted.

In addition, the AOL impairment will take into consideration market conditions, including the decline in stock prices of comparable companies in the cable industry.

In the first quarter of the year, AOL took a record $54 billion charge to write off goodwill to reflect the sharp decline in the value of its $106.2 billion purchase of Time Warner in 2000.

The company’s management had earlier warned that the writeoff could be as high as $60 billion.

Lots of Downgrades Coming

How bad is the global economy?

Well, according to a new report from Moody’s Investors Service, one out of every 13 rated global corporate bond issuers is currently under review for downgrade. Researchers at Moody’s examined recent and historic trends in rating actions and rating reviews to come up with that number.

According to the study, three sectors alone account for nearly 65 percent of the credit reviews. Utilities and telecommunications companies account for 40 percent of the total number of issuers currently under review for downgrade. Financial institutions account for another nearly 25 percent (that group includes banks, thrifts, finance and securities firms, real estate investment trusts, and insurance companies.

Moody’s said historically, about two-thirds of all reviews are ultimately resolved in the direction in which they are initiated.

“The current trend of credit deterioration is likely to continue for the foreseeable future as indicated by our Watchlist statistics, although they also clearly reveal that some industries are under far more strain than others,” said Richard Cantor, managing director of Moody’s ratings research & analysis.

According to the report, 11 percent of utilities have been downgraded over the past three months and 20 percent are currently under review for downgrade.

Nearly one-third of telecom companies are under consideration for downgrade.

Airlines have also been under tremendous credit pressure. Most of the carriers have been downgraded since September 11, 2001, in many cases more than once. Even so, 20 percent are still under review for possible further downgrade.

The banking industry seems to be undergoing a real reversal of fortune. From September 2001 to September 2002, banking upgrades outnumbered downgrades by 2-to-1. But in the past three months, downgrades have exceeded upgrades by that same ratio, and downgrade reviews now exceed Watchlists for upgrade by 6-to-1.

“It is important to note, however, that all recent downgrades involve non-U.S. banks, as do all but a few of the current negative reviews,” Moody’s Cantor added.

SEC Advises Insurer’s Restatement

Penn-America Group Inc. Wednesday said it would restate earnings lower for the years 1999 through 2001, after “extensive discussions” with the Securities and Exchange Commission.

The insurer of small businesses said the restatement would reduce 1999 net earnings by 5 cents per share, 2000 earnings by 8 cents and 2001 net by 4 cents.

The company’s management said the restatements stem from the timing of recording other-than-temporary (OTT) declines in the market value of certain investment grade preferred stock securities and common stock exchange-traded funds.

“While the company believes that it continuously has applied a disciplined OTT policy that is consistent with existing guidance provided by generally accepted accounting principles, the company has agreed to amend its policy in accordance with the SEC’s position,” Penn-America’s management noted.

An OTT write-down is a non-cash item. According to Penn-America, the write-down will have no effect on shareholders’ equity since the amounts had already been recorded as net unrealized investment losses in the company’s consolidated balance sheets and statements of stockholders’ equity.

SEC Seeks Comments on Series of Rules

The Securities and Exchange Commission is holding open meetings next week to get comments on a number of new rules.

On Oct. 30, the SEC will consider proposing new rules and amendments regarding the use of pro forma financial information in order to implement the Sarbanes-Oxley Act. It will also consider an amendment to 8-K’s requiring the filing of earnings announcements and releases.

The Commission is also mulling new rules that will require companies to provide additional items in their MDA (Management’s Discussion and Analysis) section of filings.

In addition, the SEC is seeking comment on a proposal to prohibit an issuer’s directors and executive officers from purchasing, selling or acquiring or transferring stock during a pension plan blackout period that prevents plan participants or beneficiaries from engaging in such transactions.

On Oct. 31, the SEC will take on lawyers. It said it will consider new rules that would create standards of professional conduct for attorneys who appear and practice before the Commission on behalf of issuers. The SEC points out that these standards are also required by the Sarbanes-Oxley Act.

“These standards would include a rule requiring an attorney to report ‘evidence of a material violation of the securities laws or breach of fiduciary duty or similar violation by the company or any agent thereof’ to the chief legal counsel or the chief executive officer of the company (or the equivalent),” the SEC noted in a statement.

Short Takes

  • William Ezzell was named chairman of the American Institute of Certified Public Accountants. Ezzell is a Washington-based partner at Deloitte & Touche’s government relations division. He was described in one wire service report as a key accounting lobbyist on Capitol Hill.
  • Some 41 percent of employees believe their company is not immune to a corporate scandal, according to a survey by TrueCareers, an online job board and a subsidiary of Sallie Mae. That figure probably would have been higher — except the poll excluded 10 percent of the respondents who report that their company already has been involved in a corporate scandal.

Also, 63 percent of the 724 individuals who participated in the survey said the level of trust in their company has changed within the last six months. Just 8 percent said they believe that executives are generally trustworthy.

  • General Mills Inc. is issuing $1.35 billion of 20-year zero-coupon convertible bonds in the private placement market. The company indicated it will use the proceeds to pay down some of its estimated $4 billion in commercial paper. The company may issue an additional $150 million of bonds to meet demand.

The convertibles carry a yield to maturity of 2 percent and are convertible into common stock at $51.56, a 25 percent premium over the stock’s Tuesday’s closing price of $41.25.

  • Management at Amgen said that in the third quarter the company will take a one-time write-off of in-process research and development of $3 billion related to the acquisition of Immunex.

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