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AOL's New Cash, New SEC Woes

AOL Time Warner Inc. , already under regulatory scrutiny over how it accounted for some advertising deals in its AOL unit, is reportedly facing new probes by the Securities and Exchange Commission on ad deals.

The news hit the same day the company announced a $1.22 billion cash sale of its 50 percent stake in cable channel Comedy Central, a move that helps it pay down its debt.

Tuesday's Washington Post said the SEC is investigating millions of dollars of advertising deals involving AOL, which stretch beyond the scope of those already disclosed by the company.

The report, which cited anonymous sources, said among the deals under scrutiny are a $100 million transaction between AOL and Monster.com, as well as smaller deals with Drkoop.com and Catalina Marketing Corp.

AOL Time Warner plans to release its earnings for the first quarter early Wednesday. For the past two quarters, the company has disclosed SEC probes or other regulatory issues regarding advertising accounting for AOL, leaving analysts and observers alike to wonder whether today's Post article could be made official when the results are released.

The article said the latest probes allegedly reflect efforts by the ISP to "artificially boost ad revenue before and after its merger with Time Warner Inc. in January 2001, sources said."

A spokesperson for AOL Time Warner had no comment on the story.

AOL Time Warner has already disclosed that it is cooperating with the SEC and other federal agencies on how it accounted for advertising revenue with its AOL unit, some of which involved barter deals in which goods and services were swapped for advertising space on AOL during the late 1990s and early 2000.

In late March, after it filed its 2002 annual report, the company also disclosed that it may have to restate up to $400 million in revenues as the result of an ongoing SEC probe. The company said the transactions were related to advertising sales it booked with German media company Bertelsmann in the time frame covering the first quarter of 2001 through the fourth quarter of 2002.

The restatement was related to the $6.7 billion that AOL paid for about 50 percent of Bertelsmann's stake in AOL Europe. As part of a series of complex transactions that followed, Bertelsmann agreed to purchase advertising from AOL in transactions of $125 million and $275 million respectively, according to the annual report with the SEC.

Although the advertisements purchased by Bertelsmann in these transactions were, in fact, run, the SEC staff has told the company that at least some portion of the revenue recognized for that advertising should have been treated as a reduction in the purchase price rather than as advertising revenue, the filing said.

The SEC is still looking into a range of other transactions involving the AOL unit, the filing said, and the company "may not currently have access to all relevant information that may come to light in these investigations. It is not yet possible to predict the outcome of these investigations, but it is possible that further restatement of the company's financial statements may be necessary."

That disclosure marked the second time in less than six months that AOL Time Warner has said it would restate revenues related to advertising accounting in the AOL division. In October, as it released third quarter results, AOL Time Warner said it would restate financial results for eight prior quarters as part of an internal probe of accounting practices from AOL's dot-com heyday, a decision that reduced its revenues at the time by $190 million and cash earnings by $97 million.

Separately, AOL Time Warner made strides to pay down its estimated $27 billion debt load by selling its 50 percent stake in cable station Comedy Central to Viacom for $1.22 billion in cash.

In a statement about the sale, Dick Parsons, AOL Time Warner's chairman-elect and chief executive officer, said the transaction, as well as the company's sale of its investment in GM Hughes earlier this year, demonstrates the company's commitment to previously announced debt reduction goals.

"Our expected strong Free Cash Flow generation and favorable prospects for future sales of other non-strategic assets give us confidence that we can and will achieve our debt reduction targets. We are very pleased to have reached this amicable agreement with Viacom, who have been great partners at Comedy Central."

The sale is expected to close later this quarter, the company said.