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.

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