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AOL May Restate More Results as Probe Continues

SEC Looking at Advertising Revenue

Jan 1, 2002 | Washington Post AOL Time Warner Inc. disclosed in regulatory filings yesterday that it may issue further restatements of its financial results as a federal investigation continues into a series of deals between its America Online unit and other companies.

For the first time, the media giant reported that the Securities and Exchange Commission is looking into two advertising-related transactions totaling $400 million between AOL and Bertelsmann AG, the German media conglomerate.

According to AOL Time Warner's filing, the SEC has reached a "preliminary view" that the company improperly accounted for two advertising contracts between AOL and Bertelsmann, one for $125 million and another for $275 million. In total, the two deals are the largest transactions the company has described yet to come under federal scrutiny.

The SEC is looking into the possibility that Bertelsmann bought $400 million worth of ads on the America Online service as part of AOL's payment to Bertelsmann for its 49 percent stake in AOL Europe. The SEC told AOL Time Warner that its staff reached a preliminary determination that at least part of the $400 million in advertising fees should be treated as a reduction in the $8 billion purchase price for AOL Europe. AOL had booked the $400 million entirely as advertising and commerce revenue. The AOL unit did run advertisements for Bertelsmann as specified in the contracts.

At the time that the deal took place, in January 2002, AOL was under pressure to show growth in its online advertising and commerce divisions. In October, the company announced that it would restate $190 million over a two-year period to more accurately account for advertising and commerce deals completed before and after its merger with Time Warner in January 2001.

"We are continuing our efforts to cooperate with the SEC as we have been all along and it wouldn't be appropriate to comment at this time," said AOL Time Warner spokesman Edward Adler.

In an e-mail sent to AOL Time Warner employees yesterday, chief executive Richard D. Parsons wrote: "At the time the Bertelsmann transactions took place, both we and our independent auditors believed that they were accounted for appropriately. Based on the facts available to us, we both continue to believe the accounting was correct, and we have so advised the SEC."

AOL Time Warner is under investigation by both the SEC and the Justice Department. "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," the company wrote in its regulatory filing.

Also yesterday, the company announced in a separate proxy statement that Daniel F. Akerson, a current member of its board of directors, will not stand for reelection at the next board meeting, scheduled for May 16. Akerson, the former chief executive of Reston-based XO Communications Inc., is now a managing director of District-based Carlyle Group. Akerson will not be replaced on the board, and the total number of members will be reduced from 14 to 13.

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