|
More sec probing { April 22 2003 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A7190-2003Apr21.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A7190-2003Apr21.html
SEC Probing More AOL Advertising Deals
Agency Checking to See if Firm Illegally Boosted Revenue in Monster.com, Drkoop.Com Transactions
By David A. Vise
Washington Post Staff Writer
Tuesday, April 22, 2003; Page E01
The Securities and Exchange Commission is investigating millions of dollars of advertising deals involving America Online that go significantly beyond the scope of problems already disclosed by AOL Time Warner Inc., sources familiar with the probe said yesterday.
Among the deals under scrutiny are a $100 million transaction between America Online and Monster.com, as well as smaller deals with Drkoop.com and Catalina Marketing Corp. The transactions allegedly reflect efforts by Northern Virginia-based America Online to artificially boost ad revenue before and after its merger with Time Warner Inc. in January 2001, sources said.
These deals, and others like them, explain why chief executive Richard D. Parsons has said he cannot ensure that no additional accounting problems will be disclosed while the federal probe is ongoing.
"We are continuing our efforts to cooperate with the SEC on their investigation," AOL Time Warner spokeswoman Tricia Primrose said yesterday.
The transactions in question are detailed in millions of pages of documents turned over by AOL Time Warner to the SEC in response to subpoenas and other document requests. They were not included in AOL Time Warner statements about the $190 million in revenue that it said last fall it planned to restate, or in the company's recent disclosure that the SEC has challenged AOL's accounting for $400 million in ad revenue from media giant Bertelsmann AG.
AOL Time Warner is scheduled to next report its quarterly earnings and answer questions from industry analysts tomorrow.
The SEC probe may continue for months, sources said, because federal investigators want to make certain that they do not overlook any material issues before attempting to negotiate a settlement with AOL Time Warner.
One of the largest ad deals under review by the SEC is a $100 million, four-year pact announced in late 1999 between AOL and Monster.com, the online job search firm. Investigators are seeking to determine whether the transaction was actually a profitless, "round-trip" deal in which the companies agreed to promote each other through ads on their respective Web sites. It is possible, sources said, that America Online improperly booked tens of millions of dollars of ad and commerce revenue in connection with the deal, even though accounting rules suggest that there was no real revenue to record.
"We don't comment on investigations of other companies," said Kevin Mullins, a spokesman for Monster.com.
Others familiar with the Monster.com agreement said it may have been a typical barter deal that could be subject to misinterpretation.
"The mere fact there are contemporaneous transactions going in both directions doesn't make them improper," a source familiar with the financial structure of the deal said. "Barter is a perfectly acceptable and ancient economic way of doing business. There are, of course, accounting rules that have to be followed."
In the case of Drkoop.com, the health care Web site, AOL may have turned a busted deal into advertising revenue by negotiating a $9.6 million contract-termination fee that it booked improperly as advertising revenue, sources said. In July of 1999, AOL and Drkoop.com made a four-year $89 million deal. After the transaction fell apart in the spring of 2000, AOL agreed to alter the contract in exchange for 3.5 million shares of Drkoop stock, then valued at $9.6 million.
The SEC is examining whether AOL may have improperly accounted for the $9.6 million as ad revenue in the second quarter of 2000, sources said. Accounting rules suggest that a fee received to alter a contract typically would be recorded as a one-time gain, rather than revenue from the company's advertising or other ongoing operations.
Drkoop.com was acquired last year by Florida-based Vitacost.Com Inc., which indicated yesterday that it had its own business problems with AOL unrelated to the federal probe.
"We have not been contacted by the SEC," said Wayne Gorsek, chief executive of Vitacost.Com. But Gorsek said the company, which focuses on online and catalogue sale of nutrition products, plans to file a lawsuit against America Online over alleged misrepresentation of the effectiveness of advertising on the giant Internet service.
"We intend to file our own civil lawsuit seeking damages because we feel that AOL misrepresented the performance of their ad campaigns," Gorsek said. "We feel we were misled by the AOL salesperson and management."
AOL declined to comment on the matter.
The SEC is also investigating a deal between America Online and Catalina Marketing in which AOL may have improperly manipulated the timing, frequency and placement of ads to falsely inflate revenue in the first quarter of 1998, sources said.
America Online and Catalina had agreed to a two-year, $10 million contract for supermarket advertising on AOL, the nation's biggest provider of Internet access. Under the terms of the deal, the ads were to run in a new, online food section of AOL.
But before the food section was ready, AOL apparently began running the ads with high frequency -- ahead of the contractual schedule -- allegedly to book additional revenue in early 1998. The SEC is investigating whether the company may have improperly engaged in practices known as "front-loading" and "jackpotting" -- that is, booking revenue from ads run excessively without the prominence or timing agreed upon in the contract, in order to accelerate revenue.
A Catalina spokeswoman declined to comment.
AOL Time Warner officials remain hopeful that the company's efforts to cooperate with the investigation will enable the commission to end its probe in the near future. But SEC lawyers want to avoid being embarrassed by closing the books on the case prematurely and being upstaged later by disclosures of wrongdoing that may emerge in private litigation or the related criminal probe.
Meanwhile, saddled with $30 billion in debt, AOL Time Warner has put its sports teams, book-publishing business and other divisions up for sale. It is likely, sources said, that the company will announce the sale of its 50 percent stake in the Comedy Central cable network this week to Viacom Inc., the giant media firm that already owns a half-interest in the channel.
Parsons has said that, in addition to resolving the SEC probe, the company has made paying down debt a top priority. His goal is to sell enough assets, and generate sufficient cash, to reduce debt to $20 billion by the end of next year.
© 2003 The Washington Post Company
|
|
