- The Washington Times - Thursday, July 25, 2002

The Securities and Exchange Commission is looking into advertising transactions at AOL Time Warner Inc., officials at the Internet and media company said yesterday.

Chief Executive officer Richard Parsons defended his company's accounting practices and said AOL Time Warner will cooperate fully with the SEC's request for information, which he characterized as a "fact-finding inquiry."

Mr. Parsons, in a conference call, also said the company's auditors twice examined all its advertising transactions, and he stressed that he is comfortable with AOL Time Warner's accounting.

Analysts said the inquiry could cast a pall over the company.

"An SEC investigation tends to cast a radioactive hue over a company," said Jordan Rohan, analyst at SoundView Technology Group.

AOL Time Warner reported nearly $400 million in net income yesterday, despite another disappointing quarter at America Online, the Internet unit that has been hampered by lower spending among online advertisers the past three quarters.

The company reported $10.6 billion in revenue for the second quarter, up from $9.3 billion a year ago. Corporate officials said AOL Time Warner will concentrate on increasing revenue by exploiting the restructuring it announced last week after the resignation of Chief Operating Officer Robert Pittman, who was given temporary control of America Online three months ago in a failed attempt to rejuvenate the division.

"We're making the right moves to drive sustainable growth. We have all the pieces we need," Mr. Parsons said.

AOL Time Warner's board of directors last week promoted Home Box Office Chairman Jeff Bewkes, 50, and Time Inc. Chairman Don Logan, 58.

Mr. Bewkes will run an entertainment and networks group that will include HBO, New Line Cinema, the WB and Turner networks, Warner Bros. and Warner Music. Mr. Logan will head a media and communications group that will include America Online, Time Inc., the book group and Time Warner Cable.

"This is the structure that best fits our strategy," Mr. Parsons said.

The expressed support for both men during the conference call and outlined the motive behind the move.

"I needed and felt I wanted help," he said. "This is a move to put a layer in place to help me integrate the company."

Mr. Logan and Mr. Bewkes will be charged with figuring out how the media and online divisions can complement each other.

"We're telling our divisions to operate independently but compete collectively," Mr. Parsons said.

Analysts say it could be a long time before investors begin to hear that AOL's $124 billion purchase of Time Warner, which earned regulatory approval in January 2001, is paying off.

"I'm not holding my breath on that one," said Yousseff Squali, technology analyst at First Albany Corp.

Mr. Logan may have the more difficult job of the two men who were vaulted to the top of the company by the restructuring fixing AOL. He will have help from a new chief executive at AOL. Mr. Parsons said an executive will be appointed soon to run the Internet division, based in Sterling, Va.

Revenue at America Online fell 3 percent, and advertising revenue fell 42 percent in the quarter to $412 million. Advertising revenue will be comparable in the third quarter, AOL Time Warner Chief Financial Officer Wayne Pace said.

It is not clear when advertising revenue at AOL will bottom out, said Philip Leigh, technology analyst at financial adviser Raymond James and Associates.

America Online added 492,000 subscribers during the quarter, down from 1.3 million new subscribers during the second quarter a year ago. Finding new subscribers is both harder and more expensive, Mr. Parsons said.

AOL Time Warner bounced back from a horrific first quarter, when it reported a $54.2 billion loss, the biggest in U.S. history.

AOL Time Warner stock closed at $11.40 a share on the New York Stock Exchange, down 15 cents. The stock is down 64 percent from its close of $31.60 a share at the beginning of the year.

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