AOL Discloses SEC Inquiry Into Ad Deals

AOL Time Warner Inc. said the Securities and Exchange Commission had launched a “fact-finding inquiry” into the accounting treatment of some advertising transactions at its America Online unit in 2000 and 2001.

Chief Executive Richard D. Parsons disclosed the investigation Wednesday during a conference call to discuss the media giant’s second-quarter earnings, which were slightly better than expected, with revenue up 10%.

Parsons said the transactions were reviewed by Ernst & Young, the company’s auditor, which concluded that they complied with accounting standards and were properly disclosed to investors. Parsons said the company would cooperate fully with the SEC.

AOL Time Warner itself notified the SEC after the Washington Post raised questions, Parsons added. The newspaper reported last week that America Online had used unconventional ad deals to boost revenue to meet Wall Street analysts’ expectations.

The SEC, through a spokesman, declined to comment.

The probe comes at a bad time for AOL Time Warner and Parsons, who took over as CEO in May and is trying to repair the company’s credibility with investors, who have seen the share price plunge 65% this year. The poor performance has cost the jobs of former Chief Executive Gerald Levin and, just last week, Chief Operating Officer Robert W. Pittman.

Parsons tried to mend fences Wednesday, first by offering more details on America Online’s financial performance than ever before.

Analyst Tom Wolzien of Sanford C. Bernstein said he would be “up all night” poring over the numbers--including breakdowns of AOL’s subscriber base and its advertising revenue--but he was pleased by the amount of information about the troubled unit.

Parsons also promised that he and Chief Financial Officer Wayne Pace would sign new SEC forms attesting to the accuracy and completeness of the company’s financial statements.

The signed forms are a new SEC requirement, so Parsons’ statement should have been no surprise, but analyst John Tinker of Blalock & Partners said AOL Time Warner’s stock was battered during Wednesday’s trading by rumors that the executives might refuse to sign.

“Dick’s signing off tells me that they don’t expect any more nasty surprises,” Tinker said.

Parsons also tried to defuse rumors that Chairman Steve Case might be next to leave the company. Case “is my primary partner and sounding board,” Parsons said, adding that contrary to some reports, Case supported last week’s management shake-up.

AOL Time Warner shares dropped 15 cents on the New York Stock Exchange to a new 52-week low of $11.40. News of the earnings and the SEC inquiry came after the stock market closed, and the shares continued to lose ground in after-hours trading.

However, analysts were encouraged by Parsons’ performance during the conference call and by indications that the online advertising slump that has hit America Online may have touched bottom.

AOL Time Warner reported net income for the quarter ended June 30 of $394 million, or 9 cents a share, contrasted with a net loss of $734 million, or 17 cents a share, a year earlier.

Adjusted to reflect new accounting standards, year-earlier earnings would have been $592 million, or 13 cents a share, so this year’s figures represent a 33% decline.

The biggest drag on earnings continued to be America Online, where revenue declined 3% and EBITDA, or earnings before interest, taxes, depreciation and amortization--a popular profit yardstick for media companies--sank 27% amid the Internet advertising slump.

Full company EBITDA rose nearly 2% to $2.5 billion for the quarter, beating analysts’ expectations of zero growth.

AOL aside, other divisions did well, especially Filmed Entertainment, propelled by the video release of hit films “Harry Potter and the Sorcerer’s Stone” and “Ocean’s Eleven,” and the theatrical success of “Scooby-Doo.”