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To: Glenn D. Rudolph who wrote (103452)	5/15/2000 9:12:00 PM
From: H James Morris	Read Replies (1) \| Respond to of 164684

Glenn, on 5/10/2000 I bought Aol calls. In 1996 AOL was cooking the books...who cares now? >WASHINGTON, May 15 (Reuters) - America Online Inc. (AOL.N), the world's biggest Internet services provider, settled charges on Monday it improperly accounted for certain advertising costs and agreed to pay a $3.5 million civil penalty in a case that is meant to be a stern warning to Internet start-ups. The company reported profits for six of eight quarters during fiscal 1995 and 1996 instead of the losses it would have reported had advertising costs associated with acquiring new customers been accounted for as expenses instead of being deferred, the Securities and Exchange Commission said. ``This action reflects the Commission's close scrutiny of accounting practices in the technology industry to make certain that the financial disclosure of companies in this area reflects present reality, not hopes for the future,'' said Richard Walker, head of the agency's enforcement division. Dulles, Va.-based AOL, which did not admit or deny the SEC charges, also agreed to an administrative order preventing further violations of securities laws. The advertising costs, which included costs associated with sending millions of computer disks to potential customers, were improperly capitalised on AOL's balance sheet and reached about $385 million by Sept. 30, 1996, when the company wrote them off in their entirety, according to the SEC. ``As a result, America Online will restate its historical results from 1995 to 1997 to reflect that changed treatment,'' AOL said in a written statement. This is the first time the SEC has brought such an enforcement case against a public company for improper capitalisation of advertising related to soliciting new customers and is meant as a warning to other start-up companies trying to draw in new customers. ``The broader point is to teach the message that we're paying very careful attention to what's going on in the accounting practices in the Internet business,'' said Thomas Newkirk, associate director of the SEC enforcement division. He said that more cases involving Internet companies and other accounting problems will be forthcoming in the months ahead. ``It's probably the most common area of controversy in accounting,'' said Bob Willens, a tax and accounting analyst at Lehman Brothers. ``It certainly comes up all the time, particularly now when you're dealing with new industries.'' SOARING REVENUES Earlier today in New York AOL President Bob Pittman predicted that the company, set to merge with Time Warner Inc. (TWX.N) will have combined revenues of $40 billion in 2001 and cash flow to grow 30 percent in the first year of the combination. AOL had revenues of $4.9 billion in the nine months ended March 31, already ahead of the $4.8 billion for all of fiscal 1999. Time Warner had 1999 revenues of $27.3 billion. Accounting rules prohibit companies from capitalising direct response advertising costs unless it can show, based on past experience, that future net revenues from its customers obtained through advertising will exceed the capitalised costs. The securities regulator said AOL did not qualify because it was working in an industry where technology was rapidly changing, the company's business model was evolving and its customer retention rate was unpredictable. Further, AOL was also unable to predict future costs of obtaining revenue, it had a negative cash flow, competition was increasing, while the rate at which it could retain customers was not certain, according to the SEC. ``The advantage of deferral is you usually get better matching of revenue and expenses. Undoubtedly AOL's theory is that these expenses, these shipping charges, will produce revenue beyond once they are incurred,'' Willens said. However, the SEC tends to prefer expensing costs in the period in which they they are incurred. ``The purpose here is to make clear that we don't think businesses in the Internet world can avail themselves of that exception,'' the SEC's Newkirk said. He also noted that the agency rarely issues fines in accounting cases. Shares in AOL closed up 3-9/16 to 58-5/8 on the New York Stock Exchange. 20:30 05-15-00