daily 07-18-02 dm m2 a1 cmyk abcde€¦ · tel aviv, july 17—two palestin-ian suicide bombers...

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By John Ward Anderson

and Molly Moore

Washington Post Foreign Service

TEL AVIV, July 17—Two Palestin-ian suicide bombers detonated explo-sives outside a convenience store on abusy pedestrian walkway in an im-migrant neighborhood of Tel Aviv to-night, killing themselves and three oth-er people.

The bombings, which also injured40, marked the second Palestinian at-tack against Israeli civilians in two daysafter a hiatus of nearly a month.

The bodies of the bombers, one cladin a red shirt, the other wearing blue,were found about 30 yards apart, ac-cording to Israeli police. Witnessessaid the first bomber exploded himselfnear tables where customers weredrinking beer and eating nuts. Some ofthe panicked victims, in trying to es-cape, raced headlong toward the ac-complice, who then detonated hisbomb.

“I was walking by the store with mydaughter,” said Benita Ustaris, 24, ahousekeeper who moved from Boliviafour years ago. “There was an explo-sion, the first one. And then from the

3 CiviliansDie inTel AvivBombing2nd Attack in 2 DaysFollows Month’s Lull

See MIDEAST, A25, Col. 2

First of two articles

By Alec Klein

Washington Post Staff Writer

In October 2000, a critical question confrontedAmerica Online Inc. as it sought to clinch thelargest merger in U.S. history: Was it feeling theeffects of an industry-wide slowdown in ad-

vertising?AOL’s president at the time, Robert W. Pittman,

offered a resounding answer: “I don’t see it, and Idon’t buy it,” he told Wall Street stock analysts andthe media.

Other AOL officials were less optimistic. Whileoverall revenue from online ads continued to growrapidly, internal company projections raised cautionabout one sector: dot-coms. Failures were accelerat-ing among those Internet start-ups, which re-presented a significant amount of the company’s adbusiness.

About two weeks before Pittman’s declaration onOct. 18, he and other executives were told in a meet-ing at Dulles headquarters that AOL faced the risk oflosing more than $140 million in ad revenue the fol-lowing year.

That would equal only about 5 percent of AOL’sproceeds from advertising and commerce. AOL pro-jected that most dot-com clients would still be able topay their bills. But the internal warning came wheninvestors were highly alert to any weakness in onlineadvertising. Just a week before Pittman’s publicstatements, for example, shares of AOL’s key com-petitor, Yahoo Inc., plunged 21 percent after the com-pany reported strong ad growth but acknowledgedthat the pace could not be sustained. A day beforePittman spoke, AOL shares dropped 17 percent onwhat analysts described as similar worries.

In such an atmosphere, and with its takeover ofTime Warner Inc. imminent, AOL sought to maintainits breakneck growth in advertising and commercerevenue. Besides selling ads on its online service forcash, AOL boosted revenue through a series of un-conventional deals from 2000 to 2002, before and af-ter the merger, according to a Washington Post re-view of hundreds of pages of confidential AOL

THE DEAL MAKERSHow AOL Hit Its Numbers

UnconventionalTransactionsBoosted SalesAmid Big Merger, CompanyResisted Dot-Com Collapse

See AOL, A16, Col. 1

By Steve Vogel


It was the summer of 1926, and Ben Davis was 14when his father paid $5 for a barnstorming pilot at Boll-ing Air Field in Washington to take his son for a ride.

By the time the plane landed, Benjamin O. Davis Jr.knew he wanted to be a pilot, a decision that would notonly alter his life but have a profound impact on racial in-tegration both in the U.S. military and in the country asa whole.

At Bolling Air Force Base yesterday, Davis, who diedJuly 4 at age 89, was remembered as a pioneer and ahero who shattered racial myths as the commander ofthe famed Tuskegee Airmen in World War II and later as

the first black general in the Air Force.“It was here at Bolling Field that General Benjamin O.

Davis Jr. gave birth to his dream to fly, and oh, what anaviator he became,” Air Force Col. Harold Ray, a chap-lain, said at the memorial service in the packed Bollingchapel. “It’s only fitting that here at Bolling he take hisfinal flight.”

Davis’s coffin, draped with an American flag, waslater carried across the river to Arlington National Cem-etery for burial with full military honors. Hundreds ofmourners followed behind the horse-drawn caisson thatcarried the coffin in the hot July sun. Modern Air ForceF-15 and F-16 fighters and vintage World War II air-

BY DUDLEY M. BROOKS—THE WASHINGTON POST

An airman salutes the casket of Gen. Benjamin O. Davis Jr. during the burial procession at Arlington National Cemetery.

Final Salute for Pioneering HeroThe Famous and Ordinary Honor Man Who Led Tuskegee Airmen

See DAVIS, A10, Col. 1

By Yolanda Woodlee

and Craig Timberg

Washington Post Staff Writers

Ann E. Lewis, who works securityat an apartment building in South-east Washington, decided to pick upa few extra dollars by collecting sig-natures for the reelection campaignof Mayor Anthony A. Williams. Sheasked residents to sign as theypassed the reception desk, filling upparts of four petition pages—$55 for55 signatures.

But the nominating petitions filedby the mayor’s reelection campaignsuggest that Lewis was far more pro-lific than she recalls. Eighteen pagesof petitions bearing the signatures of360 supposed voters were validatedby her signature at the bottom—or

the signature of someone pretendingto be her.

“I definitely did not have 18sheets,” said Lewis, 64, who said sheis still owed $15 by the campaign.“No way. If I find out people haveforged my name, I’m going to suesomebody. I’ve never been involvedin anything scandalous.”

Williams yesterday accepted theresignation of his top campaign staff-er, Charles N. Duncan, and put a sec-ond staffer on indefinite leave aspunishment for their role in the peti-tion crisis, which has jeopardizedthe mayor’s plans to appear on theDemocratic primary ballot in Sep-tember.

He also acknowledged his respon-

Petition Workers’ NamesMay Have Been Forged

BY GERALD MARTINEAU—THE WASHINGTON POST

“Mistakes were made by this mayor,”Anthony A. Williams said yesterday at anews conference. He also announced theresignation of his top campaign staffer;another worker was put on indefinite leave.

QuestionableSignaturesSome signatures of petitioncirculators appear to be forged.

THE WASHINGTON POST

In each pair of signatures, the top is froma voter registration card, the bottom is froma questionable petition page.

See MAYOR, A12, Col. 1

By Caroline E. Mayer and Claudia Deane


James Oliver can still be found working in his NorthwestWashington office—even though the 60-year-old cardiolo-gist had hoped to be retired and living on San Diego’s waterfront by now.

Elizabeth Medina of Queens, N.Y., shortened her fami-ly’s summer vacation from eight days to four. And insteadof taking their two young daughters to Walt Disney Worldnear Orlando, Medina and her husband went to Tampa.“We’d have spent more money in Disney World,” said the38-year-old online service specialist.

Meanwhile, retired West Virginia government employeeFrank Tolliver has decided not to replace some of theequipment on his 300-acre farm. “For a while I was feelingpretty flush,” said Tolliver, who was heavily invested intechnology stocks. Today, he added, “I certainly have lessfaith in the stock market.”

The sharp decline of the stock market is slowly butsteadily prompting many investors to make changes in theway they manage their money and even how they live fromday to day. For some, plunging share prices have meant

Stock DeclinesPrompt Lifestyle,Portfolio Changes

See INVESTORS, A18, Col. 1

By Jim VandeHei


Many Republicans, increasinglyconcerned that President Bush hasbeen slow to address brewing contro-versies, are racing ahead of him onseveral fronts, most notably in effortsto rein in wayward corporations.

While still highly supportive ofBush in general, these Republicansbelieve he has failed to soothe public

anxieties about the economy or touse the bully pulpit to protect theirparty from charges that it is soft oncorporate wrongdoers who have con-tributed to the stock market’s sharpfall. Several showed their anxietythis week by calling on Congress toembrace stiffer penalties for such ex-ecutives than the president has pro-posed.

They are also advocating moremoney for the Securities and Ex-

change Commission and the Trea-sury Department to police corpora-tions. Elsewhere, many congress-ional Republicans are pushing formore funding to combat AIDS, fightfires and fund other popular pro-grams, which could complicate thepresident’s campaign to hold downspending.

The decision to one-up the presi-

GOP Racing Ahead of PresidentBush Response to Politically Perilous Issues Worries Lawmakers

See REPUBLICANS, A4, Col. 1

The older son of a D.C. executivewhose car was blown up Friday ismissing, police said. Theexecutive’s younger son wasseverely injured in the blast.METRO, Page B1

Older Son MissingIn SUV Blast Case

Tiger Woods, who has won thefirst two legs of golf’s Grand Slam,begins his quest for the third todayat the 131st British Open athistoric Muirfield in Scotland.SPORTS, Page D1

Tiger Takes AimAt British, Grand Slam

Capital One stock fell nearly40 percent after the Falls Churchcredit card company agreed withfederal regulators to make changesregarding high-risk loans.BUSINESS, Page E1

Capital OneStock Plunges

1 Contents 2002TheWashingtonPostCompany

The Post on the Internet:www.washingtonpost.com

INSIDE

K Washington bids farewell to the National Gallery of Art’s J. Carter Brown. | Page C1K Arabs to give Bush a planfor Palestinians. | Page A24

By David Montgomery


Two young women on an urgent mission havebeen lugging boxes into the offices of U.S. sena-tors this week. The boxes contain petitions aninch thick, one for each senator. Nearly 10,000signatures were collected over the Internet in fivedays.

The petitions declare: “This bill is a seriousthreat to civil liberties, freedom of speech and theright to dance.”

Look out, Congress: The ravers are coming.“We’re offended by the fact they’re blackballing

an entire musical genre,” said Amanda Huie,checking senators’ names off her list Tuesday af-ternoon.

The genre in question is electronic dance mu-

sic, which fans enjoy at all-night parties calledraves. Legislation in Congress could hold pro-moters responsible if people attending the eventsuse illegal drugs such as Ecstasy, the party drugfrequently associated with raves.

The Reducing Americans’ Vulnerability to Ec-stasy Act of 2002—or the RAVE Act—hascleared the Senate Judiciary Committee and is onthe consent calendar, meaning it could receive fi-nal approval without a roll call vote at any time.When he introduced the bill in June, Sen. Joe Bi-den (D-Del.) said “most raves are havens for illic-it drugs,” and congressional findings submittedwith the bill label as drug paraphernalia such ravemainstays as bottled water, “chill rooms” andglow sticks.

Ravers Against the MachinePartiers and ACLU Take On ‘Ecstasy’ Legislation

See RAVE, A8, Col. 1

Anger Rises Over a Speck of Land

BY RAMON ESPINOSA—ASSOCIATED PRESS

Moroccans in a coastal village protest Spain’s takeover of a disputed islet,in background, that Moroccan soldiers occupied last week. Spanish soldierslanded before dawn and expelled the rival troops. Story, Page A22.

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Second of two articles

By Alec Klein


A t noon on Dec. 21, 2000, DavidM. Colburn swaggered to thestage in black cowboy boots,sporting his trademark 5 o’clock

shadow.From the podium, Colburn, then presi-

dent of business affairs at America OnlineInc., beamed at his audience, about 100employees assembled in the Seriff Audi-torium at AOL headquarters in Dulles forthe monthly all-hands meeting of his unit.

It was time to hand out the BammyAwards.

A takeoff on television’s EmmyAwards, the Bammys were given to thebest performers in Colburn’s division, agroup of aggressive deal makers skilled in

extracting maximum dollars from a pro-spective client. Business affairs—“BA,” asit was known around AOL—was in themiddle of many of the company’s biggestand most complicated deals, whichhelped AOL reach or exceed its financialtargets.

Theirs was a culture that grew in-creasingly important as America Onlineevolved from a Northern Virginia upstartinto an online behemoth capable of takingover Time Warner Inc.

On this day, Colburn bestowed theBammy’s gold-star plaque on Kent Wake-ford and Jason Witt, who had put togeth-er a complex transaction with Purchase-Pro.com Inc., a Las Vegas software maker.

According to several people at themeeting, Colburn praised the two men forwhat he called a “science fiction” deal to

THE DEAL MAKERS AOL’s Warrior Culture

Creative TransactionsEarned Team Rewards

BY FRANK ANDERSON—LEXINGTON (KY.) HERALD-LEADER

PurchasePro.com founder Charles E.Johnson Jr. in his pool in Las Vegas. AOLnegotiated a complex deal with Johnson.See AOL, A16, Col. 1

By Frank Ahrens


AOL Time Warner Inc. yesterday over-hauled its corporate operations and ac-cepted the resignation of its No. 2 officeras the world’s largest media conglomeratesought to reassure investors who havewatched the company’s stock value and ad-vertising revenue plummet for a year.

After a scheduled board meeting in Dul-les yesterday, AOL Time Warner an-nounced the departure of Robert W. Pitt-man, 48, the colorful, driven andsometimes abrasive media pioneer whohelped create MTV 21 years ago and re-vive America Online before its 2000 merg-er with Time Warner Inc.

AOL Time Warner said it has organizedits many businesses into two new groups;the heads of each report directly to chiefexecutive Richard Parsons.

The top three corporate officers of AOL

Time Warner now have deep Time Warnerroots; the sole remaining AOL top-brasspresence is Chairman Stephen M. Case.Though AOL remains in the corporation’sname, the online powerhouse is now sim-ply a unit, and a struggling one, of a divi-sion of a company starting to look morelike the old Time Warner. Don Logan,chairman of Time Inc. and its 140-maga-zine empire, will head a new Media &Communications Group, which will in-clude America Online, Time Inc., TimeWarner Cable, the AOL Time WarnerBook Group and Interactive Video unit.(Newsweek, a competitor of Time maga-zine, is owned by The Washington PostCo.)

Jeff Bewkes, chairman of HBO, willhead the Entertainment & NetworksGroup, comprising HBO, New Line Cine-ma, the WB television network, Turner

No. 2 Officer QuitsAt AOL Time WarnerMedia Company Reorganizes Into 2 Groups

See PITTMAN , A17, Col. 1

INSIDE

Warming temperatures arecausing Alaska’s glaciers to meltat twice the rate researchers hadthought, a new study finds.NATION, Page A14

Alaska’s Big Thaw



BY LARRY WATSON

Michael C. Hall and Peter Krause inthe HBO series “Six Feet Under.”

Arab Diplomats ‘Encouraged’ After Meeting With Bush

BY RICH LIPSKI—THE WASHINGTON POST

Saudi Foreign Minister Saud Faisal, left, and Egyptian Foreign Minister Ahmed Maher talk to reporters after discussingMideast peace plans with President Bush. The White House called the session “a very good meeting.” Story, Page A22.

By Susan Okie


Breast-feeding is a major factor that helpsto reduce a woman’s lifetime risk of devel-oping breast cancer, according to a newanalysis of research data from 30 countries.

The relatively high breast cancer ratesfound in developed countries are largely ex-plained by the fact that women in thosecountries have chosen to have few childrenand to breast-feed them briefly or not at all,according to the detailed analysis of 47 stud-ies by a British research group.

“It’s really the number of children and theduration of breast-feeding that is the key tothe differences between developed and de-veloping countries” in breast cancer rates,said Valerie Beral, an Oxford University epi-demiologist who led the project. “It reallychanges the way one looks at the cause ofbreast cancer.”

Researchers have long known that havinga full-term pregnancy before the age of 30lowers breast cancer risk and that having ad-ditional pregnancies further reduces thechances of developing the disease. For thefirst time, the analysis confirms that breast-feeding itself can protect against breast can-cer.

“This is a spectacular piece of work,” saidMiriam Labbok, a senior adviser on infantand young child feeding at UNICEF in New

Mothers WhoNurse HaveLess BreastCancer RiskStudy Cites Disease RateIn Developed World

See CANCER, A14, Col. 5

By Tom Jackman


Zacarias Moussaoui stepped to a lectern in afederal courtroom in Alexandria yesterday and de-clared that he is a member of al Qaeda and wantsto plead guilty to his alleged role in the Sept. 11 at-tacks, claiming for the firsttime an intimate knowledgeof the hijackings.

But U.S. District JudgeLeonie M. Brinkema declinedto accept his request and saidshe would give him anotherweek to decide whether hestill wanted to plead guilty.

“Bet on me,” Moussaouishot back. “I will.”

Moussaoui’s reversal is thelatest surprise in what has be-come a wildly unpredictablecase ever since Brinkema al-lowed Moussaoui to serve ashis own attorney beginning in April. It also putsthe trial of the only person charged in the Sept. 11attacks on the World Trade Center and the Penta-gon into even more uncertainty.

Next week, Brinkema could accept Moussaoui’splea and move on to the phase of the proceedingsthat determines whether he will be executed. Shealso could again reject the plea and remove him ashis own lead counsel—something she warnedMoussaoui she might do minutes before he tried toplead guilty.

MoussaouiAttemptsGuilty PleaTerror Suspect Says He HasKnowledge of Sept. Attacks

POLICE PHOTO

Zacarias Moussaouisaid he seeks to“save my life.”

See MOUSSAOUI, A11, Col. 1

By Greg Schneider


John W. Magaw, the federal lawman PresidentBush picked to protect airports from terrorists, wasforced to resign yesterday as chief of the Trans-portation Security Administration because of con-cern that his tough-cop ap-proach was not working.

The move is a midcourse at-tempt to rescue the govern-ment’s effort to restore confi-dence in U.S. air travel. Sixmonths after its founding, theTSA faced a budgetary chal-lenge from Congress and near-rebellion by the aviation in-dustry.

Transportation SecretaryNorman Y. Mineta asked Ma-gaw to resign yesterday afterconsulting with the WhiteHouse, department sources said. Retired Adm.James M. Loy, former commandant of the CoastGuard and the No. 2 official at the TSA, was namedto replace Magaw.

White House spokesman Ari Fleischer said thatMagaw resigned “for health reasons,” and that “thepresident very much appreciates the job that JohnMagaw did, taking an agency that had . . . no form toit and making great strides and progress on behalf of

Magaw OustedFrom AirportSecurity Post

FILE PHOTO/ASSOCIATED PRESS

John W. Magawheaded the TSA.

See SECURITY, A4, Col. 5

By Peter Whoriskey


The man tapped last month to become the next boardpresident of the United Way of the National Capital Areastunned the group’s leadership Wednesday by declining theposition, highlighting a crisis of confidence within the be-leaguered charity a day after it learned it is under the scruti-ny of federal investigators.

Anthony J. Buzzelli, a deputy managing partner at the ac-counting firm Deloitte & Touche, had been expected toboost the credibility of the regional charity in the face ofgrowing skepticism from donors about its financial prac-tices. Instead, his withdrawal set off a fractious meetingyesterday in which one trustee called for new management

pending the federal probe, while another spoke of risingpressure on volunteers to cut their ties to the organization.

FBI agents delivered a grand jury subpoena Tuesday toUnited Way’s offices in Southwest Washington, seeking thegroup’s financial records and other data going back to1997.

Buzzelli, who was to have been ratified as president yes-terday at the organization’s annual meeting, said his sched-ule of out-of-town travel prevented him from meeting thegroup’s growing challenges.

“Eight weeks ago, when I said yes, I thought it was a sta-ble period for the United Way,” Buzzelli said in a telephoneinterview last night. “I was satisfied that everything that

United Way’s Choice Refuses Top Job

See UNITED WAY, A12, Col. 1

By Daniel Williams


ATHENS, July 18—When fire de-partment helicopters swooped downon the Greek island of Lipsoi onWednesday to battle a blaze, the menwho swarmed out of the aircraftweren’t firefighters. The conflagrationhad been set as a ruse, and the heli-copter’s passengers were Greek spe-cial police on the trail of one of Eu-rope’s most elusive terrorist groups.

Once on the ground, they quickly ar-rested Alexandros Giotopoulos, a for-mer professor and reputed founder ofRevolutionary Organization Novem-ber 17, a group whose members hadavoided arrest for more than a quarter-century.

Since a terrorist bomb explodedprematurely on an Athens street 19days ago, delivering into police handsthe injured man who had carried it,one lead has followed another. Thetrail led to Lipsoi, 160 miles east ofAthens, and the arrest of Giotopou-los—alias Michael Oikonomous—andtwo others.

These and other detentions mayopen the door to solving 23 politicalmurders, Greek officials and foreigndiplomats said today. The victims haveincluded four Americans, starting withthe CIA’s Athens station chief, Rich-ard Welch, in 1975.

“All of these incidents of the pastwill be solved and fully solved,” said a

Greece Catches Up to Elusive Terrorists

BY ARIS MESSINIS—ASSOCIATED PRESS

A police officer escorts ChristodoulosXiros, right, wearing a bullet-proofvest, outside an Athens courthouse.

Arrests May Snuff Out November 17 Group

See GREECE, A20, Col. 3

HBO’s funeral parlor drama, “SixFeet Under,” took 23 EmmyAward nominations yesterday,one more than NBC’s “The WestWing.” “Will & Grace” was themost nominated comedy.STYLE, Page C1

HBO Leads Emmy List

K House GOP’s security plan. | Page A4

ABCDE125th Year No. 232 M2 DM VA K M1 M2 M3 M4 V1 V2 V3 V4Thursday, July 25, 2002


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NEWSSTAND 35¢HOME DELIVERY 28¢

By Jim VandeHei

and David S. Hilzenrath


House and Senate leaders, hop-ing to restore confidence in thescandal-tainted corporate world,agreed yesterday to broad newregulation of businesses and theirauditors, and to stiffer penaltiesfor those who commit financialfraud.

Marking the toughest new re-strictions on accounting practicessince the Great Depression, thelegislation is intended to make itharder for corporate executivesand auditors to deceive investors,who have lost trillions of dollarson the stock exchanges since theEnron Corp. scandal broke in Oc-tober.

The package creates a newboard to oversee the auditors ofcompanies traded on the stockmarkets; limits accounting firms’

ability to profit from doubling asconsultants to the companies theyaudit; and gives shareholdersmore time to sue companies thatmislead them. The legislation alsodramatically increases maximumfines and jail sentences for thosewho violate new and existing cor-porate laws.

The legislation emerged fromsix days of talks between Houseand Senate conferees, who largelyadopted the Senate’s broader pro-posals for cracking down on corpo-rate fraud. Legislative leaders pre-dicted the House and Senate willapprove the measure by the end ofnext week, and President Bush sig-naled yesterday he will sign it intolaw.

“Traditionally our markets havebeen the fairest, most efficient andthe most transparent in theworld,” said Sen. Paul S. Sarbanes

Hill Leaders Agree on Corporate CurbsAttack on Fraud Includes Auditing Control and Jail Terms; Markets Soar

See CONFERENCE, A10, Col. 1

By Steven Pearlstein

and Ben White


U.S. stock prices yesterdaystaged their biggest one-day rallyin nearly 15 years as Congressmoved toward passage of a corpo-rate reform bill, fears of a bankingcrisis evaporated and many in-vestors concluded that a brutaltwo-month sell-off had gone toofar too fast.

The Dow Jones industrial aver-age gained 488.95 points, or 6.4percent. It was the second-biggestone-day percentage gain since themarket crash of 1987, and thesecond-biggest point gain since

the market peak of January 2000.Trading on the New York Stock

Exchange was the heaviest on re-cord, with more than 2.7 billionshares trading hands.

The broad, powerful rally be-gan only after the Dow had fallenmore than 170 points on the open-ing bell, snapping back 667 pointsduring the course of the day.

Other indexes also postedstrong gains, with the Standard &Poor’s 500-stock index up 5.7 per-cent and the tech-heavy Nasdaqcomposite index up nearly 5 per-cent. Bond prices fell as investorsshifted money into stocks and

BY PETER MORGAN—REUTERS

Traders laugh on the floor of the New York Stock Exchange yesterday as stocks staged a sharp comeback.

Dow Rises 489As Stocks Surge

7500

7600

7700

7800

7900

8000

8100

8200

8300

SOURCE: Bloomberg News

The Dow Jones industrialaverage rose more than6 percent yesterday.

10a.m.

Noon11 1p.m.

2 3 4

Tuesday’sclose:7702.34

Yesterday’sclose:8191.29

What a Day

THE WASHINGTON POSTSee MARKETS, A10, Col. 1

By Tom Jackman


Federal agents swarmed intoArlington yesterday and shut downa massive immigration fraudscheme that allowed thousands ofillegal immigrants to obtain per-mission to work in the UnitedStates—and made millions of dol-lars for an Arlington lawyer and hiscolleague—prosecutors said.

Samuel G. Kooritzky, 63, an im-migration lawyer and owner of theCapital Law Centers, and RonaldW. Bogardus, 65, an engineer, hadsubmitted nearly 2,700 phony ap-plications since the beginning oflast year for “labor certifications”from the state and federal govern-ment, according to a 60-page affida-vit filed in federal court inAlexandria yesterday. The docu-ments certify that an employerneeds a foreign worker for a job be-cause no U.S. citizens are available.Once the Department of Labor is-sues a certification for a worker, theimmigrant can apply to the Im-migration and Naturalization Ser-vice for permanent residency.

Kooritzky allegedly charged im-migrants at least $8,000 to file thepaperwork. The two men, who are

BY JAHI CHIKWENDIU—THE WASHINGTON POST

Lawyer Samuel G. Kooritzky, center,is accused of submitting nearly2,700 phony applications for “laborcertifications” for foreign workers.

Va. MenChargedIn VisaScheme2,700 Fake PapersFiled, U.S. Says

See VISA, A14, Col. 2

By Jonathan Weisman

and Albert B. Crenshaw


Congress stands on the brink ofpassing the most significant finan-cial regulations in more than 60years, but the legislation’s true im-pact will be decided not by the law-makers who wrote it but by the reg-ulators it entrusts to oversee thecorporate accounting industry.

Corporate lobbyists, consumerwatchdogs and accounting expertsagree that the deal struck by Houseand Senate negotiators yesterdaywill change the way America doesbusiness. Corporate auditors will nolonger be policing themselves, butinstead will have to submit to thewishes of an independent oversightboard. The giant accounting firmswill have less incentive to look the

other way on their clients’ creativebookkeeping because they will nolonger be vying for lucrative consult-ing contracts. And chief executiveswill have to personally vouch for theearnings and profits their companiesreport each quarter, with the threatof prosecution hopefully keepingthem honest.

“This bill has got a lot of ourCEOs nervous,” said John Palafou-tas, chief lobbyist for the AmericanElectronics Association. “This thinghas got some teeth in it. It’s going tofocus the mind.”

But for each of these tough-sound-ing measures, there are serious cave-ats. Under the compromise legisla-tion, the independent accountingoversight board is far more tetheredto the Securities and Exchange

Analysis

Watchdogs’ VigilanceKey to Bill’s Success

See ANALYSIS, A10, Col. 5

By Craig Timberg

and Yolanda Woodlee


D.C. election board ChairmanBenjamin F. Wilson suggested yes-terday that forgeries and otherproblems are so widespread in thenominating petitions of Mayor An-thony A. Williams that he may bekept off the Democratic primaryballot.

In dismissing one of two chal-lenges against Williams because italleged that every signature wasforged, Wilson caused a stir in thecrowded hearing room when hesaid, “There is a significant num-ber—albeit at this point I don’t be-lieve 2,000—that appear to not beforgeries.”

Wilson later sought to clarify theremark by saying that the boardstaff’s signature-by-signature re-view had not found enough validones after examining 80 to 85 per-cent of the 5,800 the mayor saysare valid. The overall results of thisreview have not yet been madepublic.

Williams needs 2,000 valid sig-natures of registered city Demo-crats to get on the Sept. 10 primaryballot.

The mayor’s lead attorney, Vin-cent Mark J. Policy, continued toexpress confidence that Williamswould end up with more than

WilliamsCould MissPrimaryBallot

See MAYOR, A12, Col. 1

By Alec Klein


AOL Time Warner Inc. disclosedyesterday that the Securities and Ex-change Commission has launched aprobe into its accounting practicesafter questions were raised abouthow the company generated reve-nue through a series of unconven-tional deals.

The world’s largest media compa-ny said that its accounting was prop-er and that all the transactions wereapproved by its outside auditor. Butits chief executive and chief financialofficer vowed to give investors a bet-ter understanding of the business,beginning yesterday with more de-tailed disclosures about its online di-vision, including its advertising andcommerce revenue, as part of AOLTime Warner’s announcement ofsecond-quarter financial results.

The company performed slightly

better than analysts had expected,reporting a 10 percent gain in reve-nue, driven in large part by its con-tent businesses, including its movie-making division, and its cable televi-sion network.

The Dulles-based online division,however, remains a concern as its ad-vertising and commerce revenuecontinued to drop and its subscrip-tion growth rate came in short of an-alysts’ expectations.

As part of yesterday’s earnings an-nouncement, chief executive Rich-ard D. Parsons said AOL TimeWarner contacted the SEC after thecompany received a series of ques-tions from The Washington Postabout its business practices both be-fore and after America Online’s Jan-uary 2001 acquisition of Time Warn-er.

“After the [Post] articles came

AOL Time WarnerDiscloses SEC Probe

See AOL, A8, Col. 1



INSIDE

A Senate panel stressesintelligence and workers’rights in crafting itshomeland security bill.NATION, Page A14

Homeland Dept.Bill Takes Shape

Fidel Castro tries tocounter a petition bydissidents with a drive ofhis own.WORLD, Page A15

Castro and CriticsWage Petition War

K Uproar over SEC chairman’s promotion proposal. | Page E1

K Fed shows no sign of lowering interest rates. | Page E1

By Carrie Johnson

and Christopher Stern


Federal authorities yesterday ar-rested five former executives ofAdelphia Communications Corp.,including the founder and two ofhis sons, and charged them withdefrauding investors out of billionsof dollars by using the cable televi-sion company as their “personalpiggy bank.”

The Justice Department and theSecurities and Exchange Commis-sion each filed complaints againstJohn J. Rigas, who started Adel-phia half a century ago, his two

sons and two other former compa-ny executives in U.S. District Courtin Manhattan. The SEC alsocharged in a civil action that Adel-phia broke securities laws andfailed to cooperate with its in-vestigation.

Rigas, 78, and his sons Michael,48, and Timothy, 46, were arrestedand handcuffed by Postal Serviceinspectors yesterday morning at aManhattan apartment.

The complaints allege that Adel-phia laid out $13 million to build agolf course on John Rigas’s land,paid for Manhattan apartmentsused by Rigas family members, cov-ered hundreds of millions of dollars

of the family’s stock losses, andprovided company airplanes for aRigas African safari and other tripswithout reimbursing the firm—allwithout disclosing the transactionsto outside board members or in-vestors. Prosecutors also say theexecutives produced false docu-mentation to hide debt and obscurethe true financial condition of thecompany.

Adelphia, the nation’s sixth-larg-est provider of cable television ser-vice, sought bankruptcy protectionlast month. The Coudersport, Pa.,company disclosed in March that it

Adelphia Founder, Sons ChargedFamily Looted Sixth-Largest Cable TV Company, U.S. Says

See ADELPHIA, A11, Col. 1

BY LOUIS LANZANO—ASSOCIATED PRESS

John J. Rigas, founder of Adelphia, is led to a court appearance in New York yesterday by a U.S. Postal Inspection Service officer.

By Juliet Eilperin


The House voted overwhelm-ingly last night to expel Rep.James A. Traficant, an Ohio Dem-ocrat who taunted foes for yearswith bombastic floor speeches butnow faces a likely prison term onfelony convictions for bribery andcorruption.

Traficant, scheduled to be sen-tenced Tuesday, became only thesecond House member since Re-construction to be expelled. TheHouse ousted Rep. Michael “Oz-zie” Myers in 1980 for acceptingmoney from an FBI agent posingas an Arab sheik.

While most lawmakers facingexpulsion have chosen to resign,Traficant fought his political deathsentence until the end.

“I’ll go to jail before I’ll resignand admit something I didn’t do,”

Traficant said. “I’ll be damned if I’llbe pressured by a government thatpressured these witnesses todeath.”

Traficant walked out of thechamber before the House voted420 to 1 to oust him, with nine vot-ing present. Rep. Gary A. Condit(D-Calif.), who lost his primarythis year after revelations surfacedconcerning his relationship withslain intern Chandra Levy, was theonly member to vote against ex-pulsion.

Known for his spiky gray hair,an outdated polyester wardrobeand floor speeches littered withreferences to “Star Trek” and hisanatomy, the nine-term Housemember railed against the govern-ment and the Washington estab-lishment during the three-hour de-bate.

House Votes 420 to 1To Expel Traficant

See TRAFICANT, A4, Col. 2

ABCDE125th Year No. 323 M3 DM VA K M1 M2 M3 M4 V1 V2 V3 V4Thursday, October 24, 2002


FINALWeather

Today: Cooler, rain later.High 51. Low 42.Friday: Breezy, rain.High 48. Low 45.

Details, Page B8





NEWSSTAND 35¢HOME DELIVERY 28¢

Richard Helms, the former CIA directordubbed by his biographer as “The ManWho Kept the Secrets,” has died at age 89. OBITUARY, Page B7

Ex-CIA Director Helms DiesPresident Bush has harnessed thegovernment’s resources to promoteRepublicans in the midterm elections. NATION, Page A8

Bush Pulls Out the Stops As Chinese President Jiang Zemin prepared tomeet with President Bush, North Korea’snuclear weapons program loomed large. WORLD, Page A23

N. Korea a Key Issue for Visit

INSIDE

By Peter Baker

and Susan B. Glasser


MOSCOW, Oct. 24 (Thurs-day)—A large group of armed Che-chen rebels stormed a crowded Mos-cow theater Wednesday night,taking hostage as many as 700 peo-ple in the audience for a popular mu-sical and demanding an end to Rus-sia’s long-running war in theseparatist southern republic.

Witnesses reported gunfire whenthe group of about 40 men and wom-en, armed with automatic weaponsand wearing camouflage uniformsand masks, seized the hall after 9p.m. They said the hostage-takershad grenades strapped to their bod-ies and said they were prepared toblow up the building if it werestormed by troops and police.

Hours later, a standoff appeared tohave set in and continued throughthe night as hundreds of Russian sol-diers and police, ambulances andfiretrucks surrounded the massivetheater not far from central Moscow.By early this morning, area residentswere being evacuated in buses.

About 9:10 a.m., an explosion washeard in the vicinity of the theater.However, authorities would not de-scribe what had happened.

A spokesman for the city policeconfirmed that the hostage-takerswere Chechens and said they wereholding more than 650 people in thetheater after releasing about 150 oth-ers. The spokesman, Valery Griba-kin, said that at least one woman was

See MOSCOW, A32, Col. 1

Rebels HoldHundredsHostageIn MoscowChechen GunmenTake Over Theater

By David A. Vise

and Alec Klein


AOL Time Warner Inc. an-nounced yesterday that it will re-vise its financial results for a two-year period occurring before andafter its merger in January 2001 toaccount for online ad sales and oth-er deals that improperly inflatedrevenue by $190 million and onemeasure of profitability by $97 mil-lion.

The company said it discoveredthe problems during an internal re-view of its books and records thatwas launched after the Securitiesand Exchange Commission andthe Justice Department openedprobes into its accounting. Thecompany declined to identify thedeals involved, but said they oc-curred between July 1, 2000, andJune 30 of this year.

“Even though the total amountof the restatement represents asmall portion of America Online’stotal revenues during this period,we have taken, and do take, thismatter very seriously,” said chiefexecutive Richard D. Parsons.

Parsons said the company willshare the results of its review withfederal investigators. The compa-ny’s decision to publicly restate itsfinancial results now, before thefederal investigations are complet-ed, is likely to be looked upon fa-vorably by the SEC, according tosources familiar with the investiga-tion. But the move is unlikely to in-fluence the criminal investigation,which appears to be focused moreon possible wrongdoing by indi-vidual executives than on the com-pany itself, sources said.

Yesterday’s disclosure is anabout-face for New York-basedAOL Time Warner, which had ini-tially stood by the accuracy of itsaccounting in the wake of a Wash-ington Post report in July describ-

AOLTo ReviseFinancialResultsOnline Ad DealsInflated Earnings

See AOL, A6, Col. 1

By Sari Horwitz, Dan Eggen

and Michael E. Ruane


Investigators yesterday wereseeking a man in connection withthe deadly sniper shootings thathave terrorized the Washington ar-ea, even as Montgomery CountyPolice Chief Charles A. Moose fol-lowed the sniper’s mandate at atelevised briefing and made refer-ence to “a duck in a noose.”

Moose said police wanted toquestion John Allen Muhammad, aformer Army soldier once knownas John Allen Williams, who hadbeen linked to the case in a tele-phone communication last weekfrom a man who police believe isthe sniper.

“We believe that Mr. Muham-mad may have information materi-al to our investigation,” Moosesaid in a briefing just before mid-night.

Moose cautioned that Muham-mad may not be directly involvedwith the shootings. Muhammadand a juvenile companion, identi-fied by sources as Lee Malvo, 17,were the subject of an intense man-hunt last night.

He described Muhammad, 41,

Police Look for Former SoldierFor Questioning in Sniper Case

BY BRIAN SNYDER—REUTERS

Officials hand out photographs of John A. Muhammad, whom police want to question. They say he was linked tothe sniper case in a telephone communication last week from the man who police believe is the gunman.

Moose Appeals to GunmanTo Communicate Further

See SNIPER, A12, Col. 1

as “armed and dangerous” and saidhe was wanted on a federal fire-arms charge. But Moose added “astrong word of caution: Do not as-sume from this allegation thatJohn Allen Muhammad . . . is in-volved in any of the shootings weare investigating.”

The developments occurred on aday when the fatal shooting of aMontgomery County bus driverwas ballistically linked to the snip-er responsible for nine other kill-ings in the Washington area. Aschildren were shepherded toschool by fearful parents yesterday,details emerged of a second letterin which the sniper threatened toharm children.

Police sources said yesterdaythat in one of a flurry of contacts—including phone calls and two let-ters that made references to “we”and “us”—the sniper made a num-ber of demands for money and atleast one curious request. Mooseresponded with a direct statementlast night.

“We understand that you com-municated with us by calling sever-al different locations,” Moose said.“Our inability to talk has been a

By Amy Shipley

and Steve Vogel


TACOMA, Wash., Oct. 23—The investigation into the sniperterrorizing the Washington areajumped across the country todayas federal agents combed througha yard here, looking for shell cas-ings and bullet fragments thatmay have been fired by a man po-lice want to question in connec-tion with the case, law enforce-ment sources said.

Agents armed with chain saws,metal detectors and heavy equip-ment removed a tree stump con-taining a bullet fragment and oth-er evidence from the yard,officials said.

Startled neighbors said agentsfrom the FBI and the federal Bu-reau of Alcohol, Tobacco and Fire-arms swarmed the home thismorning.

FBI spokeswoman MelissaMallon said the property ownerconsented to the search. She re-fused to say why agents were

there.A law enforcement source said

the man police are looking for—John Allen Muhammad, alsoknown as John Allen Williams—may have used the tree stump fortarget practice and investigatorswant to remove any bullets or bul-let fragments to compare themwith the .223 bullets used by theWashington sniper. Police saidMuhammad may be travelingwith a 17-year-old named LeeMalvo. A witness saw one of themfiring an assault-type rifle at treesin the yard, according to a law en-forcement source.

FBI agents also visited Belling-ham High School, about 100 milesnorth of here, today seeking in-formation on Malvo, who once at-tended the school, officials said.They also served search warrantsin Alabama in connection withthe same investigation, sourcessaid.

Chris Waters, 23, a soldier atFort Lewis, who lives across the

A Distant Search for CluesAgents Look for Bullets Fired in Back Yard on West Coast

See SEARCH, A13, Col. 1

By Jacqueline L. Salmon

and Ylan Q. Mui


Shortly after the sniper shootings began, Mi-chelle Yu’s 10-year-old daughter, Catherine,crept into her older sister’s room and took herbig stuffed dog Schubert, a family favorite. NowCatherine sleeps with the dog nestled safely be-tween her head and the top of the bed.

“I said, ‘Silly girl, why do you let Schubert takeup all the space?’ ” said Yu, who lives in Potomac.“She said, ‘Mommy, Schubert can protect me sothat the bullet can’t get into my head.’ ”

The shootings that have left 10 people deadand three seriously wounded in the last threeweeks have terrorized much of the Washingtonarea, but most of all, its youngest and most vul-nerable residents.

The apparent randomness of the attacks, theirwide geographic distribution, the fact that onevictim was a 13-year-old boy and, most recently,the revelation that the sniper has made a vaguebut direct threat against children have deeplytraumatized some youngsters, according to par-ents, therapists and pediatricians interviewedacross the region yesterday.

“Your children are not safe anywhere at anytime,” read the disturbing postscript on the noteleft at the scene of Saturday night’s shooting inAshland, Va., and revealed Tuesday evening byMontgomery County Police Chief Charles A.Moose.

Yesterday morning, Darby Gingery’s son,Gunnar, 12, appeared at the breakfast table witha copy of the newspaper carrying stories on the

Children Anxious; Parents Feel Helpless

See CHILDREN, A16, Col. 1

By Richard Morin

and Claudia Deane


Half of all Washington area resi-dents fear they could become a vic-tim of the serial sniper, whose mur-derous three-week rampage hasspread anger, fear and anxietythroughout the region and alteredthe way many people work, shopand play, according to a Washing-ton Post poll.

The survey found that 50 per-cent of those interviewed were atleast somewhat fearful of fallingvictim to the sniper and that 28 per-cent were at least a little con-cerned. Only one in five—19 per-cent—said they had no fear ofbecoming the sniper’s next victim.

A larger proportion of Washing-ton area residents—more than four

in 10—said the sniper shootingsmade them feel more personallythreatened than did either theSept. 11 attacks or the anthraxscare, according to the poll com-pleted last night, before policeidentified a man wanted for ques-tioning in connection with the snip-er incidents. A juvenile companionis also being sought.

“It’s been kind of frightening andscary at times,” said Tony Banks,33, an administrative clerk living inLanham. “Before I get scared, I getangry.”

“I don’t live in New York; I don’twork at the Pentagon,” said a 52-year-old Bladensburg resident whowas so frightened by the sniper thatshe declined to give her name. “Butthe sniper is going from Washing-

Half of Area Residents in Fear, Post Poll FindsRoutines Altered as a Precaution

See POLL, A15, Col. 1

BY MICHAEL LUTZKY—THE WASHINGTON POST

ª Previous messages from Moose to the sniper. | Page A12

Montgomery County Police Chief Charles A. Moose’smessage to the sniper at 11:52 p.m. yesterday:“We understand that you communicated with us by calling several differentlocations. Our inability to talk has been a concern for us, as it has beenfor you. You have indicated that you wanted us to do and say certainthings. You asked us to say, ‘We have caught the sniper like a duck in anoose.’ We understand that hearing us say this is important to you.However, we want you to know how difficult it has been to understandwhat you want because you have chosen to use only notes, indirectmessages and calls to other jurisdictions. The solution remains to call usand get a private toll-free number established just for you. We still askyou to call or write us at P.O. Box 7875, Gaithersburg, Md. 20898-7875.If you are reluctant to contact us, be assured that we remain ready to talkdirectly with you. Our word is our bond. If we can establish communicationswith you, we can offer other means of addressing what you have askedfor. Let’s talk directly. We have an answer for you about your option.We are waiting for you to contact us.”

Authorities Seeking‘Person of Interest’FBI and local police aresearching for informationon the whereabouts of:

JOHN ALLEN MUHAMMADª Also known as John

Allen Williams.ª Considered armed and

dangerous.

Anyone with informationshould call 911, or the tipline at 888-324-9800.

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A6 Thursday, October 24, 2002 S DM VA K The Washington PostNATIONAL NEWS

ing several unconventional adver-tising and commerce transactionsthat totaled $270 million.

America Online Inc.’s success ingenerating ad revenue was one ofthe prime reasons that investorsvalued its stock so highly, pushingup the company’s share price toenable AOL to pull off its mergerwith Time Warner Inc. and fashionthe world’s largest media compa-ny. But as the ad market slumpedand accounting questions sur-faced, AOL’s fortunes changed.Many of AOL’s top executiveswere pushed out or reassigned,and Time Warner hands assertedcontrol of the company. The entireAOL operation is now part of alarger division instead of a corpo-rate unit unto itself.

The Post report, based on hun-dreds of internal AOL Time Warn-er documents and company sourc-es, detailed a series of deals thathelped the Dulles-based onlinecompany boost its advertising andcommerce revenue from 2000 to2002, with many occurring aroundthe time of the AOL-Time Warnermerger. Among the transactionsexamined were two in which AOLconverted legal awards into ad andcommerce deals. In another in-stance, AOL served as a middle-

man, selling ads on behalf of eBayInc. but booking all of the revenueas if it were AOL’s own.

At the time AOL asserted that ithad accounted for those dealsproperly, citing the work of its out-side auditor, Ernst & Young LLC,which had confirmed AOL’s fi-nancial statements when theywere reported over the past twoyears. The company also took theadditional step of asking Ernst &Young to recertify the numbers inlight of the Post report, and the ac-countants did so, reiterating thatAOL had properly reported its ac-counting.

“We were told our client hasbeen conducting an internal re-view,” said Les Zuke, spokesmanfor Ernst & Young. “There is reallynothing I can say or add.”

Within days of the Post report,the SEC and the Justice Depart-ment launched concurrent investi-gations into AOL’s accounting.AOL Time Warner quickly restruc-tured its operations, eliminatingits business affairs division, whichhad engineered most of the addeals in question. Then, in August,it fired its top business dealmaker,David M. Colburn, who had over-seen business affairs and its the ad-revenue deals.

Later that month, AOL ac-knowledged that $49 million from

three ad and commerce deals mayhave been inappropriately booked.Sources said those deals included acomplex transaction with troubledWorldCom Inc., which is facing itsown accounting scrutiny by feder-al authorities. Parsons also prom-ised to provide investors and WallStreet with more transparency in-to the company’s financial results.

Parsons declined yesterday toidentify the three questionabledeals or any others, citing the fed-eral probes and the fact that AOLTime Warner is now the subject ofseveral shareholder lawsuits. Headded that the company did notexpect to revise its financial state-ments further for the period inquestion.

“We have not only reviewedthose three transactions but con-ducted an extensive review of AOLtransactions from July 1999 toJune 2002,” he said. “This reviewhas included large ad transactions.. . . The transactions reviewedcomprise more than 70 percent ofAOL’s deals during that period.”

The accounting disclosurescome as AOL’s sagging onlinebusiness is dragging down the fi-nancial performance of the corpo-rate parent, the world’s biggestmedia company. Advertising reve-nue at AOL plummeted 48 percentand earnings fell 30 percent in the

third quarter, the company saidyesterday. With little confidenceremaining in AOL on Wall Street,AOL Time Warner said it will holda special “AOL Day” on Dec. 3 tooutline a new business strategyand reassure investors about thedivision’s future.

The only bright spot at AOL,

which provides access to the Inter-net and exclusive content to 35.3million computer users, was an in-crease of 206,000 subscribers inthe quarter that ended Sept. 30,and a related 15 percent increasein subscriber revenue.

Parsons pledged to pay specialattention to the future of the trou-

bled online division.“We haven’t and won’t diminish

our focus on managing our compa-ny,” he said. “Except for AmericaOnline, all of our businesses aredoing quite well. . . . Our top oper-ating priority remains turning

Ad Deals Inflated AOL’s SalesBy $190 Million Over Two YearsAOL, From A1

FILE PHOTO/BY SUZANNE PLUNKETT—ASSOCIATED PRESS

AOL Time Warner headquarters in Manhattan’s Rockefeller Center. The media giant said it will revise its financialresults for a two-year period before and after its January 2001 merger.

See AOL, A7, Col. 1


The Washington Post K DM VA S Thursday, October 24, 2002 A7NATIONAL NEWS

around America Online.”Parsons said the key to

AOL’s future was maintain-ing the loyalty of its sub-scribers, who pay $23.95 amonth for the service. He saidthe release last week of thenewest version of AOL soft-ware, AOL 8.0, reflected a“renewed focus” on members,adding that AOL 8.0 had beendownloaded more than 5 mil-lion times, making this thecompany’s best introductionever of an updated version.Microsoft plans to release itsnew online software, MSN8.0, today.

For the third quarter, AOLTime Warner as a whole,which owns highly profitabletelevision, music and pub-lishing properties, posted rev-enue of $10 billion, a 6 per-cent increase over the sameperiod in 2001. A 13 percentjump in revenue from AOLsubscriptions, cable and otherbusinesses spurred the in-crease. Revenue from its oth-er media businesses, led by

home-video sales of “TheLord of the Rings,” jumped 8percent.

Overall, AOL Time Warnerreported net income of $57million (1 cent per share) inthe third quarter, comparedwith a loss of $997 million (22cents) in the same period of2001. The company’s finan-cial results were hampered bythe weak advertising perfor-mance at AOL, where thebacklog of advertising andthe sale of new advertisingare both weak. Operatingearnings for AOL Time Warn-er, which do not include in-terest, taxes and other ex-penses, fell 1 percent in thequarter, to $2.2 billion.

The restatement of earn-ings because of accountingproblems reduced earningsbefore interest, taxes, depre-ciation and amortization(EBITDA), one commonmeasure of profitability, by$97 million. It included $22million in transactions be-tween AOL and other parts ofthe AOL Time Warner em-pire. The adjustments re-present 1 percent of AOL’srevenue for the two-year peri-od ended June 30, 3.4 percentof its ad and commerce reve-nue, and 1.9 percent of EBIT-DA. The biggest quarterly im-pact—$66 million in reducedrevenue—was in the threemonths ended Sept. 30, 2000,only months before the AOL-Time Warner merger wasconsummated.

AOL HadStoodBehindResultsAOL, From A6

Associated Press

DETROIT, Oct. 23—The detained co-founder of an Islamic charity pleaded forU.S. political asylum today, saying hewould be a target for both sides in the waron terrorism if he were deported to Leba-non.

Rabih Haddad, a Lebanese citizen, tes-tified that al Qaeda supporters could per-secute him for his vocal opposition to theterrorist group and the Sept. 11, 2001, at-tacks. He said he also feared action by theLebanese government because of U.S. al-legations linking him with terrorist activ-ities.

Lebanon is “very eager to show theU.S. that they are one in the war againstterrorism,” Haddad said at an asylumhearing today before immigration JudgeRobert Newberry. “There’s no tellingwhat they could do.”

Haddad, who has been jailed since Dec.14 on a visa violation, denies that he orhis organization, Global Relief Founda-tion, have links to terrorists or related ac-tivities. The Bush administration has saidit suspects Global Relief of having ties toterrorism, but no criminal charges havebeen filed against Haddad or the 10-year-old foundation.

The Ann Arbor resident, 41, is seekingasylum for himself and his family. Thegovernment also is trying to deport Had-dad’s wife, Salma al-Rushaid, and three oftheir four children. The judge is expectedto issue a ruling Thursday.

Muslim CharityOfficial SeeksU.S. Asylum

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A8 Thursday, July 25, 2002 S DM VA K The Washington PostTHE ECONOMY

By Peter Baker


MOSCOW, July 24—The finan-cial riptide that has swept throughthe United States and Western Eu-rope reached Russia today, draggingdown a market that until now hadseemed relatively insulated from theswirling economic forces afflictinginvestors around the world.

The Russian Trading System(RTS) composite index fell 7.4 per-cent in brisk trading, taking with itsome of the country’s biggest com-panies, including energy-rich Gaz-prom, Sibneft, Yukos and Lukoil.The tumble took place hours beforeWall Street rallied as investors heresuccumbed to panic selling after thesevere losses elsewhere in recentdays.

Despite today’s turmoil, Russiahas enjoyed an extraordinary recov-ery from the 1998 financial crisisbrought on by its devaluation of theruble and default on some debt. Thecountry has expanded its economy,stabilized its currency, balanced its

budget, enacted important reformsand curbed some of the worst ex-cesses of its new capitalist kingpins.The market responded with a 50percent surge in stock prices in thefirst five months of this year, makingit one of the hottest in the world.

Through much of the downwardspiral in more developed countries,Russia has been shielded by massiveoil and gas reserves and the new-found optimism about its invest-ment climate, but today’s sell-offshowed that ultimately it cannot ig-nore trends abroad.

“Growth is an optimistic conceptand the world is full of fear,” saidJames Fenkner, chief strategist atTroika Dialog brokerage househere. “Hope is definitely gettingsqueezed out of the market. We needsome good news.”

Analysts said Russia’s fundamen-tal economic conversion in recentyears remains the most salient fac-tor for long-term growth, and theyexpressed hope that Russia willshake off the global problems. “Themarket is currently tanking because

of external factors,” said Eric Kraus,a leading financial strategist here.

The underlying story offers a casestudy in how economic travails inthe United States can influence evenisolated markets. Like other emerg-ing markets, Russia faces the pros-pect of losing ground even if it is do-ing what the West has advised it todo to develop a strong market econ-omy.

Under President Vladimir Putin,Russia now runs a budget surplus,has been paying its foreign debt andhas put into place a new land codeallowing the sale of property. Whilebusiness tycoons still enjoy consid-erable freedom to exploit formerstate assets and undercut foreign in-vestors, Putin has stabilized the po-litical system more than at any timesince the collapse of the SovietUnion. The country has becomesomething it was not at the time ofthe 1998 crisis: a generally morepredictable, if not always fair, placeto do business.

Foreign investors burned by the1998 meltdown have begun return-

ing. Ford Motor Co. recentlyopened a factory near St. Peters-burg, and General Motors is work-ing on one in partnership with aRussian firm. The U.S. CommerceDepartment last month finally des-ignated Russia a market economy,with the statutory protections thatstatus brings.

The rise of the RTS has reflectedthe changes. After plummeting to adisastrous low of 40 points duringthe worst of the crisis, it hadclimbed back to 277 by January ofthis year and soared to 420 in May.While still shy of its record of 563 inAugust 1997—the RTS closed to-day at 324.96, which is still up 17percent for the year—the strongand steady rise has meant that manyinvestors who stuck it out have re-couped much of their lost wealth.The total market value of all Russianshares increased to $100 billion—still just one-fifth of the Frankfurt,Germany, market but an especiallyimpressive figure for a country stillbuilding a stock market after 70years of communism.

“A lot of stocks are at or neartheir all-time high,” said William F.Browder, chief executive officer ofHermitage Capital Management inMoscow. He said that even after to-day’s drop, “Russia’s held up sur-prisingly well, all things consid-ered.”

Despite the brightening picture,some investors continue to strugglewith Russian partners who usemurky practices to siphon money toforeign bank accounts or otherwisecheat foreign backers.

Gazprom, which supplies West-ern Europe with 25 percent of itsgas, was among the hardest hit intrading today, falling 12 percent.Several large oil companies also fellsignificantly, including Sibneft(down 10 percent), Yukos (8 per-cent), Surgutneftegaz (8 percent)and Lukoil (5 percent).

The government announced to-day that it soon plans to sell 50 mil-lion shares of Lukoil, the country’slargest oil producer, which recentlydisclosed a sharp drop in profits.

Russian Economy Finally Feels the HeatMarket That Seemed Insulated From Western Woes Suffers Significant Drop

BY ALEXANDER ZEMLIANICHENKO—ASSOCIATED PRESS

A broker looks at trading terminals Monday in Moscow. Russian stockmarkets closed lower as investors succumbed to panic selling elsewhere.

out [last week], the SEC informedus that they are conducting a fact-finding inquiry,” Parsons said in aconference call with Wall Street ana-lysts and the media.

Parsons said “investor trust” is“fundamental to our future,” and hepromised the company would fullycooperate with the authorities. JohnHeine, an SEC spokesman, declinedto comment.

The company disclosed the SECinquiry after the close of markets.AOL Time Warner shares finished at$11.40, down 15 cents, or 1 percent,in New York Stock Exchange trad-ing. In after-hours trading, sharesfell as low as $10.49.

AOL stock is hovering at its low-est levels since October 1998.Shares are down about 76 percentsince the merger was completed.

The company has moved to re-store investor confidence in recentdays. On the day Robert W. Pittman,under pressure, announced his res-ignation as chief operating officerlast week, the company overhauledits corporate structure, making theonline division a part of a unit that al-so includes Time Inc., Time WarnerCable and the AOL Time WarnerBook Group.

The reorganization is a stunningturn of events for the Internet divi-sion, which acquired Time Warnerabout a year and a half ago in whatwas then considered a triumph ofnew media over old media. The on-line division now is being overseenby Don Logan, a longtime TimeWarner hand.

He is part of a new team Parsonsput in place to reinvigorate the com-pany’s growth. For the three-monthperiod ended June 30, the New Yorkcompany reported net income of$394 million (9 cents a share), com-pared with a net loss of $734 million(17 cents) in the same period a yearago. If, however, current accountingstandards on goodwill were in effectin the year-earlier period, it wouldhave shown not a loss but a gain of$592 million, or 13 cents a share.That would mean this year’s resultswould be 33 percent lower.

Excluding one-time items, AOLTime Warner reported a per-shareprofit of 24 cents, flat compared withthe year-earlier period. Those re-sults were 2 cents more than ana-lysts’ expectations, a survey by in-vestment research firm FirstCall/Thomson Financial showed.

Quarterly revenue rose 10 per-cent, to $10.58 billion, exceeding an-alysts’ target of $10.02 billion.

The online division, however, con-tinues to struggle. During the quar-ter, advertising and commerce reve-nue fell 42 percent. Wayne H. Pace,the chief financial officer, said theonline division generated $412 mil-lion in ad and commerce revenue, of

which $342 million came directlyfrom ad revenue.

Pace said he is comfortable withthe company’s accounting and dis-closure practices, but he said hewants AOL Time Warner to be “onthe leading edge” of disclosures.

The SEC probe disclosed yester-day is not AOL’s first. In May 2000,the SEC alleged that AOL violatedsecurities laws by issuing inaccuratefinancial reports during 1994, 1995and 1996 related to how AOLbooked its marketing expenses.AOL denied any wrongdoing butpaid a $3.5 million fine—then thebiggest amount in history—and re-stated three years of earnings as partof an SEC settlement.

Now, the SEC is reviewing howAOL Time Warner booked revenue.The Post examined a number of theonline division’s advertising andcommerce deals, focusing on severaltransactions that added up to $270million. That represented a smallportion of AOL’s nearly $5 billion inad and commerce revenue duringthe period reviewed, July 2000through March 2002.

AOL Time Warner’s chief exec-utive said that all of the deals exam-ined by The Post had been reviewedby AOL Time Warner’s outside audi-tor, Ernst & Young LLP, which con-firmed the company followed ac-counting rules in booking the deals.Parsons also said he plans to swearto the accuracy of the company’s fi-nancial statements under a require-ment being imposed on executivesas of Aug. 14.

Parsons, however, said that adher-ing to generally accepted accountingprinciples “may not be enough” intoday’s climate, an apparent allusionto financial scandals unfoldingacross corporate America today. Asa result, Parsons said, the companyis working to simplify its structureand provide investors with addition-al information about its financial re-sults.

Parsons faces investor unrest onseveral fronts: At least eight class-action lawsuits have been filed in thepast five business days alleging thatAOL Time Warner officials madefalse and misleading statementsabout the company’s business and fi-nancial condition and how it gener-ated advertising and commerce rev-enue as a result of unconventionaltransactions.

Now, in light of the SEC probe,analysts remain concerned about thecompany’s prospects.

“The SEC inquiry is troublesometo me,” said Jordan Rohan, an ana-lyst at SoundView TechnologyGroup in Old Greenwich, Conn. Hesaid the inquiry could make it diffi-cult for AOL Time Warner to con-duct business and seek deals withother companies. For now, he saidthe company’s prospects are “stillmurky.”

AOL Time WarnerDiscloses SEC ProbeAOL, From A1

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A16 Thursday, July 18, 2002 M2 DM VA K The Washington Postx

THE DEAL MAKERS How AOL Hit Its Numbers

documents and interviews with cur-rent and former company officialsand their business partners.

AOL converted legal disputes in-to ad deals. It negotiated a shift inrevenue from one division to anoth-er, bolstering its online business. Itsold ads on behalf of online auctiongiant eBay Inc., booking the sale ofeBay’s ads as AOL’s own revenue.AOL bartered ads for computerequipment in a deal with Sun Micro-systems Inc. AOL counted stockrights as ad and commerce revenuein a deal with a Las Vegas firm calledPurchasePro.com Inc.

AOL also found ways to turn thedot-com collapse to its advantage,renegotiating long-term ad con-tracts it risked losing into short-term gains that boosted its quarterlyrevenue.

One AOL executive raised ques-tions internally about some of thedeals. Robert O’Connor, then vicepresident of finance for AOL’s ad-vertising division, said he outlinedhis concerns in a series of meetingslast year and this year with Pittman,now in charge of the online division;David M. Colburn, who oversees itsbusiness affairs; J. Michael Kelly,chief operating officer of the onlinedivision; and other high-rankingcompany executives.

“Clearly, a lot of what they wereliving on was revenue that was notof the highest quality,” said O’Con-nor, who resigned in March. “I don’tknow if they’re still in denial, butthere were some pretty big businessissues they were not willing to face.For nine months, I tried to get theseguys out of denial. I tried to take theperfume off the pig.”

AOL said the deals were handledproperly and the company “main-tained a strict and effective systemof internal controls.” The companysaid the total revenue representedby all the deals reviewed by ThePost was “truly microscopic”—lessthan 2 percent of AOL’s overall reve-nue, including subscriber fees—andtherefore immaterial to the compa-ny’s business.

“The accounting for all of thesetransactions is appropriate and inaccordance with generally acceptedaccounting principles,” wroteThomas D. Yannucci, a lawyer hiredby AOL to respond to The Post’squestions. “The disclosures inAOL’s financial statements are ap-propriate and accurate. AOL’s state-ments provide our investors with allappropriate material informationabout our business.”

Further, he wrote, the company’soutside auditor, Ernst & Young LLP,found the deals to be in accordancewith generally accepted accountingprinciples. The auditor declined todiscuss its review, citing the confi-dentiality of client matters, but H.Stephen Hurst, an Ernst partner, re-leased a statement at AOL’s requestsaying the firm stands by its originalview that the accounting and dis-closures were appropriate.

AOL officials declined to be in-terviewed on the record about thetransactions.

The Post reviewed a number ofAOL’s advertising and commercedeals, focusing on several trans-actions that added up to $270 mil-lion. That represented a small por-tion of AOL’s nearly $5 billion in adand commerce revenue during theperiod reviewed, July 2000 throughMarch 2002.

Without the unconventionaldeals, AOL would have fallen shortof analysts’ estimates of the compa-ny’s growth in ad revenue (which isreported in a category that also in-cludes revenue from commerce) inthree quarters in 2000 and 2001.

Collectively, the deals helpedAOL beat Wall Street analysts’ ex-pectations for earnings per

share—a crucial profit yardstick forinvestors—by a penny per share intwo quarters in 2000. At the time,investors punished companieswhose earnings were off by even acent. On the day AOL announced itsearnings that October, Apple Com-puter Inc. said it missed WallStreet’s reduced projections for itsearnings by one cent, sending itsshares down 6 percent a day later.

Revenue Targets

The driving force behind thesedeals was the powerful business af-fairs division within AOL, a hard-charging unit of 100 or so deal mak-ers, including many lawyers, whohelped negotiate and finalize mostof AOL’s largest transactions. InsideAOL, the unit was known simply as“BA” and some of its deals werecalled “BA specials,” an allusion tothe aggressive ways the divisiongenerated revenue.

Former and current AOL employ-ees said company executives werepartly motivated to meet revenuetargets by the pending $112 billionall-stock acquisition of Time Warn-er. Even though this merger dealcontained no dissolution clause thatwould be triggered if either part-ner’s stock fell too far, companysources said that some AOL officialsfeared that if AOL stumbled, TimeWarner shareholders could beginclamoring to end it anyway. TimeWarner under some circumstancescould have backed out of the deal bypaying a breakup fee of about $4.4billion.

“The bubble had clearly burst, butsenior management was under enor-mous pressure to hit the [financial]numbers and close the Time Warnertransaction, which would diversifythe revenue base and lower the riskprofile of the company,” said JamesPatti, a senior manager in AOL’sbusiness affairs division at the time.

Patti said he told senior exec-utives he was uncomfortable withsome of the transactions pushed byhis unit. Shortly after receiving amerit promotion, Patti was laid offin 2001, a move he said he believeswas directly related to his refusal toparticipate.

“I had been asked to paper manyof these questionable deals and wasunwilling to cooperate, making myconcerns known to management,”Patti said. “The layoff came exactlyone week later. Ultimately, I washappy to leave the company with myintegrity and professional ethics in-tact.”

AOL declined to comment on thedepartures of Patti and O’Connor. Itdisputes their characterization thatit resorted to questionable deals tomaintain strong ad revenue growthin the fall of 2000. In its written re-sponses to The Post, AOL said its adand commerce growth rate washealthy by any measure—80 per-cent higher during the quarter thatended Sept. 30 than a year earlier. Itadded that failing dot-coms account-ed for only a fraction of its overallbusiness and that other, more stablecompanies were more than makingup that revenue.

The company said that Pittmanand other executives were accuratein their public statements. DuringAOL’s Oct. 18, 2000, conference callwith analysts, Stephen M. Case,then AOL’s chairman and chief ex-ecutive, said, “AOL’s advertisinggrowth is right on target.” He add-ed: “The current advertising envi-ronment benefits us because it willdrive a flight to quality.” And Kelly,then chief financial officer, calledAOL’s ad and commerce revenuegrowth “very healthy” and empha-sized, “I can’t say that stronglyenough.”

Some experts who reviewed thedeals examined by The Post ques-tioned whether some of the deals

were accounted for properly. Theyalso questioned whether investorscould have adequately understoodAOL’s advertising business from thecompany’s statements and other in-formation AOL made available tothe public.

“That’s the whole purpose of fi-nancial statements—for investorsand others to understand the busi-ness,” said James Cox, a Duke Uni-versity law professor who is a mem-ber of the legal advisory board of theNew York Stock Exchange and theNational Association of SecuritiesDealers.

Yannucci, AOL’s outside attor-ney, wrote June 21 that no expertcould render a proper judgment onthe company’s accounting without“a full understanding of the agree-ments and transactions at issue, aswell as their context as part ofAOL’s overall business.”

In a separate letter yesterday,

Yannucci added: “We believe sucharm-chair speculation about AOL’saccounting and financial disclosuresby less than fully-informed ‘experts,’directly contradicted by the fully-informed views of our outside audi-tors (Ernst & Young), is not onlygrossly unfair and unwarranted inlight of the exhaustive facts we havepresented to you, but is also recklessin the current highly-charged envi-ronment.”

When the company eventuallyidentified a downward trend in itsadvertising business, it properly dis-closed it in the latter part of 2001,Yannucci wrote.

Shares of AOL Time Warner Inc.,as the company was renamed afterthe merger, have been in retreat ev-er since, closing at $13.11 yesterday,down 72 percent since the deal wasconsummated.

Wall Street has begun to questionwhether the AOL-Time Warner mar-

riage ever made sense—for TimeWarner—in light of the online unit’sweakness. The company still pos-sesses an array of powerful assets,such as HBO, Warner Bros. andTime magazine (a competitor ofNewsweek, which is owned by TheWashington Post Co.). But now,company officials are struggling toturn around the online unit.

Birth of a Giant

The evolution of AOL from asmall online service to a major ad-vertising force began in late 1996.

Facing stiff price competitionfrom other Internet service provid-ers, AOL abandoned the hourly feethat it had been charging customers,replacing it with a flat-rate monthlycharge. Users began to spend moretime online, taxing AOL’s networkand eating into its profit margin.AOL set its sights on getting compa-nies to buy ads to promote them-selves on its vast online network.

Ad revenue was intended to keepthe company growing at a fast clipafter the growth of its basic busi-ness—monthly subscriber fees—be-gan to ebb.

“Advertising was supposed to bethe big thing to defray concernsabout AOL plateauing,” said Mi-chael Bromley, a business devel-opment director for AOL consumerdevices until he was laid off last year.“On Wall Street, it’s not what youmake, it’s what you’re perceived as.”

By the fall of 2000, ad and com-merce revenue had rocketed fromvirtually nothing to more than $2billion a year—about a third of thecompany’s overall revenue. A primereason was the emergence of dot-coms initially rich with venture cap-ital and eager to promote them-selves.

But the capital now was drying upand the Nasdaq Stock Market was ina free fall. Questions about ad reve-nue began to emerge on Wall Streetjust as AOL sought to complete itsTime Warner merger.

Several analysts at the time tookAOL’s reports of a big jump in adand commerce revenue in the Sept.30 quarter as a sign of the compa-ny’s strength in the face of a slowingad market, and they encouraged in-vestors to buy AOL shares as themerger neared.

In a research note a day afterAOL’s Oct. 18 conference call, ana-lyst Youssef H. Squali, then of INGBarings LLC, reiterated his “strongbuy” rating on AOL’s stock. “Solidadvertising revenues attest toAOL’s hybrid subscription/adver-tising model, which so far has pro-vided the company with more pro-tection from the dotcom meltdownthan other large new media compa-nies,” he wrote.

Mary Meeker, an analyst at Mor-gan Stanley Dean Witter & Co., wasalso encouraged by AOL’s ad andcommerce revenue results. “Thishas developed quickly into AOL’sfastest growing revenue stream anda key element of growth going for-ward,” she wrote in a research notea day after AOL released its num-bers.

And analyst Christopher Dixon,then of PaineWebber Inc., wrotethat AOL’s strong ad and commercerevenue “should alleviate some con-cerns about the health of the Inter-net advertising environment.”

What the analysts failed tonote—or didn’t know—was thatmany dot-coms no longer had thecash to pay for all the ads they hadagreed to buy in their premium-priced long-term contracts withAOL.

At the company’s Dulles offices,AOL was already holding weeklyemergency meetings to discuss thestatus of failing dot-com ad deals,company sources said. AOL closelymonitored the status of these ad

deals, large and small, according toseveral company documents ob-tained by The Post.

The AOL documents gave a de-tailed report, week by week, of thehealth of the dot-coms, how muchthey owed AOL, what AOL was do-ing to get its money, how the dot-coms were responding and howmuch money AOL reckoned it couldlose if the dot-coms didn’t pay theirbills.

One firm, Living.com, an onlinefurniture business, owed AOL $1.2million. “They are out of $, wantedto look at new deal but then backedout completely,” AOL stated in aconfidential summary of dozens ofdeal restructurings, dated Aug. 18.

AOL’s conclusion: “Not solvable.”The company was right: Liv-

ing.com shut down that month.In another internal document,

AOL stated that BigEdge.com, anonline sporting goods retailer, “De-manded restructuring conversationwith 3 options (including terminat-ing deal outright).”

AOL figured its upcoming pay-ment of $500,000 “may be in jeop-ardy.”

BigEdge.com was a part ofMVP.com, another struggling firmwhose domain name, trademarkand certain assets were sold off toSportsLine.com in January 2001.

There were dozens of other shakydeals of various sizes. They addedup. AOL faced the risk of losing$23.2 million in revenue in the quar-ter ended Sept. 30, 2000, accordingto an internal company memo sum-marizing the situation.

Early Warnings

In September, other internal com-pany documents obtained by ThePost said that AOL was “at risk” tolose more than $108 million in adrevenue in fiscal 2001, from July2000 to June 2001, with most of thatjeopardized revenue coming fromdot-coms. In early October, O’Con-nor, the AOL advertising executive,said he briefed Pittman and othercompany executives about theweakness of AOL’s dot-com adver-tisers two weeks before Pittman’sOctober 2000 comments. O’Connorsaid he told them that the companyrisked losing more than $140 mil-lion in ad revenue in calendar year2001.

AOL said that just because ad rev-enue was identified as “at risk” didnot necessarily mean the companywould fail to collect it. Yannucci,AOL’s attorney, did not respond toThe Post’s question about howmuch dot-com revenue was lost inthat period. He wrote that “onewould hope” O’Connor’s estimatewas “a worst-case assessment.”

Cox, the Duke professor, said hebelieved that AOL should have beenmore forthcoming about the dot-com restructurings. It appears that asignificant part of AOL’s ad busi-ness was in jeopardy and it shouldhave said so publicly, Cox said.“They have an obligation to disclosewhat is happening to the present cli-ent base,” he said.

AOL said it had no obligation tomake such disclosures, asserting theamounts were too small. “It shouldbe beyond reasonable dispute thatthese amounts do not remotely re-present a material percentage ofAOL’s advertising and commercerevenues for these quarters,” AOL’sattorney wrote.

But Doug Carmichael, a profes-sor of accounting and director of theCenter for Integrity in Financial Re-porting at the City University ofNew York’s Baruch College, dis-agreed. In accordance with Securi-ties and Exchange Commission re-quirements, he said, AOL shouldhave disclosed “significant negativetrends” that company officials knewabout. “And certainly,” Carmichael

0

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60

70

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$100

Oct. 18, 2000: AOL announces strong quarterly results. “AOL’sadvertising growth is right on target,” says chairman and chiefexecutive Stephen M. Case.

Oct. 19, 2000: “Solid advertising revenues attest to AOL’s hybridsubscription/advertising model, which so far has provided thecompany with more protection from the dot-com meltdown thanother large new media companies.”—Youssef H. Squali, then ananalyst with ING Barings LLC

IV I II III IV

September 2000:AOL settles legal dispute,securing ad deal withWembley.

March 2000: The Nasdaq meltdown.The Nasdaq composite index drops9.4 percent during the month.

S1999

O N D J2000

F M A M J J A S O N D

Jan. 10, 2000:AOL-Time Warnermerger announced

Early October 2000:Internal AOL projectionsshow dot-com ad revenueat risk for 2001.

A Rocky RoadAmerica Online’s stock price has declined steadily since the companyannounced its merger with Time Warner on Jan. 10, 2000. The slidecame as the entire media industry was hit by a falloff in advertising.AOL Time Warner Inc. first hinted at troubles generating ad revenuein July 2001 but did not cut revenue forecasts until after the terroristattacks on Sept. 11—nine months after the merger closed.

SOURCES: Bloomberg News, Post research

A growing America Online began moving into its huge Dulles campus in 1996.


June 2000: AOL agrees to give adsto Sun Microsystems in exchange forcredits on computer purchases.

FILE PHOTO/REUTERS

AOL stockprice closes

Stephen M. Case,

left, and Gerald M.

Levin celebrate the

AOL-Time Warner

merger

announcement.

AOL Sought to Sustain Growth Amid SlowdownAOL, From A1

Adding It UpTally of deals reviewed by The Washington PostIN MILLIONS OF DOLLARS

Dot-comsRevenue from deals that were terminated or restructured: $56

WembleyConversion of legal dispute into ad deal: $23.8

TicketmasterConversion of legal action into ad deal: $13

Golf ChannelAOL negotiated a shift in revenue fromTime Warner Cable to online unit: $15

EBayDeal in which AOL booked revenue for selling eBay ads: $95

Sun MicrosystemsEquipment-for-ads barter deal: $37.5

PurchaseProDeals in which AOL booked performancewarrants as ad and commerce revenue: $28

PurchaseProDeal in which AOL bartered advertising: $1.8

Total: $270.1 million

1

SOURCES: AOL, interviews, company records

THE WASHINGTON POST

2

3

4

5

6

7

8

BY LES TODD—DUKE UNIVERSITY PHOTOGRAPHY

Duke University law professor JamesCox says AOL should have been moreforthcoming about the dot-comrestructurings.

Mary Meeker, a financial analyst forMorgan Stanley, wrote favorably ofAOL’s ad and commerce revenueresults in the fall of 2000.

BY FRANK VERONSKY FOR THE WASHINGTON POST

AOL Time Warner Inc. yesterday issued the following statementfrom John Buckley, executive vice president for corporatecommunications for the online unit:

“The accounting for all of the transactions The WashingtonPost has discussed with AOL was appropriate and inaccordance with GAAP [generally accepted accountingprinciples]. The disclosures in AOL’s financial statements werealso appropriate and accurate.

“AOL’s independent auditors, Ernst & Young, specificallyreviewed all but one of these transactions at the time theywere accounted for. Moreover, since the Post contacted AOL,Ernst & Young has confirmed in writing that the accounting andrelated financial statement disclosure for all of the transactionswere appropriate and in accordance with Generally AcceptedAccounting Principles.

“Moreover, the facts show that AOL has maintained a strictand effective set of internal controls, a point underscored bythe Post’s own reporting.

“Finally, it should be noted that, in their entirety, thetransactions cited by the Post comprised less than two percentof AOL’s revenues during the same period, and accounting forthem differently would have had no impact on the Company’snet income.”

AOL Says Accounting ‘Was Appropriate’


A16 Friday, July 19, 2002 M2 DM VA K The Washington Postx


generate revenue, a reference someattendees took for the aggressiveway the company constructed thetransaction.

Colburn himself and several otherattendees do not recall the state-ment, according to an attorney AOLhired to respond to The Post. Thecompany declined to make Colburnor any other member of the businessaffairs unit available for comment.

Under terms of the agreement,AOL would sell software for Pur-chasePro and, in exchange, earntens of millions of dollars in perfor-mance warrants—a right to buy Pur-chasePro stock at a certain price.AOL would book the value of thosewarrants as advertising and com-merce revenue. It was an unconven-tional arrangement, but one thatAOL’s attorney said did not violateany accounting rules.

Wakeford and Witt joined Col-burn on stage and accepted theplaque. In his acceptance speech,Wakeford thanked someone whowas not in attendance: “Junior,”Charles E. Johnson Jr., Purchase-Pro’s rambunctious founder andthen-chief executive.

The crowd roared with laughterover the tongue-in-cheek remarks.But not everyone was amused.

“The sheer arrogance, the feelingof being untouchable, was amazing,”said one attendee.

AOL’s business affairs culture re-warded those who could becreative—and those who knew howto close deals. Business affairs exec-utives usually got involved in ad-vertising transactions after the salesforce had reached a general agree-ment with clients. Business affairswould draw up a list of proposedterms and talk to the company’s ac-countants about how to structurethe deal.

The unit’s work was blessed byexecutives at the highest levels.Business affairs deal makers an-swered to Colburn, who reported toRobert W. Pittman, then AOL’spresident. Their deals also were re-viewed by AOL’s auditors, and weresubject to what AOL said was a“strict and effective system of in-ternal controls.”

Sources said those controls werenecessary to deal with a unit likebusiness affairs, whose complextransactions were known as “BAspecials” inside AOL. Typically, theunorthodox deals involved contractsthat closed late in a fiscal quarterand helped AOL boost its financialresults.

Though its deal makers may havebeen aggressive, AOL said they gen-erally had little idea whether their ef-forts would produce favorable quar-terly results. The company said toomany deals were up in the air in theclosing days of a quarter for anyoneto be sure how the final tallies wouldturn out.

Pressure to close ad deals was par-ticularly intense during much of2000, when the company sought tocomplete its merger with TimeWarner, the sources said.

“It was definitely part of everydaylife. It was definitely out there,” saidJonathan Salkoff, who served as amanager in business affairs and de-clined to discuss specific companymatters. He was laid off in January2001, just after the merger was ap-proved.

After completing the Time Warn-er takeover, AOL sources said theycontinued to feel pressure to closedeals. It was, they said, part of busi-ness affair’s culture—an unrelentingneed to win.

The Good Times

When AOL announced its block-buster takeover of Time Warner inJanuary 2000, business affairs was atfull throttle.

Start-ups lined up to strike a dealwith AOL, a blue-chip Internet firmin a sea of untested wannabes search-ing for an IPO, the initial public of-ferings of stock that had already cre-ated mind-boggling personal wealthfor many denizens of Silicon Valley.

The transactions, in turn, helpedenrich AOL. Everyone, it seemed,was becoming an instant millionaireat the company’s Dulles headquar-ters. There were a lot of Ferraris. Andtwentysomethings and secretaries re-tiring with seven-figure bank ac-counts after a few years on the job,thanks to the incredible windfall fromstock options.

At business affairs, almost any-thing seemed possible. Hard work be-got wealth. Wealth begot parties.And parties, on occasion, becamepart of work.

That included a spontaneous ex-cursion from Dulles to San Franciscoby a handful of AOL officials on thecorporate jet. They called it a “team-building trip.”

It took place in the Gold Club top-less bar on Howard Street, saidsources who were present, and bothmen and women from AOL attended.

“The lavish parties, the crazyantics—it really socialized you,” saidanother AOL source. “You had to toethe line.”

Business Division Leader Demanded LoyaltyAOL, From A1

1 2 3 4 5

The Heart of a DealHere is how America Online brings advertising deals to fruition, a process that takes anywhere from one to six months:

ACCOUNTINGLEGALAD OPERATIONS

TERM

SHEET

CONTRACT CONTRACT

REVIEWED

SOURCE: Staff reports

THE WASHINGTON POST

The interactive marketingdivision typically makes the initialcontact. Usually, it’s a manager,director or vice president who makesthe call, depending on the size of thedeal. The carriage plan—thenumber of online impressions, adplacement and estimated cost—isdiscussed in general terms.

Once a general agreement is reached,business affairs takes over. Amanager, senior manager or directorwill go over the deal’s economics anddraw up a term sheet, a basic adagreement. The term sheet goes toAOL’s legal team, which turns it intoa formal contract.

When an agreement has been reachedon the contract, business affairsdistributes it for formal sign-offs byother affected AOL divisions, such asaccounting, legal and adoperations. Sign-offs are usually doneby e-mail, but the bigger the deal, themore likely that sign-offs will be donein person, with an e-mail follow-up.

Then the business affairs lead officialtakes the contract in person toDavid M. Colburn, head of businessaffairs. The official walks Colburnthrough the contract; if Colburnapproves, he gives a verbal acceptanceand then signs the contract.

Ernst & Young, AOL’s outsideauditor, periodically reviews deals—often at the prompting of AOL’s internalaccountants—and also examines themat the end of the quarter.

COURTESY CHAI LIFELINE

David M. Colburn, known as abrilliant corporate strategist, set thetone for AOL’s culture as head of itsbusiness affairs division.

Robert O'Connor, vice president for finance in AOL’s advertising division,

resigned after he raised concerns about the company’s ad inventory and

was told he wasn’t a team player. In an e-mail (an excerpt of which is shown

below), Myer Berlow, then president of global marketing solutions, referred

to O’Connor’s outspokenness in a note to Barry Schuler, then chairman and

chief executive of AOL Time Warner’s Internet division.

THE WASHINGTON POST

Myer Berlow, Colburn’s counterpartat AOL’s interactive marketingdivision. The two were sometimesknown to yell at their deal makers.

COURTESY CHAI LIFELINE

BY JUSTIN SULLIVAN FOR THE WASHINGTON POST

AOL “team-building” trips included one to San Francisco’s Gold Club toplessbar, according to sources. Both men and women from AOL attended.

strated the effectiveness of its in-ternal controls. Homestore officialsdeclined to comment.

Grim Times

By August 2000, the business af-fairs bravado was beginning to de-flate.

The tech-laden Nasdaq Stock Mar-ket was hemorrhaging, dot-comswere dropping like flies and grim se-nior deal makers at AOL convenedemergency meetings around a longconference table in the boardroom,sandwiched between the offices ofStephen M. Case, then AOL’s chair-man and chief executive, and Pitt-man, then AOL’s president.

Before them was a growing list ofstruggling start-ups pleading to re-structure their advertising deals.

Colburn ran the meetings. MyerBerlow, his counterpart heading theinteractive marketing division, whichworked with business affairs on addeals, would sit in or monitor the pro-ceedings by speakerphone. Partici-pants said many discussions weremore like yelling matches. Colburnand Berlow would sometimes screamat their deal makers about the need toget AOL’s business partners to payup.

“Why can’t you get this dealclosed?” Colburn would shout, re-called someone in attendance. “Whycan’t you do this?”

The deal makers would throw uptheir arms in futility.

“Colburn was always remindingeverybody what pressure we were inbecause of the merger,” said an AOLofficial. “He’d say, ‘Are you guys cra-zy? Are you forgetting what we haveto accomplish?’ ”

The Telefonica Deal

The pressure inside AOL tight-ened like a vise: The stock was erod-ing, and the firm was engaged in te-dious negotiations with federalregulators reviewing the merger.Enough failing dot-com advertiserscould compound the problems.

For months, AOL managed tokeep up its ad revenue from dot-comsby restructuring their deals intoshorter-term arrangements. But bymid-December 2000, it became hard-er to find revenue. In at least one in-stance, business affairs pushed toofar.

The unit brokered a deal to sell$15 million in online ads to Telefon-ica SA, the big Spanish telecommuni-cations company. AOL needed to runthe ads in the final days of Decemberto book the revenue in that quarter.

But with so little time left, AOLhad to place the ads in high-traffic ar-eas of AOL, such as its welcomescreen, the first Web page people seewhen they use the service. More con-sumers saw ads on the welcomescreen and AOL could get faster cred-it for running the promotions.

AOL officials didn’t care that theTelefonica link from AOL’s English-language welcome screen took usersto a Spanish-language site, said AOLsources familiar with the deal. Nordid it matter that Telefonica’s com-puter servers couldn’t handle all ofthe customer traffic from AOL, theysaid.

AOL succeeded in running the Te-lefonica ads fast to book the revenuebefore Dec. 31, as accounting rulesrequired.

But after the deal was done, andJanuary came along, AOL was stillrunning the Telefonica ads. Underthe deal, they were supposed to havestopped in December.

When some AOL officials noticedthe ads were still running, theyraised questions and learned it washappening at the behest of businessaffairs. The unit’s officials had strucka verbal agreement with Telefonicato continue running hundreds of mil-lions of ad impressions for monthsbeyond December, as a bonus, thesources said.

The bonus, it turned out, was akey condition for Telefonica agreeingto spend $15 million on ads thatwould run in the December quarter,the sources said. Without the bonus,Telefonica would have insisted onrunning the $15 million in ads overseveral quarters, which would haveforced AOL to book a smaller

amount of revenue in the Decemberperiod, the sources said.

In the end, AOL’s internal accoun-tant determined that the $15 millionDecember ad deal was really part of alonger-term commitment, which in-cluded the ads that had run as part ofthe bonus deal, sources said. As a re-sult, internal accountants movedabout $5 million of the Telefonicarevenue from AOL’s December quar-ter to the next quarter.

AOL said the firm’s action “high-lights the rigor and integrity ofAOL’s internal accounting controls.”

Telefonica declined to commenton the specific transaction, but in astatement it said, “Our relationshipwith AOL covers several areas andwe at Telefonica are satisfied with allaspects of this relationship.”

Elusive Targets

After the merger, the ad marketcontinued to weaken in 2001, forcingdown online ad rates. Robert O’Con-nor, then vice president of finance forAOL’s advertising division, said hewarned company executives last yearand this year that the trend wouldeventually create a fundamental busi-ness problem.

As the price of online ads fell, AOLwould be forced to sell more ads toreach its revenue targets, O’Connortold other company officials. Therewas a finite number of Web pagesthat AOL’s users viewed in a givenperiod. Eventually, AOL would runout of online space—inventory—torun ads where consumers would seethem.

As it was, AOL was racing to runall the ads it was selling. In somecases, AOL resorted to what wasknown internally as “jackpotting.”The term referred to gambling slotmachines, where, for example, threecherries in a row wins.

In AOL’s case, jackpotting meantit would run the same ad three timeson a single Web page, often at thebottom of the screen, where it wasless visible, sources said.

AOL also took advantage of its “adrotation” to run more ads, sourcessaid. When viewers look at a screen,the Web page automatically refresh-es itself at a specific interval, some-times from eight to 10 seconds.

But at the end of a quarter, whenAOL was trying to meet its financialtargets, it would increase the speedof the ad rotation to get credit forrunning more ads, sources said.

In late February this year, AOL ex-ecutives informed O’Connor, whocontinued to raise questions aboutinventory, that he was not a teamplayer and that he no longer had abright future at the company, accord-ing to a company e-mail. O’Connorimmediately said he would resign.AOL would not comment on O’Con-nor or his departure.

Berlow, later named president ofglobal marketing solutions for theparent company, tried to persuadeAOL officials to stop O’Connor fromleaving. In a March 8 e-mail to BarrySchuler, then chairman and chief ex-ecutive of the Internet division, Ber-low defended O’Connor.

“The only reason you know thatthere is an inventory problem is thatBob [O’Connor] continued up theladder with the inventory problem(Bobby-Ripp-Kelly-Mayo) and shothis career out the window,” Berlowwrote to Schuler.

Berlow was referring to RobertFriedman, then head of AOL’s inter-active marketing division; Joseph A.Ripp, chief financial officer of theInternet unit; J. Michael Kelly, thechief operating officer; and MayoStuntz Jr., executive vice president ofAOL Time Warner’s cross-divisionalinitiatives.

O’Connor left the company onMarch 29 without negotiating a sev-erance package. He said he was nolonger comfortable working in an en-vironment where officials didn’twant to hear about internal businessissues.

“Not only were they not willing toget out of denial,” he said, “now theywere going to actually punish thosewho were going to even raise is-sues.”

Staff researcher Richard Drezencontributed to this report.

AOL declined to comment onsuch conduct, other than to say itdoes not condone activities thatwould be in violation of companypolicies.

Colburn’s Charge

The tone for the company’s cul-ture back in the heyday of 2000 wasset by Colburn, then head of busi-ness affairs.

Colburn, now executive vice pres-ident and president of business af-fairs and development for AOL TimeWarner’s subscription services andits advertising and commerce busi-nesses, was a larger-than-life figure.

A lawyer, former venture capital-ist and former chief executive of aposter company, Colburn is athleticbut carries a paunch. He is charis-matic and rough-hewn. Tall and im-posing, he speaks in a high-pitched,nasal tone.

By many accounts, Colburn alsocommanded respect as a brilliantcorporate strategist, a smart lawyerwho remembered every detail andwas always thinking 10 steps aheadin every negotiation.

He burnished his imposing rep-utation on Sundays at 9 a.m. on theregulation basketball court outsidehis large, clapboard and stone coun-try-style house in Potomac.

There, he gathered his loyalists—a group of deal makers who want-ed to move up the corporate ladder.Attendance was de rigueur. What hetaught his disciples was his way ofplaying sports—and doing business.He played a ferocious game, break-ing down his opponents with roughelbows, blatant fouls and name-call-ing, attendees said.

“It’s the way he gets people to lovehim and fear him,” said an AOL offi-cial. “You don’t go to play, you gothere to be abused.”

Colburn could be rougher on histroops at work, said several sources,many of whom declined to speak forattribution for fear it would hurttheir career or jeopardize their bene-fits.

Once, Colburn beckoned TedRogers, then a new member of histeam—and a former WashingtonRedskins player—and gave him adressing down outside AOL’s fifth-floor boardroom during a meeting of“Op Com,” the operating committeeof senior executives, chaired by Pitt-man.

Witnesses said Colburn screamedat Rogers for a paperworkmistake—getting the wrong AOLexecutive’s signature on a particulardeal. The berating became water-cooler legend: If Colburn could deci-mate Rogers, a 250-pound, 6-foot-21⁄2former linebacker, what about therest of his crew?

When asked about the incident,Rogers said, “Maybe I deserved it. Idon’t know. I felt completely demor-alized because it was my first deal.”

Rogers said he realized that thecompany’s “lifestyle and culture”wasn’t for him, so after 14 months heleft AOL of his own accord in May2000.

Every couple of weeks, AOLsources said, Colburn would pickother people, poke fun at them, yellat them, break them apart, thenbuild them back up.

“He’d put an arm around you, andsay, ‘Things are going to be all right,I really love you,’ ” said an AOLsource. “He’d say a kind word, andit’d make your day. It’s like an abu-sive father.”

Colburn also bestowed financialrewards on his minions. He wouldsend favored underlings and theirspouses on weekend getaways toplaces like New York, all expensespaid, including limousine serviceand lavish dinners, AOL sourcessaid.

Colburn helped decide who gotstock options, another powerful in-centive to keep employees in line, es-pecially when AOL shares were onthe rise, sources said. During theheight of the Internet boom, employ-ees recalled logging on to their com-puters in the morning, checkingtheir portfolio and staring in amaze-ment at their growing assets.

“It was like, ‘Wow, I just made afew thousand dollars just by sleep-ing,’ ” said an AOL official.

company said it was common for itsdeal makers to seek out relation-ships with new business partners,and then leverage those relation-ships to generate additional reve-nue.

There was a perception withinAOL that some business affairs exec-utives acted as though there were norules. AOL sources described a dealin which a junior financial analyst atthe company had been directed by aBA official to alter an internal reportsteering more revenue to HomestoreInc., an online home and real estateservice, sources said.

Homestore shared revenue withAOL from advertising sold on Home-store’s house and garden areas with-in AOL’s online network, the sourcessaid.

Every month, AOL financial ana-lysts would receive a report from op-erations, showing the level of ad reve-nue and an estimate of Homestore’sshare. Without explaining why, busi-ness affairs told the AOL financial an-alyst to change the report, inflatingHomestore’s ad revenue share by anadditional $2 million, the sourcessaid.

When AOL officials discovered theproblem, the maneuver was short-circuited, and the company said itfixed the error. “[W]hile a reportwhich erroneously attributed a reve-nue share from certain advertisers toHomestore was initially generated,the mistake was identified and the re-port was later corrected,” AOL’s at-torney said in a letter to The Post.

AOL said that outcome demon-

But in exchange for such largess,Colburn demanded loyalty, AOLsources said, and never was thatmore clear than when AOL was atthe pinnacle of its power.

“He created these foot soldierswho went to war for him,” said anAOL source. “These were headytimes.”

Picking Partners

AOL could make or break a com-pany just by picking which one it de-cided to do business with. WhenAOL struck a deal with a dot-com, itoften had the effect of giving thestart-up instant credibility, a leg upon the competition and better pros-pects for launching an IPO.

“I would basically pick the winnerof [an industry], their stock wouldgo up, and they’d be instantly rich,and they’d do anything for me,” saidan AOL business official.

Just as Colburn exacted loyaltyfrom his employees, AOL exactedsteep terms from its partners. Some-times, in a display of its clout, AOLwould demand that a dot-com signan ad deal within 24 hours or AOLwould take the offer elsewhere, com-pany sources said.

During the Internet bubble, AOLdeal makers had another advantage:Frequently, they were bargainingwith naive dot-commers in theirtwenties and thirties who had nevernegotiated a business deal in theirlives.

AOL said its executives did notmistreat prospective clients. The


The Washington Post K DM VA M2 Thursday, July 18, 2002 A17x

THE DEAL MAKERS How AOL Hit Its Numbers

said, “the problems with dot-comswere material to them.”

AOL sources who were familiarwith these dot-com deals said thecompany considered taking thestruggling firms to court to get themto pay for the ads that they hadagreed to buy. But the sources saidAOL determined that such a strate-gy wouldn’t be fruitful because thepublic filings would show someweakness in its business.

So AOL advertising officials wentto work. They strove to convertsome of the risk to AOL’s long-termad contracts into a short-term gain,by getting one-time payments fromclients who could no longer meettheir obligations. That helped putoff the day when the dot-com ad-vertising swoon would be apparentin the company’s quarterly results.

In some instances, AOL said in itswritten response to The Post, itwould renegotiate a struggling dot-com’s ad deal to shorten the term ofthe contract. The dot-com wouldpay AOL a fee for breaking the dealearly, and that fee would be incorpo-rated into the new, shorter-term addeal, effectively creating a balloonpayment. AOL would count all ofthe revenue, including the fee for re-negotiating a shorter-term deal, asad revenue.

AOL said it accounted for thedeals properly. Amounts “earned byAOL under these types of long-termadvertising agreements have alwaysbeen advertising revenues and therestructurings do not change thecharacter of those revenues, onlythe time frame over which they aremeasured and the amount thatshould be recognized,” wrote Yan-nucci, AOL’s attorney, in a letter toThe Post.

From July 2000 through March2001, AOL said, it booked $56 mil-lion from dot-com deals that wereterminated or restructured, about 3percent of its $2.1 billion in overallad and commerce revenue duringthat time. In each quarterly earningsreport during the period, the termi-nated and restructured deals rangedfrom 1.5 to 4.4 percent of AOL’s ad-vertising and commerce revenue.

Eventually, as the pattern of re-structuring dot-com contracts re-peated itself quarter after quarter,AOL reported the trend in the latterpart of 2001. In its Nov. 14 SEC fil-ing it said: “The growth in ad-vertising and commerce revenueswas driven by a general increase inadvertising sales, includingamounts earned in connection withthe settlement of certain advertisingcontracts.”

By the December quarter thatyear, online advertising had swungfrom growth to contraction, de-creasing by 7 percent over the sameperiod a year earlier.

24dogs.com

In September 2000, AOL foundanother way to boost ad sales: froma legal dispute.

The origins of the legal case reachback to 1992, far removed fromAOL, when MovieFone Inc., an on-line ticketing firm, and a former sub-sidiary of Wembley PLC, a big Brit-ish entertainment company, set up ajoint venture to develop hardwareand services for automated movie-ticketing sales, according to U.S. le-gal filings and British public docu-ments. The parties had a falling-out,the matter went to arbitration, andthree years later MovieFone won anaward against the former Wembleysubsidiary.

When AOL purchased Movie-Fone a year later in 1999, it inher-ited the $22.8 million arbitrationaward, plus interest, which had notyet been paid.

AOL said it would have been cost-ly to litigate with an overseas com-pany. So AOL in September 2000 of-fered an alternative: Buy $23.8million in online ads instead. Thatwould also save the British firmmoney—requiring Wembley tospend $3 million less than the ar-bitration award, including interest,

according to sources familiar withthe negotiations and confidentialcompany documents summarizingthe deal.

But AOL had to move fast, thesources said. The company wasshort of its targeted advertising andcommerce revenue for the Sept. 30,2000, quarter ending just days away.

The British wondered what theyhad to advertise to AOL’s users.Wembley was in the gambling busi-ness, operating greyhound racetracks in such places as Rhode Is-land and Colorado.

AOL’s answer: 24dogs.com.Wembley was preparing to launch

24dogs.com, an online greyhound-racing Web site. Still under con-struction, the Web site would allowgamblers to check the odds andplace a bet on a dog.

AOL suggested it could run adsfor the Web site. The British mulledthe offer. But with the quarter clos-ing fast, AOL could not afford towait.

To book the revenue in the quar-ter, AOL needed to run the ads be-fore Sept. 30 to conform with ac-counting rules. So, withoutWembley’s knowledge, AOL em-ployees lifted art work—a picture ofa racing greyhound—off the Britishcompany’s 24dogs.com Web site,created banner and button ads outof it and started running them, saidAOL sources familiar with the mat-ter.

The greyhound banner and but-ton ads ran on various AOL sites, in-cluding Spinner.com, its online ra-dio service, the sources said. AOLran as many as three or four Wem-bley ads on a single Web page.

The number of greyhound ads,however, got to be a little too much,even for some at AOL, the sourcessaid. A Spinner official on the WestCoast called an AOL official in Dul-les, and complained, “Dude, myhome page looks like a dog site,” ac-cording to a source familiar with theconversation.

Within about an hour of postingthe greyhound ads, Wembley’s un-finished Web site crashed from anoverload of customer traffic fromAOL, sources said.

AOL got its deal. Wembleyagreed to buy $23.8 million in AOLads. The terms of the deal allowedAOL to dictate—at its own “dis-cretion”—when and where theWembley ads would run throughAOL’s vast network. Such a provi-sion meant that Wembley’s adscould have appeared at any time orplace—not necessarily targeting itscore audience.

Wembley confirmed that itreached a confidential agreementwith AOL but declined to discussany of the specifics.

According to a copy of the Sept.26, 2000, confidential settlement be-tween the companies, AOL andWembley released each other fromall claims. It stipulated that “AOLwill promote various Wembley USAwebsites with 1 billion [ad] impres-sions to run at AOL’s discretion.Such promotion is: a) a good faithgesture by AOL to expeditiouslyand amicably settle the arbitrationmatter, and b) a way to demonstratethe potential of AOL’s interactiveproperties to drive traffic to Wem-bley USA websites.”

AOL ran enough ads to book$16.4 million in that quarter. In thesame three-month period endedSept. 30, 2000, AOL converted an-other unresolved legal action into adrevenue, a $13 million deal withTicketmaster, a majority-owned unitof USA Interactive Inc., accordingto internal company documents andsources.

Ticketmaster declined to com-ment.

Several accounting experts tookissue with the Wembley deal, sayingmoney from an arbitration awardowed to a company that AOL ac-quired should have been booked assomething other than ad revenue.

“To say that was $23.8 million inad revenue, I have to question that,”said Walter P. Schuetze, the chief ac-

countant at the SEC from 1992 to1995 and the chief accountant of itsenforcement division from 1997 to2000. “That’s pulling white rabbitsout of black hats.”

AOL said it booked the Wembleyand Ticketmaster deals appropri-ately. “It is entirely common and ap-propriate to resolve litigation by cre-ating or amending a businessrelationship—even if that litigationhas reached the point of a judg-ment,” said AOL’s attorney. “. . .Such resolutions are one way inwhich unproductive disputes areturned into productive, and hopeful-ly continuing, business relation-ships.”

After AOL and Wembley signedthe ad deal, sources said a handful ofbusiness affairs officials gathered ina vice president’s office at AOL andcelebrated by blaring a popular songon a personal computer: “Who Letthe Dogs Out.”

After the Merger

When AOL closed its mergerwith Time Warner on Jan. 11, 2001,it quickly began touting the com-bined company’s synergies, or itsability to generate growth in all ar-eas of the business by cross-promot-ing properties and leveraging dealsmade by one unit across others.

One example involved a deal be-tween AOL’s Time Warner Cable di-vision and the Golf Channel, a ma-jority-owned unit of cable giantComcast Corp.

According to sources familiarwith the deal, the Golf Channelagreed in June 2001 to pay $200 mil-lion over five years to have its sportsprogramming carried on TimeWarner Cable, the nation’s second-largest cable television provider.But once the deal was essentially inplace, the online unit weighed in,asking Time Warner Cable to sharea piece of the Golf Channel deal, thesources said.

Complying, Time Warner Cabletold the Golf Channel to spendabout $15 million of the $200 mil-lion transaction for advertising onAOL’s online unit, according tosources.

Cable companies often use suchnegotiations to extract concessions

out of programmers. AOL sourcessaid the Golf Channel had few op-tions—if it wanted to be carried onTime Warner Cable. “We told themwhere and when” the ads ran, said asource familiar with the deal. “Theydidn’t have a choice.”

Golf Channel spokesman DanHiggins confirmed his companyagreed to buy the online ads becauseit wanted the cable deal.

“When you’re trying to negotiatelong-term deals with them [cablecompanies], there are certain thingsthat matter to them,” said Higgins,who would not discuss details of thenegotiations. “If they want the mon-ey to go to certain places, as long asit’s in line for us . . . you come to adeal that both can live with.” Hecalled the agreement “mutually ben-eficial.”

Higgins said that while AOL stip-ulated that the Golf Channel buy on-line ads as part of the cable agree-ment, it benefited the Golf Channel.“AOL reaches a lot of people,” hesaid. “From a branding perspective,it’s good for us.”

The $15 million ad deal alsohelped AOL’s online division reportbetter numbers in its third quarter,ended Sept. 30, 2001.

Yannucci, AOL’s attorney, wrotethat “it was perfectly sensible to ad-vertise the Golf Channel on AOL.”

Enter EBay

On July 25, 2001, AOL found an-other way to generate ad dollars,this time through an agreementwith eBay, the giant online auctionsite.

AOL was not only an advertisingmedium for other companies, it alsoserved as an advertising broker, sell-ing ads for other companies that

lacked AOL’s expertise and salesforce. AOL agreed to serve in thiscapacity for eBay, hoping to sell abig chunk of the auction site’s adspace, according to AOL’s confiden-tial executive summary of the deal.AOL said it was able to bundle ad-vertising for different Web sites andoffer package deals to advertisers.

In the eBay deal, AOL did notsimply take the customary commis-sion of an ad rep. AOL counted all ofthe eBay revenue as if it were AOL’sown.

“AOL recognizes all revenue gen-erated from eBay inventory sales ona topline basis,” AOL said in its in-ternal documents.

When asked about the financialarrangement, AOL declined tomake any documents available butconfirmed that it booked the sale ofeBay’s ads as AOL’s own revenue,which it maintained is the proper ac-counting method. AOL said itbooked $80 million in revenue in2000 and 2001 and $15 million inthe first quarter of 2002, the grossamounts from selling eBay’s ads.

With this accounting, AOL wasable to report a larger amount of adand commerce revenue. (The grosssales didn’t change AOL’s net in-come, because AOL counted thepayments it forwarded to eBay—minus its broker’s fee—as an ex-pense elsewhere in its books.)

Under accounting standards,there are several factors to considerin determining which party canbook the gross revenue from a trans-action.

One way an agent can book thegross amount of revenue from thesale of a merchant’s goods is if theagent first acquires the goods andthen resells them to another party,accounting experts said.

Such is the case with Price-line.com Inc., for example, whichbuys airline tickets from the airlinesbefore reselling them to customers.But AOL did not buy eBay’s ad-vertising inventory.

AOL said it was appropriate for itto book eBay’s revenue as AOL’sown in part because the advertisercontracted directly with AOL, AOLset the price and received paymentdirectly from the advertiser. AOLsaid eBay’s accounting for thedeal—booking only the net pay-ments—shows that the company al-so viewed AOL as a principal.

Several accounting experts, how-ever, said that those factors may notbe sufficient for AOL to properlybook eBay’s ad sales as AOL’s ownad revenue. They said the appropri-ate accounting largely hinged on theamount of financial risk AOL as-sumed in the transaction.

An internal company documentshows that AOL carried no financialpenalty if it did not sell eBay’s ads,and AOL confirmed this. Accordingto the document, AOL had a non-binding, informal commitment toreach certain ad sales targets foreBay over two quarters.

In the document, AOL projectedit might have to pay eBay $40 mil-lion to $45 million in the second half

of 2001 “if AOL makes ad purchaseson eBay to reach the targets.” AOLdid not respond to The Post’s ques-tion about how much of that amountit paid eBay. AOL said that anotherfactor that showed it was the princi-pal in the deal was that it shared“credit risk” with eBay. AOL wouldnot explain how it shared that risk.

Several experts said that sharingthe credit risk may not be enoughfor AOL to be considered the princi-pal in the transaction and properlybook all of eBay’s revenue as itsown.

If AOL had been contractually ob-ligated to pay eBay for the full priceof the ads when an advertiser failedto pay, then AOL could have beenconsidered the principal and bookedeBay’s revenue, these experts said.But in its letter, AOL said it was notcontractually obligated in this way.

“It seems to me AOL is not takingany of the normal risks of a mer-chant and, therefore, the situationseems more similar to the agentmodel where you should only bookthe margin or the net rather thanthe gross,” said Bala Dharan, a RiceUniversity accounting professor.

Michael Sutton, the SEC’s chiefaccountant from 1995 to 1998, said,“This sounds more like an agencyrelationship than a principal rela-tionship.” An agent should book acommission, he said, not the grosssale, as AOL did.

O’Connor, the AOL executivewho left the company in March, saidhe told company officials he wasconcerned that the accountingmight lead to an SEC investigation.

AOL, however, said that taking allthe aspects of the deal into consider-ation, it was reasonable to concludethat it was the principal in the trans-action and it rejected the experts’opinions, saying they didn’t have allthe information to make the properdetermination. Ernst & Young,AOL’s outside auditor, reviewed thetransaction and confirmed its ac-counting.

The company also said theamounts of money involved were afraction of the total ad and com-merce revenue and not material tothe company’s business.

AOL’s ad-repping deal continuedinto 2002. In exchange for the ar-rangement, according to sourcesand documents, eBay also agreed toextend from four to five years anagreement to buy ad space on AOL’sservice, a deal worth an additional$18.8 million, AOL confidential doc-uments show. EBay declined tocomment on the specifics of its busi-ness dealings with AOL.

Several accounting and legal ex-perts said the way AOL treated theeBay deal and other transactionsraised broader questions about howthe company was explaining itsbusiness to the public.

As with other conglomerates,AOL has been under mounting scru-tiny as investors have lost confi-dence in corporate America’s books.AOL is now being pushed by WallStreet to disclose more about how itearns its revenue and accounts forits expenses.

Accounting experts said a publiccompany has a fundamental obliga-tion to do its best to offer a fullyformed picture of its operations. DidAOL provide enough informationwhen it began to identify weaknessin its dot-com advertising business?

Dharan, the Rice University pro-fessor, said the company did not.“They were representing somethingto investors,” he said, “that was dif-ferent from what was going on in-side.”

0

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$100

Sept. 24, 2001: AOL cutsrevenue and earningsforecasts.

J2001

F M A M J J A S O N D J2002

F M A M J

Yesterday’sclose:$13.11

Jan. 31, 2001: AOL announces fourth-quarter results that beatWall Street estimates. “We are seeing exciting momentum inour subscription and advertising/commerce businesses acrossthe company,” says Chief Operating Officer Robert W. Pittman.

April 18, 2001:AOL announcesstrong first-quarterresults.

June, 2001:Golf Channel agrees tobuy advertising fromAOL as part of its dealwith Time Warner Cable.

July 18, 2001:AOL reports weaksecond-quarterresults, sees signsof soft market.

July 25, 2001:Internal memo describesdeal in which AOL sells adsfor eBay, counting revenuefrom eBay sales as AOLrevenue.

Dec. 5, 2001:Chief executiveGerald M. Levinannouncesresignation.

Jan. 11, 2001:Merger closes.

I II IV I II

April 24, 2002:AOL reports a$54 billion lossfor the firstquarter.

J

THE WASHINGTON POST

The merged

company's new

headquarters—

the AOL Time

Warner

Building in New

York.



Chief Operating

Officer Robert W.

Pittman was still

optimistic in early

2001.


Gerald M. Levin greets

shareholders outside the

Apollo Theatre before AOL

Time Warner's May 2002

annual meeting, where he

formally handed the reins

to Richard D. Parsons.

AOL Time Warnerstock price closes

In a confidential memo, AOL executives outlined a plan to sell ads for eBay on the online auction house’s own Web

site. AOL then counted the full amount of sales of eBay’s ads as AOL’s own advertising revenue.

THE WASHINGTON POST

Keeping TabsAmerica Online held weekly meetings in Dulles during thesummer of 2000 to discuss the status of troubled dot-com deals,which one executive estimated might cost the company morethan $100 million in ad revenue the following year. The companytracked deals in detailed internal reports describing the financialcondition of its advertisers, how much they owed AOL and whatAOL was doing to get its money.

THE WASHINGTON POST

TODAY

How AOL Hit Its Numbers:In the crucial period before and after its merger withmedia giant Time Warner, America Online used a series ofunconventional business deals to keep its advertising andcommerce revenue growing at a breakneck pace.

FRIDAY

AOL’s Warrior CultureAmerica Online’s freewheeling business affairs division,which rewarded aggressive practices and discourageddissent, was key to many deals—including AOL’scomplicated relationship with a Las Vegas software firm.

The Deal Makers


The Washington Post K DM VA M2 Friday, July 19, 2002 A17x


By Alec Klein


A t the height of the Internetboom, when America On-line Inc. was king of theheap, it found an unlikely

business partner: a former videostore operator who had a penchantfor blackjack.

In the early days of his Las Ve-gas start-up, Charles E. JohnsonJr. said he would go down to theneon-bathed Strip, put big wads ofmoney on the casino tables andfind a way to meet payroll.

“Junior,” as he liked to be called,played for the big payday. And for acouple of heady years, his compa-ny, PurchasePro.com Inc., was thearchetypal dot-com, a softwareventure led by a swashbuckling ex-ecutive who took it public duringthe Internet euphoria of 1999,struck a big deal with AOL a yearlater and hit it rich.

AOL also profited from the part-nership.

In one unorthodox arrange-ment, AOL gave $9.5 million incash to PurchasePro for $30 mil-lion in stock warrants in the firm,and AOL booked the difference—$20.5 million—as ad and com-merce revenue. PurchasePro alsobought advertising space fromAOL, and it paid AOL commis-sions for selling PurchasePro soft-ware.

AOL earned its warrants undera marketing deal that included dis-tributing PurchasePro software.The warrants, similar to stock op-tions, gave AOL the right to buyshares in PurchasePro for a pennyeach, according to internal compa-ny documents. AOL calculated thevalue of the warrants and booked itas $20.5 million in advertising andcommerce revenue in its Decem-ber 2000 quarter and another $7million in the March 2001 period.

The $28 million in PurchaseProdeals represented just a fraction ofAOL’s overall revenue. But thepartnership illustrates how AOLdid business at the peak of theInternet bubble, using its corpo-rate leverage to generate advertis-ing and commerce revenue, a keygrowth engine, from a dot-comfirm whose fortunes were tied tothe online giant.

An Unlikely Partner

Of AOL’s many partners, Pur-chasePro was among the unlikeli-est, led by a maverick who was in-experienced in the ways oftechnology.

Johnson is a barrel-chested for-mer gym owner with a tuft of plati-num-blond hair and a country-boytwang, by way of Lexington, Ky.

Before Johnson started Pur-chasePro in 1996, the 6-foot for-mer point guard for the Universityof Cincinnati’s basketball teamsaid he didn’t even know how touse e-mail.

His tech transformation beganone day while he was working outat a gym in Las Vegas and he got totalking with casino impresarioSteve Wynn.

Wynn’s Mirage hotel and casi-no, a big operation, contracted outfor many goods and services. John-son reckoned the casino could setup a way to do its shopping on theInternet. He just needed a guy tofigure out how to slap together thesoftware to make it happen. Theidea for PurchasePro.com wasborn.

The company soon was devel-oping and marketing software forelectronic-commerce transactions.Hotels, for example, could use thecompany’s software to create aWeb site to buy and sell bed linensand other goods and services. Hil-ton Hotels Corp., among others,became a customer.

It wasn’t long before such onlinebusiness-to-business transactionsbecame the hot thing in 2000.AOL, always on the lookout fornew opportunities, struck a dealwith Johnson’s start-up in March2000.

AOL used PurchasePro’s soft-ware to erect a small-business por-tal on AOL’s Netscape site towhich customers could subscribefor a monthly fee. AOL also earneda commission when it sold Pur-chasePro’s software to other com-panies, which could create theirown online marketplaces to buyand sell goods and services.

There was another way AOLmade money: It earned $3 in per-formance warrants for each dollarof revenue it generated for Pur-chasePro under their marketingpartnership. Under the agreement,the warrants gave AOL the right tobuy shares in PurchasePro for $63each. But with dot-com shares indecline, the two companies agreedto revise the deal in December2000, according to a confidentialAOL summary circulated to exec-utives for their signatures.

As part of the revised arrange-ment, PurchasePro agreed to re-duce the exercise price for eachshare of PurchasePro stock anAOL warrant could buy from $63to a penny. AOL estimated itwould earn $30 million in the quar-ter ended in December 2000 by ex-ercising the warrants, according tointernal company documents.AOL would buy PurchaseProstock for a penny per share and re-sell them at their market price.

The warrants were valuable toAOL because they were treated asad and commerce revenue.

“$30MM [million] of revenuefrom performance warrants vest-ing in calendar Q4 [the Decemberquarter] will be treated as ad-vertising revenue,” AOL stated inits executive summary of the deal.

For PurchasePro, a dot-com onthe rise, the AOL partnershiphelped it to generate revenue andsell its software service.

Many cash-poor dot-coms paidfor their online ads by giving AOLequity in their high-flying stock.Often such deals legitimized com-panies in the eyes of Wall Streetbecause of AOL’s status at the van-guard of the tech boom.

But the difference in this dealwas that PurchasePro was not us-ing its stock to buy ads to promote

itself on AOL. Instead, AOL wasearning warrants from selling Pur-chasePro software. The revenuewas booked as commerce, which isreported in the same income lineas advertising sales. AOL said itcombines ad and commerce reve-nue because many of its deals aremultifaceted and do not fall neatlyin either of those categories.

In return for restructuring theagreement, which included reduc-ing the warrants’ exercise price,AOL agreed to give PurchasePro$10 million in revenue, accordingto AOL’s internal documents.

PurchasePro got its $10 millionthis way: AOL paid it $4.9 millionto cover the cost of giving 100,000AOL customers a free month’ssubscription—at $49 per user—toPurchasePro’s marketplace ser-vice, which was co-branded withAOL’s Netscape portal. AOL alsoagreed to buy $4.6 million worth ofPurchasePro’s software, whichAOL would distribute to some ofits business partners. AOL wouldcome up with another $500,000 byselling ad space on PurchasePro’sonline marketplace.

The bottom line: AOL essential-ly paid $9.5 million for $30 millionin warrants, netting $20.5 million.

The deal helped AOL boost itsincome from ad and commerce.Though the category includes thetwo revenue streams, most WallStreet analysts generally regardthe total as an indicator of howAOL’s ad business is doing. Suchassumptions could be misleading,said Johnson, the former Pur-chasePro chief executive.

“The warrants had nothing todo with ad revenue,” Johnson said.“They were directly related to sell-ing our marketplace software toour customers, suppliers and part-ners.”

AOL declined to make availableany officials for comment on therecord. Thomas D. Yannucci, anattorney hired by AOL to answerThe Post’s questions, stated in aletter that the $28 million in reve-nue associated with the Purchase-Pro warrants “is de minimis whenviewed against AOL’s advertisingand commerce revenues of $1.4billion for the same period andAOL’s total revenues of $4 bil-lion.” He said AOL had disclosedin its financial statements that itsometimes accepts various formsof equity, including warrants, ascompensation for advertising ande-commerce services.

In addition, AOL’s outside audi-tor, Ernst & Young LLP, reviewedthe transaction and confirmed thatAOL’s accounting was in accor-dance with generally accepted ac-counting principles, Yannucciwrote.

Yannucci said the warrant reve-nue had been properly recognizedin the ad and commerce category.

Under accounting standards,the proper treatment of the trans-action depends on the details ofthe December restructuring thatlowered the exercise price ofAOL’s warrants to a penny. If Pur-chasePro was setting a price forAOL warrants for future sales of

software, the booking may havebeen correct.

But some accounting expertssaid that if PurchasePro were sim-ply repricing AOL‘s existing war-rants, the situation would be dif-ferent. It may have been moreappropriate for AOL to book thatgain as “an equity investment or acompletely independent invest-ment transaction,” said Bala G.Dharan, an accounting professorat Rice University.

Doug Carmichael, a professor ofaccounting and director of theCenter for Integrity in FinancialReporting at the City University ofNew York’s Baruch College, said,“Warrants would be an invest-ment, whether they vested or not.If you recognize the gain on repric-ing, then that’s an investmentgain.”

Yannucci said in a letter, “Thechange in the value of these war-rants resulted from a transactionbetween the parties structured toincrease the incentive to AOL toperform future services. In this in-stance, the warrants did not vestand were not owned by AOL untilit had performed its obligationsunder the agreement.”

AOL did not provide further de-tails about the repricing.

Help Meeting Targets

As the months went by, AOLand PurchasePro found other waysto provide each other with quickinfusions of revenue, often nearthe end of a quarter.

Under one small deal, Purchase-Pro would receive $1.8 million

worth of advertising on the AOLservice, according to an internalcompany document dated March21, 2001. In return, AOL would re-ceive $1.8 million worth of promo-tions that mentioned its Netscapebrand when PurchasePro ran tele-vision ads on CNN and HeadlineNews, which were now part of themerged company, AOL TimeWarner Inc.

PurchasePro got little valuefrom the ads it ran on the AOL ser-vice, according to sources and in-ternal AOL documents that lay outwhere PurchasePro’s ads wouldrun.

The “carriage plan” showed thatmany of the PurchasePro adswould run on AOL’s ICQ instant-messaging service. Instant mes-sages allow users to converse bytext in real time over the Internet.The ICQ service targets a largelyteenage and international audi-ence who would have little use forPurchasePro’s business-to-busi-ness software. The ads appearingon ICQ’s application also had “al-most no click through,” an AOLsource said, meaning that few us-ers actually clicked on the ads tofind out more about the productbeing touted.

PurchasePro’s ads also were torun on Winamp, AOL’s music soft-ware player, another service thatdid not target PurchasePro’s busi-ness clientele. A source familiarwith PurchasePro’s thinking saidthe company did not care wherethe ads ran. Each side was more in-terested in boosting its ad reve-nue, sources for both companiessaid.

The Deal’s Demise

Eventually, the partnership be-tween AOL and PurchasePro fellapart. In May 2001, Johnsonstepped down as PurchasePro’sCEO after the company badlymissed its financial targets. In No-vember 2001, Arthur AndersenLLP resigned as PurchasePro’s in-dependent auditor after notingwhat it considered deficiencies inthe design and operation of Pur-chasePro’s internal controls.

About a month after Johnsonleft PurchasePro, Eric Keller, anAOL senior vice president, wasplaced on administrative leave,pending an internal investigationof the company’s relationship withPurchasePro, sources said. AOLhas not publicly disclosed the in-ternal inquiry, Keller’s status orhis subsequent departure. Kellerdeclined to comment.

AOL stopped reselling Pur-chasePro software in the first halfof 2001, according to PurchaseProofficials. AOL ceased using Pur-chasePro’s technology as the back-bone of AOL’s small-business por-tal around this February, Pur-chasePro said.

Chris Benyo, PurchasePro’s se-nior vice president, said the com-pany now has a new managementteam, and a different approach tomarketing its products.

“Some weird [expletive] hap-pened, but it was a valid businessapproach,” Benyo said. “The strat-egy was valid, the partner was val-id. The question is whether the ex-ecution was what we would havehoped it would’ve been.”

Unorthodox PartnershipProduced Financial GainsDeals Allowed AOL, PurchasePro.com to Boost Revenue

FILE PHOTO/BY FRANK ANDERSON—LEXINGTON (KY.) HERALD-LEADER

“The warrants had nothing to do with ad revenue,” says former PurchasePro.com executive Charles E. Johnson Jr.“They were directly related to selling our marketplace software to our customers, suppliers and partners.”

THURSDAY

How AOL Hit Its NumbersIn the crucial period before and after its merger withmedia giant Time Warner, America Online used a series ofunconventional business deals to keep its advertising andcommerce revenue growing at a breakneck pace.

TODAY

AOL’s Warrior CultureAmerica Online’s freewheeling business affairs division,which rewarded aggressive practices and discourageddissent, was key to many deals—including AOL’scomplicated relationship with a Las Vegas software firm.

The Deal Makers

Networks, Warner Bros. pictures andWarner Music.

Ann Moore, executive vice president ofTime Inc., will take over the company,which publishes magazines such as People,Time, Sports Illustrated and In Style. ChrisAlbrecht, president of HBO’s original pro-gramming, takes over HBO.

“We have the best media, entertainmentand communications businesses in theworld, but our challenge—and our goal inmaking these changes—is to take the les-sons we’ve learned over the past two yearsand use them to make the parts work to-gether to create greater value for ourshareholders,” Parsons said in a preparedstatement.

AOL Time Warner was assembled in a$112 billion merger between America On-line, the nation’s leading Internet serviceprovider, and Time Warner Inc., a motionpicture, music and publishing empire. Thehope was that the combined companywould achieve “synergy”—that cost reduc-tions and cross-promotion between com-patible divisions of the company wouldproduce a revenue machine greater thanthe sum of its parts. Some synergy wasachieved: Time has successfully sold sub-scriptions to its magazine on AOL.

But Pittman struggled to get all of AOLTime Warner’s far-flung divisions to worktogether. That became all the more diffi-cult after an advertising slump took hold in2001 and revenue no longer flowed freely.

“The synergy strategy did not play out,”said Jordan Rohan, an analyst with Sound-view Technology Group, in Old Green-

wich, Conn. “But more importantly it didnot play out because the large online ad-vertising deals were not efficient for ad-vertisers. It is not that cross-selling doesnot work—it does—but the million-dollar,multi-year online ad deals did not workout.”

Over the past year, AOL Time Warner’sstock has dropped from $47.25 to $12.45,yesterday’s close after a 5 percent drop onheavy volume.

Analysts attributed yesterday’s declineto the management changes and to an arti-cle in The Washington Post describinghow AOL carried out a series of un-conventional business deals to help gener-ate ad and commerce revenue before andafter the merger. Pittman oversaw the on-line service during the period.

Parsons addressed the restructuringand The Post’s story in an e-mail to AOLTime Warner employees:

“I realize that these changes follow a pe-riod of tough going for our company, inwhich our initial expectations ran head-oninto the dot-com bust, the ad recession anda general decline in investor confidence.The media scrutiny and speculation has of-ten been intense and sometimes, as evi-denced by a story in today’s WashingtonPost, unsettling.”

“Please be assured that there is abso-lutely no substance to any suspicionsraised about America Online’s advertisingdeals. There are no ‘accounting issues’ atour company. Yet we can’t be satisfied withobserving the law or merely doing what’srequired. Given who we are and what wedo, we must embody a higher standard.”

The past year has been one bad Wall

Street experience after another for AOLTime Warner. In September, the companytold investors that it would not make itsprojected earnings for 2001.

Three months later, chief executive Ger-ald M. Levin announced his retirement.And then, earlier this year, AOL TimeWarner said it would take a $54 billion

charge—the largest in U.S. business histo-ry—because the value of the stock it usedto buy Time Warner had plunged.

That was a tacit admission that the dealhad been overvalued, and it sparked around of second-guessing on Wall Streetabout whether the combination ever madesense.

Yesterday, analysts praised the manage-ment shake-up and said Pittman’s exit willbe welcomed by investors who punishedAOL Time Warner for setting high earn-ings goals and failing to reach them.

“When you push people together, thenthe economy started to go south and theonline piece goes south and you’re goinginto every division and telling guys you’vegot to give more at the office, my guess isthe hostilities ran pretty deep,” said TomWolzien, a media analyst with New York’sSanford C. Bernstein & Co.

In addition to his duties as chief operat-ing officer, Pittman was charged with tem-porarily taking over the struggling Amer-ica Online division, which has experiencedsagging revenue and stagnant growth.Though he has submitted his resignation,Pittman will continue overseeing the unituntil a permanent chief is selected, thecompany said.

“Having worked so hard to build theAOL service and brand, and after then go-ing through the merger and the last 18months, it’s time to take a break,” Pittmansaid in a prepared statement. “I’m proud ofwhat we built at AOL and believe that ithas a great future. Likewise, I have confi-dence in AOL Time Warner’s prospects.”

In the same statement, Parsons calledPittman a “brand builder and visionary,

and a great manager and operating exec-utive.”

In addition to creating MTV, Pittman al-so helped forge VH1, Nick at Nite andCourt TV. He helped overhaul the SixFlags theme parks for Time Warner Inc.before the merger. At Time Warner, Pitt-man clashed with Levin, according toSteve Brill, former publisher of Brill’s Con-tent, who knew both men at the time. Pitt-man then moved over to AOL, where hebecame president.

When Pittman joined AOL in 1996, thecompany was struggling. Competitors of-fered less-expensive Internet services, andAOL was grappling with an overtaxed on-line network, which was creating connec-tion difficulties for its dial-up customers.Pittman spearheaded a strategy to turnAOL into a Internet marketing power-house, making the online service less de-pendent on subscriber fees for growth.

The merger of AOL and Time Warnerthrew Levin and Pittman back together.When Levin resigned unexpectedly aschief executive in December, some compa-ny insiders felt that Pittman had beenpassed over for the top AOL Time Warnerjob and that AOL’s culture was slowly be-ing subsumed by Time Warner’s.

“In the end, AOL is just a smaller organi-zation and didn’t have the depth of man-agement” that Time Warner has, Wolziensaid. “What you’ve seen here is that, whenthey went to the bench, AOL didn’t havethe bench.”

Staff writers Christopher Stern,Shannon Henry and Michael Barbarocontributed to this report.

Pittman Resigns From AOL Time Warner as Firm ReorganizesPITTMAN, From A1

FILE PHOTO/BY RICHARD DREW—ASSOCIATED PRESS

Robert Pittman, 48, helped create the cableTV channels MTV, VH1, Nick at Nite andCourt TV before joining AOL in 1996.

DAILY 08-02-02 DM M2 E1 CMYK

ABCDE ][

BUSINESSFriday, August 2, 2002 K DM VA M2

EWashTech

Stocks

DOW 8506.62DOWN 229.97, 2.6%

NASDAQ 1280.00DOWN 48.26, 3.6%

STANDARD & POOR’S 500884.66, DOWN 26.96, 3.0%

WASH. POST-BLOOMBERG REGIONAL

145.74, DOWN 1.30, 0.9%10-YEAR TREASURY NOTEUP $5.63 PER $1,000, 4.39% YIELD

CURRENCIES119.36 YEN=$1, EURO=$0.9834

Long DistanceVerizon seeks to selllong-distance service inVirginia.Page E3

Troubled TycoTyco said its chief financialofficer will resign.Page E3

Slump in ProfitsFalling oil and gas priceshelped pull Exxon Mobil’searnings down 41 percent.Page E3

Making a MoveRWD Technologies, one ofHoward County’s largestcompanies, said it maymove its headquarters fromColumbia.WASHTECH, Page E5

INSIDE

ate, and we expect to hear furtherfrom the SEC shortly.”

Stern also said PurchasePro beganto withdraw from its AOL part-nership last summer and terminatedit in the fall of 2001.

AOL spokesman John Buckley de-clined to comment. SEC spokesmanJohn Heine also declined comment.

Sources familiar with the SECprobe said the regulatory agency,which has oversight over the financialreporting of U.S. companies, has sofar had only preliminary talks with at-torneys for PurchasePro about itsbusiness dealings with AOL. It wasunclear yesterday which aspect of theAOL-PurchasePro partnership wasunder review. The SEC probe followsa Washington Post report that exam-ined various business dealings be-tween the two companies.

In one unorthodox arrangement,AOL gave $9.5 million in cash toPurchasePro for $30 million in stockwarrants in the firm, and AOLbooked the difference—$20.5 mil-

By Alec Klein


The Securities and ExchangeCommission has widened its probe ofAOL Time Warner Inc., investigatingthe company’s former business rela-tionship with a Las Vegas softwarefirm.

Last week, AOL Time Warnerchief executive Richard D. Parsonsdisclosed that the SEC had launcheda fact-facting inquiry into the busi-ness practices of the world’s largestInternet service, Dulles-based Amer-ica Online. The Justice Departmentalso is conducting a criminal in-vestigation of the online unit, accord-ing to sources.

PurchasePro Inc., a struggling dot-com that markets business software,yesterday confirmed that it has beencontacted by federal regulators aswell. “As far as we know, the SEC islooking into our transaction withAOL that occurred under prior man-agement,” said PurchasePro spokes-man Steve Stern. “Our accounting forthis was conservative and appropri-

SEC ExpandsProbe of AOLQuery Targets Deals With PurchasePro

See AOL, E5, Col. 3

By Renae Merle


For years, WorldCom Inc. seniormanagement was known as “TheBernie and Scott Show.” As chief fi-nancial officer, Scott D. Sullivan

could—and often did—complete his boss’ssentences. Bernie Ebbers laid out the vi-sion and Sullivan provided the numbers.

Yesterday, Sullivan made a handcuffedstroll before the cameras and into custodyin tasseled loafers and a dark business suit,setting the stage for more questions abouthow much Ebbers knew about the account-ing methods Sullivan allegedly used to in-flate WorldCom’s profits.

“They often seemed to be two men withone brain,” said Patrick McGurn, vicepresident at Rockville-based InstitutionalShareholder Services, which representsbig investors.

An attorney for Sullivan, Andrew J. Gra-ham, was out of the office yesterday andcouldn’t be reached for comment.

Sullivan’s roots lie in Upstate New York.He was one of the “cool guys” at Bethle-hem Central High School—a member of ahigh school fraternity, Sigma Kappa Delta,which required paddling for admission.From there he headed to State Universityof New York at Oswego.

“He didn’t seem like an ambitious guy.Oswego is definitely a party school,” ac-cording to a high school friend. “He didnot strike me as the kind that was going togrow up a successful businessman.”

Still, Sullivan graduated summa cumlaude and was recruited by six of the eight

large accounting firms. He spent severalyears at KPMG LLP before moving to Flor-ida to take a job at a long-distance phonecompany.

His partnership with Ebbers began in1992 when WorldCom bought ATC LongDistance, where Sullivan was vice presi-dent and treasurer. Only an assistant trea-surer with WorldCom at first, Sullivanmade impressions inside and outside thecompany.

Initiating coverage of the industry, Rich-ard Klugman, an analyst at Jeffries Jeffer-ies & Co., remembers flying to Mississippito meet with company executives and en-

countering the young accountant. “I wasimmediately impressed,” said Klugman,who has followed WorldCom since 1993.“Scott’s three big pluses—I am embar-rassed to say this in hindsight—were thathe had a strong grasp of the details, he hada very smart strategic view of the business. . . and he could take both of those andcommunicate that to the Street.”

After two years Sullivan was promotedto chief financial officer, where he becamea master of acquisitions from an office nextto Ebbers’s.

SullivanRoseBy theNumbers Deals, Detail PushedCareer at WorldCom

BY SHANNON STAPLETON—REUTERS

Former WorldCom chief financial officer Scott Sullivan being taken to court yesterday in New York.

See SULLIVAN, E4, Col. 1

rise slightly. And the Labor De-partment reported that states re-ceived 387,000 initial unemploy-ment claims last week, an increaseof 20,000, the first such increase inthree weeks.

The tepid figures came a day af-ter the Federal Reserve said theeconomy expanded at a sluggish1.1 percent annual rate in the sec-ond quarter, well below consensuspredictions and a steep slide from

By Ben White


NEW YORK, Aug. 1—Stocksfell sharply today as a handful ofnew reports suggested that theeconomic recovery is losing steamand in danger of stalling.

The Dow Jones industrial aver-age dropped 229.97 points, or 2.6percent, to close at 8506.62. Thebroader market indexes sank aswell, with the Standard & Poor’s500-stock index shedding 26.96,or 3 percent, to close at 884.66.The technology-laden Nasdaqcomposite index suffered theworst, losing 48.26, or 3.6 percent,to close at 1280.00.

Traders and money managerssaid the losses stemmed primarilyfrom investor unease over shakyeconomic indicators, including areport from the Institute for Sup-ply Management suggesting thatfactory production has slowed.The industry group said its busi-ness activity index fell to 50.5 lastmonth from 56.2 in June. A read-ing greater than 50 signals produc-tion growth.

The Commerce Department,meanwhile, released a reportshowing that construction unex-pectedly fell 2.2 percent in June.Analysts had predicted it would

Stocks Fall SharplyOn Economic NewsDow Drops 230 Points; Nasdaq Off 3.6%

See MARKETS, E3, Col. 3

BY RICHARD DREW—ASSOCIATED PRESS

Shaky economic indicators madetrading grim for Luke Scanlon on theNew York Stock Exchange floor.

By Paul Blustein


Seeking to douse a financial fire-storm raging through South Amer-ica, the International MonetaryFund and U.S. Treasury SecretaryPaul H. O’Neill yesterday made itclear that new international loansfor Brazil and Uruguay are in theworks.

“Certainly there is a matter ofsome urgency here,” said theIMF’s chief spokesman, Thomas

Dawson, referring to talks the IMFis holding this week with Brazilianofficials on a new loan to supple-ment that country’s current $15billion package. An agreement tospeed aid to Uruguay, which wasforced to close its banks this weekto halt a run by depositors, willpreferably come “sooner ratherthan later,” he added.

At a separate news conference,O’Neill—who caused a diplomatictempest with Brazil earlier thisweek—took a much more concilia-

tory stance than he has previously,stating: “I continue to favor sup-port for Brazil and other nationsthat take appropriate policy steps.”

But fresh IMF aid will be forth-coming for Brazil only if the majorcandidates running in October’spresidential election reach an “un-derstanding” to broadly follow pol-icies that financial markets view ascredible and sensible, Dawson em-phasized. The two candidates lead-ing in the polls are both leftistswho have criticized the govern-

ment’s pro-IMF policies, so thenew approach effectively meansthat the onus is on them to reachsome accommodation with themonetary fund lest they risk beingblamed for a full-blown economiccollapse.

The promising talk of new bail-outs helped reverse a nosedive inBrazilian financial markets thathas spread to neighboring coun-tries in recent weeks and raised

IMF, O’Neill Back Loans to Brazil, UruguayTalk of New Bailouts Helps Reverse Plunge in South American Financial Markets

See O’NEILL, E2, Col. 5

By Ben White


Stanley Works, the Connecti-cut-based tool manufacturer, saidlate yesterday that it has re-versed a move to change its offi-cial address to Bermuda.

The decision comes after thecompany was widely criticizedfor considering the move, whichwould have reduced its U.S. taxburden. Members of the AFL-CIO protested the plan earlierthis week outside the company’sNew Britain, Conn., headquar-ters and members of Congressfrom both parties have urgedStanley Works to reconsider.

In a prepared statement, Stan-ley said it changed its mind be-cause “Congress has starteddown a path to deliver compre-hensive tax reform that would

eliminate the inequities of U.S.international taxation and there-by accomplish Stanley’s originaland continuing goal.”

“We have been asked by thecongressional leadership on bothsides of the aisle to support theirefforts toward rectifying this sit-uation. . . . We have honoredtheir request, and the ball is nowin their court,” Stanley chief ex-ecutive John M. Trani said in astatement.

The planned reincorporationin Bermuda has been a central is-sue in a pivotal Connecticut con-gressional campaign betweenRepublican Rep. Nancy L. John-son and Democratic Rep. JamesH. Maloney, who are battling fora 5th District seat that was re-drawn based on population

Stanley Decides AgainstBermuda Reincorporation

See STANLEY, E3, Col. 3

Conn. Firm Chided for Tax Avoidance By Anitha Reddy


Larry D. Thompson, head ofthe federal task force on corporatefraud and former director of Pro-vidian Financial Corp., made aprofit of between $1 million and$5 million when he exercised hisProvidian stock options in July2001, according to his annual fi-nancial disclosure statement re-leased yesterday.

Thompson, who was also chair-man of the troubled credit cardfirm’s audit committee until hisresignation to become U.S. depu-ty attorney general in May 2001,exercised his options and soldProvidian stock worth nearly $5million in a series of transactionsin early July last year, accordingto the disclosure statement. Histotal profit from the transactionsremained uncertain, however, be-

Deputy AG Profited Before Stock FellThompson Exercised Providian Options During Transition

FILE PHOTO BY BILL O’LEARY—THE WASHINGTON POST

Deputy Attorney General Larry D. Thompson, left, disclosed his personalprofit from selling stock and options in Providian, where he was a director.See PROVIDIAN, E2, Col. 1

DAILY 07-30-02 DM SU E1 CMYK

ABCDE ][

BUSINESSTuesday, July 30, 2002 K DM VA S

EWashtech

StocksClassified

DOW 8711.88UP 447.49, 5.4%

NASDAQ 1335.25UP 73.13, 5.8%

STANDARD & POOR’S 500898.96, UP 46.12, 5.4%

WASH. POST-BLOOMBERG REGIONAL

146.13, UP 5.43, 3.9%10-YEAR TREASURY NOTEDOWN $13.44 PER $1,000, 4.56% YIELD

CURRENCIES119.79 YEN=$1, EURO=$0.9809

By Carrie Johnson


Senate investigators cited internal e-mailsand memos from Merrill Lynch & Co. to detailthree occasions in which officials at the in-vestment bank came to the aid of Enron Corp.in an effort to curry favor with the Houston en-ergy trader.

In April 1998, after Enron leaders com-plained about their low stock rating by a Mer-rill research analyst, then-president Herb Alli-son called to mollify Enron Chairman KennethL. Lay—and improve Merrill’s chances of tak-ing part in a lucrative deal with Enron, in-vestigators said.

Stock analyst John Olson left Merrill fourmonths later and a new analyst, Donato Eas-sey, lifted Enron’s rating from “neutral” to “ac-cumulate” that fall. The move was praised byMerrill’s bankers and Enron executives, whosent the firm business worth $40 million to $50million, according to an e-mail quoted by the in-vestigators.

“It is clear that your responsive message wasappreciated by the Company, and any animosi-ty in that regard [relating to Enron’s stock rat-ing] seems to have dissipated in the ensuing

Merrill TiesTo EnronAt IssueIn ProbeSenate Panel to LookAt Firms’ Relationship

See MERRILL, E4, Col. 1

By Caroline E. Mayer


The securities industry is pushing the stateof California to exempt arbitrators that handledisputes against stock brokerages from new ar-bitration ethics standards that require moredisclosure of conflicts of interests.

The National Association of Securities Deal-ers’ Dispute Resolution division and the NewYork Stock Exchange sued the California Judi-cial Council last week, saying their own arbitra-tion rules require arbitrators to disclose anypossible conflicts of interest. They said theirprocedures are regulated by the Securities andExchange Commission to make sure the pri-vate judgment process is as fair as the publiccourt system. They are also concerned aboutthe costs and complexities especially if otherstates follow California’s lead and impose differ-ent sets of rules.

Almost all stock brokerage firms require in-vestors to agree when they open their accountsto waive their rights to a court trial and refer alldisputes to arbitration. The NASD and NYSEhandle almost all investor complaints broughtagainst stockbrokers, which are estimated tototal more than 5,000 cases this year. The num-ber of cases has been rising rapidly in the pastthree years as more households own stocks and

ArbitrationStandardsChallenged

See ARBITRATION, E4, Col. 1

By Frank Ahrens


It’s a tough time to be a media lordpushing tomorrow’s ideas.

The weekend ouster of ThomasMiddelhoff, chief executive of Germa-

ny’s Bertelsmann AG—one of the world’stop five media companies—is only the mostrecent expulsion from a quickly shrinkingclub that once sought to change the wayconsumers get their entertainment.

Earlier this month, the board of directors

of France’s Vivendi Universal SA—theworld’s second-largest media firm—tossedout its star-struck chief executive, Jean-Marie Messier, who briefly sold his compa-ny on a dream of Parisian teenagers watch-ing movies on their cell phones.

A little over a week ago, Robert W. Pitt-man, chief operating officer of AOL TimeWarner Inc.—the world’s largest mediaconglomerate—resigned after failing to in-tegrate the sprawling company’s many as-sets into a streamlined, moneymakingwhole by delivering Time Warner movies,

music and magazines via America Onlineand Time Warner Cable.

For his part, Middelhoff spent the pastfour years trying to turn a 167-year-old pub-lishing company—which began by printingChristian songbooks—into an internation-al music, software, online, book and maga-zine company.

Best known in the United States as cor-porate parent of BMG Entertainment,which carries artists such as Aretha Frank-lin, Outkast, the Dave Matthews Band andDolly Parton, Bertelsmann even bought the

Napster file-sharing site last year for $9 mil-lion and $91 million in forgiven loans andadvances.

It was a bold move by Middelhoff, 49,who split with the other major music labelsby acquiring the renegade online site,which was by then shut down by music in-dustry lawsuits. It was a tacit admissionthat the file-swapping service had all butrendered obsolete the music industry’s tra-ditional means of distributing and selling


Thomas Middelhoff, who as chairman and chief executive of Bertelsmann AG oversaw its purchase of Napster, was ousted on Sunday.

FILE PHOTO/REUTERS

Robert W. Pittman resigned aschief operating officer of AOLTime Warner on July 18.


Vivendi Universal’s board firedChairman Jean-Marie Messierearlier this month.

Moguls on a Downhill Slope

See MOGULS, E4, Col. 1

With Bertelsmann Ouster, Another Media Giant Eschews Vision for Revenue

By Paul Blustein


For the second time in five weeks, com-ments by Treasury Secretary Paul H. O’Neillsent Brazil’s currency plunging yesterday—and this time, a diplomatic incident ensued.

Foreign Minister Celso Lafer summonedU.S. Ambassador Donna Hrinak to complainof “profound ill will” generated by remarks thatO’Neill made in a televised interview Sunday,which traders interpreted as suggesting thatWashington will oppose new international aidfor Brazil’s crisis-stricken economy. Brazilianofficials were particularly exercised over theTreasury secretary’s assertion that he wants tomake sure such aid won’t “just go out of thecountry to Swiss bank accounts.”

The episode came amid mounting concernthat Brazil, Latin America’s largest economyby far, is sinking into the sort of financial con-flagration that has devastated Argentina. Thegovernment announced late yesterday that itwill send a team of officials to the InternationalMonetary Fund’s Washington headquarters todiscuss a possible increase or extension in a$15 billion loan program that expires late thisyear, according to wire service reports fromBrazil.

Thanks in large part to investor concernsthat a leftist candidate will win October’s presi-dential election, the Brazilian real has lostmore than a quarter of its value against theU.S. dollar this year, and the nation’s bondshave plummeted. Those factors have forcedthe government to pay very high interest rates

to borrow money and are stoking worries thatBrazil may be forced to default on its $300 bil-lion-plus debt, as Buenos Aires did.

O‘Neill’s tart tongue has generated contro-versy on numerous occasions during his stew-ardship at the Treasury, but drawing a formalprotest from another nation’s foreign ministeris a first for the Treasury chief, according to hisaides, who maintained that he had been misun-derstood by both the markets and the Brazil-ians.

Ironically, the comments that caused the lat-est flap came as O’Neill was defending himselfon Sunday talk shows against criticism that helacks the deft touch of his Democratic prede-cessor, Robert E. Rubin, in calming financial

BY PAULO WHITAKER—REUTERS

A trader stands by a U.S. dollar exchangerate board at the futures and commoditiesmarket in Sao Paulo, Brazil, yesterday.

In Brazil, ‘Ill Will’ Over O’NeillTreasury Chief’s Remarks Cause Diplomatic Stir, Weaken Currency

See REAL, E4, Col. 5

By Anitha Reddy


The telecommunication industry’swidespread practice of trading com-munications capacity to build world-wide networks came under renewedscrutiny this week after Qwest Com-munications International Inc. an-nounced it incorrectly booked as muchas $1.16 billion from the deals.

Qwest, the dominant local phoneprovider in 14 western states, becamethe first major telecommunicationscompany to declare its intention to re-state earnings because of the practice,saying it improperly recorded revenuein 18 percent of its swaps in the yearsbefore and after its 2000 merger withUS West Inc.

“Accounting errors were made,”

Qwest’s chief executive, Richard C.Notebaert, said in a conference call forinvestors yesterday. “They will be cor-rected and they will be disclosed.”

Afshin Mohebbi, Qwest’s presidentand chief operating officer, is sched-uled to testify today in a Senate Com-merce, Science and TransportationCommittee hearing on the accountingcrisis in the telecommunications in-dustry. The head of the Federal Com-munications Commission, Michael K.Powell; the chief executive of telecom-munications upstart Global Crossing,

BY PAUL J. RICHARDS—AGENCE FRANCE-PRESSE

Qwest, which has offices inArlington, announced that it willrestate $1.16 billion in earnings.

Qwest MovePuts FocusOn Trades

See QWEST, E3, Col. 4

By Bruce Meyerson

Associated Press

NEW YORK, July 29—AOLTime Warner, EDS and MetLife wereamong 15 parties chosen today toserve on the committee that will re-present thousands of creditors owedbillions of dollars in WorldCom’sbankruptcy.

Also today, WorldCom namedJohn S. Dubel its new chief financialofficer and Gregory F. Rayburn chiefrestructuring officer in the telephoneand Internet service company’s bidto reorganize its debts and opera-tions.

Dubel replaces Scott Sullivan, theousted CFO who is expected to facecriminal charges in WorldCom’s ac-counting scandal. Dubel and Ray-burn, both principals with the re-structuring firm AlixPartners,attended today’s creditors’ meeting

along with WorldCom chief exec-utive John W. Sidgmore.

The Nasdaq Stock Market, mean-while, announced that it will delistthe nearly worthless shares of World-Com and its MCI long-distance unit.The move, effective Tuesday, wasblamed on the bankruptcy case andWorldCom’s inability to stay up todate with the federal filing require-ments for public companies.

The creditors committee was se-lected from among 51 parties thatsubmitted applications to Carolyn S.Schwartz, the U.S. trustee handlingthe WorldCom case for the JusticeDepartment.

The committee is to negotiatewhat portion of their debts the credi-tors would be repaid when World-Com emerges from bankruptcy, aswell as how much stock in a reorga-

AOL, MetLife on PanelOf WorldCom Creditors

See WORLDCOM, E3, Col. 4

By Alec Klein


AOL Time Warner Inc.’stop dealmaker is relinquish-ing day-to-day oversight ofthe business affairs divisionof the world’s largest Inter-net service, according tocompany sources familiarwith the matter.

David M. Colburn, knownby many in the industry forhis brash and aggressive

style, will no longer handlethe business deals brokeredby America Online, thesources said. He will, how-ever, continue to work onstrategy and other broad is-sues, they said.

Colburn’s day-to-day du-ties are being handed toLance Conn, who is return-ing to Dulles from London,where he helped expand the

AOL TIME WARNER

David Colburn is knownfor his brash style.

DealmakerAt AOL toShift FocusColburn Giving UpDay-to-Day Duties

See AOL, E2, Col. 1


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E2 Tuesday, July 30, 2002 S DM VA K The Washington PostBUSINESS IN BRIEF

The Treasury Department said it plans to borrow $76 billion in the July-September period, $21 billion more than projected three months ago. It nowalso expects to have $40 billion in cash on hand at the end of the period, $5billion less than forecast. An even larger gap occurred in the second quarter,when the Treasury hoped to pay down $89 billion in debt and ended up bor-rowing $15 billion. Falling tax receipts and rising spending, much of it forhomeland security and military operations in Afghanistan, are boosting thebudget deficit.

Fewer Internet Domain NamesThe number of Internet domain names has contracted sharply in the past

year, the first such reduction since the Web popularized the Internet, accord-ing to the latest surveys of the world’s top 10 registrars of Internet names.Since reaching a peak of about 30.6 million in September, the number of Netaddresses ending in “.com,” “.net” and “.org” has dropped by more than 1.6million through May—a 14 percent decline.

MORE NEWS

Budget Group, the parent of Budg-et Rent-A-Car and Ryder truckrental, filed for Chapter 11 bank-ruptcy protection, blaming thepost-Sept. 11 drop-off in travel.The company said customers willnot be affected by the filing in U.S.Bankruptcy Court in Wilmington,Del. The Daytona Beach, Fla.-based group listed assets of $4.05billion and debts of $4.33 billion.

The Securities and ExchangeCommission posted a new Website naming executives who havecertified the accuracy of theircompanies’ financial statements incompliance with a new rule. Therule requires that chief executivesand chief financial officers of 947U.S. companies attest that finan-cial reports filed with the agencyare accurate and complete.

Bill Gates’s personal investmentfund and charity raised its stake inCox Communications to 33.4 mil-lion Class A shares. The combinedstake of Gates’s Cascade Invest-ment fund and the Bill & MelindaGates Foundation amounts to 5.8percent of the Class A commonshares outstanding of Cox.

Gates also said the company isforming a board of about 15 uni-versity professors to provide ad-vice on security and privacy issuesas the world’s biggest softwaremaker tries to improve its rep-utation in both areas.

T-bill rates rose. The discount rateon three-month Treasury bills auc-tioned yesterday rose to 1.680 per-cent, from 1.660 percent the previ-ous week. Rates on six-month bills

rose to 1.690 percent, from 1.675percent. The actual return to in-vestors is 1.712 percent for three-month bills, with a $10,000 billselling for $9,957.50, and 1.727

percent for a six-month bill sell-ing for $9,914.60. Separately, theFederal Reserve said the averageyield on one-year Treasury bills, apopular index for changing ad-justable-rate mortgages, fell to1.88 percent from 1.97 percentlast week.

Computer Associates Internation-al, the world’s fifth-largest soft-ware maker, said it will begintreating stock options as expens-es starting in April, a move thatwill trim its annual earnings by 2cents a share.

Dynegy agreed to sell a naturalgas pipeline for $928 million incash and $950 million in assumeddebt to MidAmerican EnergyHoldings, a unit of Warren Buf-fett’s Berkshire Hathaway thathas been buying energy assets.The 16,600-mile Northern Natu-ral Gas pipeline system runs fromTexas to the Great Lakes.

AOL Time Warner and AT&Tagreed to temporarily suspendthe registration process for

AT&T’s stake in their joint ven-ture, Time Warner Entertain-ment, according to sources famil-iar with the matter. AT&T andAOL Time Warner are negotiat-ing an alternate transactionaimed at unwinding the part-nership.

Adelphia Communications’ found-er and chairman, John J. Rigas,personally ran up as much as$66.9 million in advances fromthe cable television company’scash management account, fed-eral investigators allege. Atsome point, the investigatorssay, his son and vice presidentfor finance, Timothy Rigas,reined in the withdrawals, lim-iting his father to a $1 million-a-month maximum.

The National Highway TrafficSafety Administration has up-graded its investigation intomore than 300 complaints aboutair-bag problems in the 1997Ford Escort and Mercury Trac-er. The probe covers 396,208 ve-hicles and reports of 23 fires, 21inadvertent air-bag deploy-ments and five injuries. NHTSAalso opened an investigation in-to 30 accidents in which air bagsdid not deploy in the 2001 KiaRio, according to reports of ac-tions taken by the agency inJune. One person was killed and26 injured in the crashes.

EARNINGS

Humana reported second-quarterearnings of $45.4 million, up 19percent from the year-ago period.The health-care provider’s reve-nue rose to $2.83 billion, from$2.49 billion a year earlier.

Tyson Foods said its fiscal third-quarter profit jumped almost six-fold, to $109 million, as a result ofhigher chicken prices and growthfrom its purchase of beef andpork processor IBP. Revenue tri-pled to $5.9 billion.

Kellogg said second-quarter profitrose 52 percent, to $173.8 mil-lion, because of lower costs relat-ed to last year’s purchase of Kee-bler Foods and higher sales.

LOCAL BUSINESS

AES shares rose 41 percent, theArlington-based power produc-er’s biggest one-day gain ever, af-ter its partner in a California elec-tric plant said it may soon settle adispute with the state over mil-lions of dollars in power sales.Shares of the company, whichdoes business in 33 countries,rose 64 cents, to $2.20 on theNew York Stock Exchange.

Coventry Health Care of Bethesdasaid its second-quarter profitjumped 79 percent, to $36.6 mil-lion, as the company’s memberenrollment and commercial ratesrose.

Rouse Co. of Columbia said itssecond-quarter profit was $98.1million on revenue of $277.4 mil-lion, compared with $25.9 millionon $269.9 million in revenue forthe same period last year. Fundsfrom operations rose 8.5 percent,to $73.7 million, for the periodended June 30, driven by growthfrom Rouse’s purchase in May ofeight malls and other assets fromshopping center developer Ro-damco North America NV.

Compiled from reports by theAssociated Press, BloombergNews, Dow Jones News Serviceand Washington Post staffwriters

Treasury to Increase Borrowing

DILBERT By Scott Adams

COURTESY OF TOYOTA

Toyota employees and executives celebrate the 10 millionth vehicle built at the Japanese company’s plant inGeorgetown, Ky. Toyota has been manufacturing vehicles in North America for 16 years.

BY ITSUO INOUYE—ASSOCIATED PRESS

Honda’s executive vice president,Koichi Amemiya, announces thatthe automaker’s profits for thefirst fiscal quarter jumped 20percent from a year ago, lifted bystrong overseas sales and afavorable exchange rate.

13-wk: % 26-wk: %

Treasury Bills

THE WASHINGTON POST

SOURCE: Treasury Department

1.712 1.727

13 20 28 3J

10 17 24 1J

8 15 22291.5

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2YIELDS IN PERCENT

Internet division’s reach throughout Eng-land, France and other parts of the conti-nent. Conn, a 34-year-old lawyer, joinedAmerica Online in 1996.

Conn said he will be back in the UnitedStates permanently on Sept. 1.

America Online spokesman John Buckleyconfirmed the personnel change. “Lance is aterrific person to be taking on new responsi-bilities,” Buckley said. “He will continue tolook to David [Colburn] for his supervisionand guidance. And this is all part of ongoingefforts to make deal flows work smoother

and better.”In his new role, Conn will make the final

review of and sign off on deals put togetherby the business affairs unit, roles previouslyplayed by Colburn. The deals often involvesome of the largest and most complex ad-vertising deals between AOL and compa-nies wishing to market themselves on theInternet service. Reporting to Conn will besenior vice presidents Steven Rindner, TedPrince and Gio Hunt.

Conn will retain his title as senior vicepresident and continue to report to Col-burn. Conn also will assume some of the re-sponsibilities of Adam Lehman, who recent-

ly left business affairs, where he essentiallyserved as chief operating officer of the unit.

Colburn may still get involved in some ne-gotiations with select business partners,and he retains his post as executive vicepresident and president of business affairsand development for AOL Time Warner’ssubscription services and its advertisingand commerce businesses. Colburn report-ed to Robert W. Pittman, who resigned un-der pressure earlier this month as AOLTime Warner’s chief operating officer.

The company said Colburn was vacation-ing in Israel and was unavailable for com-ment.

Colburn, a lawyer, former venture capital-ist and former chief executive of a postercompany, played a major role in buildingAmerica Online into a marketing power-house during the late 1990s, leading a unitof about 100 dealmakers who brokered hun-dreds of millions of dollars in advertisingand commerce contracts.

Now, however, the online division’s ad-vertising revenue is in a deep swoon. In itsjust-ended second quarter, the Internetunit’s ad and commerce revenue dropped 42percent. On the same day, AOL Time Warn-er announced that the Securities and Ex-change Commission is conducting a probeof the online unit following a WashingtonPost report about how the division generat-ed advertising and commerce revenuethrough a series of unconventional deals.

Colburn’s Duties to Change at AOLAOL, From E1 Visit The

Washington Post’sInternet site athttp://www.washingtonpost.com to find:K Stock quotesupdatedcontinuously.K Breakingbusiness news.K The area’sbiggest companiesin the InteractivePost 200.

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NOTICE OF SINKING FUND REDEMPTIONSerial Preferred Stock, $3.40 Series of 1992

($50 Par Value)CUSIP No. 73767981-1

Pursuant to the provisions of the Articles of Serial Designation dated August 24,1992, for the Serial Preferred Stock, $3.40 Series of 1992, of Potomac ElectricPower Company (the “Company”), notice is hereby given that the Companywill redeem on September 1, 2002, to meet sinking fund requirements, 40,000shares of its outstanding $3.40 Series of 1992 Serial Preferred Stock at theredemption price of $50.00 per share.

Certificates for the shares selected by lot for redemption should be surrenderedfor payment of the redemption price to the Redemption Agent.

By Mail:Mellon Investor Services, L.L.C.Reorganization DepartmentP.O. Box 3300South Hackensack, NJ 07606

By Hand:Mellon Investor Services, L.L.C.Reorganization Department120 Broadway, 13th FloorNew York, NY 10271

By Overnight:Mellon Investor Services, L.L.C.Reorganization Department85 Challenger Road Mail Drop-ReorgRidgefield Park, NJ 07660

BY:ANTHONY J. KAMERICKVICE PRESIDENTAND TREASURER

Dated: August 2, 2002

Federal Tax Law may require backup withholding on principal payments toholders who fail to provide a valid Taxpayer Identification Number on FormW-9. Holders who wish to avoid backup withholding should submit acompleted and signed Form W-9 when presenting certificates for payment.

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By Sabrina Jones


RWD Technologies Inc., one ofHoward County’s largest compa-nies, said yesterday that it maymove its headquarters from Colum-bia after its lease expires in 2003,dealing another blow to the coun-ty’s sputtering technology industry.

The technology services and con-sulting firm’s chief executive, Rob-ert W. Deutsch, said yesterday thatthe company would move its 600-person Howard workforce toRWD’s new Applied TechnologyLaboratory, in a 63,000-square-footbuilding adjacent to the University

of Maryland, Baltimore County.RWD now employs about 160 to170 people at the laboratory, thebase of RWD’s financially strug-gling Latitude360 division, whichsells e-learning products.

RWD’s chief financial officer,Beth M. Buck, said the decision tomove is not final yet.

“That is not a decision that hasbeen made,” Buck said. “That’s oneof several things we’re consider-ing.”

The company’s lease expires inDecember 2003, Buck said. RWD isalso looking at sites in Columbiaand will choose a location for itsheadquarters by May or June.

ened to $2.2 million (14 cents pershare), from $1.6 million (10 cents)in the same period in 2001, and thatit expects to fall short of its 2002earnings projections. The companyhad said previously that it wouldearn 20 cents per share for the fiscalyear. RWD shares lost 6 cents yes-terday to close at $2.14, down 2.8percent.

RWD is among the largest com-panies in Howard County and is thelargest tenant in its Columbia high-rise office building, said Linda H.Wilson, executive vice president ofthe Howard County Economic De-velopment Authority.

“It is certainly the type of compa-

ny that we would want to retain,and we will work to keep them inHoward County,” Wilson said.“They are the type of company wefeel certainly benefits HowardCounty.”

The county’s technology sectorhas seen a widespread fallout in thepast few years. Last year, Israelifirm Trellis Photonics Ltd. shutdown its U.S. operations in Colum-bia and halted construction of a60,000-square-foot manufacturingplant. In June, Corvis Corp., a Co-lumbia fiber-optics firm, laid off 240workers, including 70 in its Howardcorporate office.

Then last month, Bookham Tech-

nology PLC, a British optical prod-ucts firm, announced that it willclose its 150,000-square-foot Co-lumbia plant later this year, layingoff 45 workers. That was followedby Florida-based server-softwarefirm Citrix Systems Inc.’s layoff of100 Columbia workers when itclosed its office, the former head-quarters of Sequoia Software, a por-tal software firm. Citrix bought Se-quoia last year for $185 million.

“It’s always a balancing act,” Wil-son said. “You have an influx ofcompanies coming in, and then youhave the slump. That’s typical.That’s part of economic develop-ment, the ebbs and the flows.”

The company now occupies fourfloors in a 138,000-square-footbuilding in Columbia Town Center,where it has been for about a dec-ade. RWD wants a new locationwith fewer floors and more space.

RWD, whose sales have beenhurt in recent years by companiesthat are cutting back on informa-tion technology spending, recentlyimplemented a series of cost-cut-ting measures, including reducingits workforce through layoffs andattrition, dropping from 1,074 inJune 2001 to 917 in June of thisyear.

The company reported last weekthat its second-quarter loss wid-

RWD Technologies Considering Move From Howard County

K Maximus, a Reston govern-ment contracting firm, said itearned $11.1 million (48cents a share) in the threemonths ended June 30. Thefirm earned $11.8 million (53cents) in the same period of2001. Fiscal third-quarter rev-enue rose to $133.1 million,from $130.6 million a yearearlier. Maximus said it ex-pects to post revenue from$136 million to $142 millionand per-share earnings be-tween 50 cents and 53 centsfor its fiscal fourth quarter.Shares of Maximus rose$2.18, or 9.2 percent, to closeat $25.90.K On-Site Sourcing, an Alex-andria firm that provides doc-ument-management technolo-gy, said it earned $541,474(10 cents a share) in the threemonths ended June 30. In thesame period of 2001, On-Siteearned $420,233 (8 cents).Second-quarter revenue fellslightly, to $10.31 millionfrom $10.33 million a yearearlier. On-Site said it expectsto post earnings from 30 centsto 34 cents a share for theyear, but it warned that 2002revenue will be lower than the$44 million to $46 million pre-dicted earlier. Shares of On-Site closed at $2.92, up 16cents.K Sitel, a Baltimore companythat provides call-center ser-vices, said it earned $3.5 mil-lion (5 cents a share) in thethree months ended June 30,up from a loss of $30.2 million(41 cents) in the same periodin 2001. Second-quarter reve-nue was $196.7 million; it was$177.8 million a year earlier.Sitel ended the quarter with acash balance of $28.8 millionand said it expects to post rev-enue from $190 million to$194 million in the third quar-

ter. Shares of Sitel rose 5cents, to close at $2.25. K Meridian Medical Technolo-gies, a Columbia firm thatprovides drug delivery and di-agnostic systems, said itsigned a contract with the Ca-nadian Department of Nation-al Defense to design and man-ufacture an auto-injector toadminister a nerve agent anti-dote. The injector is to keepthe antidote, which can beself-administered, in a dry,stable form until it is used.Terms of the contract werenot disclosed.K Lockheed Martin, a Bethes-da defense contractor, sold itsFormtek database-manage-ment unit to closely held DFIInternational because it nolonger considered the busi-ness essential. Terms weren’tdisclosed. DFI, a Washington-based management consult-ing company, bought Formtekthrough its SwannStreet Ven-tures investment arm, thecompanies said. The purchasewas financed with private eq-uity, led by Resource Ven-tures. Lockheed has said itplans to sell its 81 percentstake in Comsat Internation-al’s Latin American operationto World Data Consortiumand to shed other telecommu-nications investments. Wash-ington-based Formtek servesmore than 50 corporate cli-ents and more than 40,000 us-ers. Its customers includeaerospace and defense compa-nies, automakers, manufac-turers, telecommunicationscompanies and utilities inNorth America, Europe andAsia. The unit has 21 employ-ees and was acquired by Lock-heed in 1989.

Compiled from reports byWashington Post staffwriters,washingtonpost.com andBloomberg News

IN BRIEF

By Ellen McCarthy


Increased research and develop-ment spending along with a drop inpayments from partners drove Gen-Vec Inc.’s second-quarter loss up 84percent, the company said yester-day.

The Gaithersburg biotechnologyfirm lost $6.9 million (32 cents ashare) in the three months endedJune 30, compared with a loss of$3.8 million (21 cents) in the year-earlier period. Quarterly revenue fell

to $1.6 million, down 23 percentfrom $2 million in the same period of2001.

“The operating expenses and theincreases that we saw are primarilyattributed to the clinical costs,” saidJeffrey W. Church, GenVec’s chief fi-nancial officer. “That’s just the costof doing business when you’re ad-vancing products through the clinic.It’s an expensive process but onethat we have planned for.”

The company develops gene-based medicines, including one, Bio-Bypass, that is being studied as a po-

revenue in the year-earlier period,resulted from the conclusion of thePfizer partnership.

The company ended the quarterwith $31.8 million in cash and in-vestments; Church said that shouldlast the company through the sec-ond or third quarter of 2003.

“But between now and then we’llhave advanced in the trials, whichwill continue to add value to ourcompany. We are hopeful that thatwill translate into a high stock priceand open up equity markets,” hesaid. “In addition we are looking atcorporate partnerships around eachof our programs.”

Shares of GenVec rose 12 centsyesterday, to $3.40.

tential candidate to treat patientswith coronary heart disease and oth-er cardiovascular diseases.

Pharmaceutical giant Pfizer Inc.had been collaborating with GenVecon BioBypass but announced in Jan-uary that it would end the part-nership. Rockville-based Bio-Reliance Corp. will pick up some ofthe manufacturing work that wasdone by Pfizer as a result of an agree-ment reached earlier this month.Church said the absence of contract,license and milestone payments,which accounted for $850,000 in

GenVec Quarterly Loss Grows 84%

By Yuki Noguchi


Primus TelecommunicationsGroup Inc. of McLean posted aloss on slightly decreased reve-nue during its second quarter,but the company said it has re-duced its debt and will not re-quire additional funding for theforeseeable future.

The company posted a loss of$11.6 million (18 cents a share)on revenue of $251.2 million inthe quarter ended June 30. Thatcompared with earnings of$116.1 million ($2.21) on reve-nue of $271.1 million a year ear-lier.

Primus sells telecommunica-tions and Internet services andis better known outside theUnited States, from which it de-rives about three-quarters of itsrevenue.

One of the hallmarks of Pri-mus’s financial results over thepast year and a half has been itsreduction in debt. Since the be-ginning of 2001, the companyhas been repurchasing its bondson the open market, reducing itsdebt from $1.3 billion to $615million. As a result of those re-ductions, Primus’s interest pay-ments decreased to $16.8 mil-lion during the quarter, fromabout $32 million in the sameperiod a year ago.

The company has also beenselling unprofitable businesses,lowering its revenue to reduceexpenses.

Analysts praised the results.“For awhile, they were cling-

ing for life, but at the present,they’re out of the woods,” saidChris Roberts, a research ana-lyst for brokerage firm Tejas Se-curities Group in Austin, whichhas no investments or bankingrelationship with Primus. “Theyare right on track. The results

are very favorable in light of thecurrent telecom market.”

The company said it expectsrevenue for this year to be morethan $1 billion, and said its earn-ings before interest, taxes, de-preciation and amortizationwould be between $95 millionand $100 million during theyear—more than it had initiallyexpected.

“This performance is all themore remarkable consideringthe devastation occurring in theindustry,” John DePodesta, co-founder and executive vice pres-ident of Primus, said in a confer-ence call with analysts.

The financial results were re-leased after the markets closed.Shares of Primus closed at 73cents, down 2 cents.

Separately, Primus chief exec-utive K. Paul Singh testified yes-terday in federal district court inAlexandria as a defendant in alawsuit brought by investors inTutornet.com Group, an onlineventure in which Primus hadproposed to invest up to$400,000 three years ago. Pri-mus had proposed to purchase19.9 percent of Tutornet, whichwas later charged with fraud bythe Securities and ExchangeCommission. Tutornet settledthose charges for $55,000 in Oc-tober 2000.

Tutornet’s investors are nowattempting to recover damagesfrom Primus, charging that Pri-mus essentially controlled Tu-tornet through a wholly ownedsubsidiary. If Primus or some ofits executives are found respon-sible, it may be liable for an un-known amount of damages.

Primus has characterized the$300,000 it handed over toTutornet as an advance, not aninvestment. Primus spokesmanJordan Darrow declined to com-ment on pending litigation.

Primus Posts Loss,Reports Less Debt

lion—as ad and commerce revenue.PurchasePro also bought advertisingspace from AOL and paid AOL com-missions for selling PurchasePro soft-ware.

AOL earned its warrants under amarketing deal that included distrib-uting PurchasePro software. Thewarrants, similar to stock options,gave AOL the right to buy shares inPurchasePro for 1 cent each, accord-ing to internal company documents.AOL calculated the value of the war-rants and booked it as $20.5 millionin advertising and commerce reve-nue in the quarter ended December2000 and another $7 million in thequarter ended March 2001.

The PurchasePro deal was one ofseveral unconventional transactionscarried out by AOL at a critical timebefore and after its takeover of TimeWarner Inc. in January 2001.

AOL has said it booked thesedeals properly, and its outside audi-tor Ernst & Young LLP has con-firmed the accounting.

At least two AOL executives havealready retained attorneys in con-nection with the company’s part-nership with PurchasePro, sourcessaid. That includes Myer Berlow, aformer AOL advertising executivewho now is a company consultant,and David M. Colburn, executivevice president and president of busi-

ness affairs and development forAOL Time Warner’s subscriptionservices and advertising and com-merce businesses, the sources said.The firm declined to make Berlowor Colburn available for comment.

Colburn recently relinquished hisday-to-day duties overseeing theInternet division’s business affairsunit, which negotiated many of thecompany’s unconventional transac-tions. Colburn’s move follows the re-cent resignation announcement ofRobert W. Pittman as AOL TimeWarner’s chief operating officer.

PurchasePro has faced its ownturmoil—widening financial losses,hundreds of layoffs and a plungingstock price that closed yesterday at33 cents. In November 2001, ArthurAndersen LLP resigned as Purcha-sePro’s independent auditor afternoting what it considered deficien-cies in the design and operation ofPurchasePro’s internal controls.

Also last year, Eric Keller, an AOLsenior vice president, was placed onadministrative leave, pending an in-ternal investigation of the compa-ny’s relationship with PurchasePro,sources said.

AOL-PurchasePro DealsSubject to SEC ScrutinyAOL, From E1

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