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Unorthodox Partnership Produced Financial Gains

Under accounting standards, the proper treatment of the transaction depends on the details of the December restructuring that lowered the exercise price of AOL's warrants to a penny. If PurchasePro was setting a price for AOL warrants for future sales of software, the booking may have been correct.

But some accounting experts said that if PurchasePro were simply repricing AOL's existing warrants, the situation would be different. It may have been more appropriate for AOL to book that gain as "an equity investment or a completely independent investment transaction," said Bala G. Dharan, an accounting professor at Rice University.

"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." (File Photo/Frank Anderson - Lexington (KY.) Herald-Leader)

_____AOL Series_____
Part I: Unconventional Transactions Boosted Sales (July 18, 2002)
Part II: Creative Transactions Earned Team Rewards (July 19, 2002)
The Heart of a Deal: How America Online Brings Advertising Deals to Fruition
Excerpt of AOL E-mail
A Rocky Road: Graphical Timeline Tracks AOL Stock Price
AOL Documents and Deals Reviewed by The Washington Post
_____Time Warner_____
Stock Quote and News
Historical Chart
Company Description
Analyst Ratings
Timeline: Time Warner Highlights
Company Downsizing Actions
_____Time Warner News_____
Former AOL Chairman Heads Luxury Travel Firm (The Washington Post, Nov 23, 2004)
Time Warner Nears Deal Over AOL Accounting (The Washington Post, Nov 23, 2004)
AOL Concentrates On Security Issues With New Software (The Washington Post, Nov 18, 2004)
More AOL Time Warner News

Doug Carmichael, a professor of accounting and director of the Center for Integrity in Financial Reporting at the City University of New York's Baruch College, said, "Warrants would be an investment, whether they vested or not. If you recognize the gain on repricing, then that's an investment gain."

Yannucci said in a letter, "The change in the value of these warrants resulted from a transaction between the parties structured to increase the incentive to AOL to perform future services. In this instance, the warrants did not vest and were not owned by AOL until it had performed its obligations under the agreement."

AOL did not provide further details about the repricing.

Help Meeting Targets

As the months went by, AOL and PurchasePro found other ways to provide each other with quick infusions of revenue, often near the end of a quarter.

Under one small deal, PurchasePro would receive $1.8 million worth of advertising on the AOL service, according to an internal company document dated March 21, 2001. In return, AOL would receive $1.8 million worth of promotions that mentioned its Netscape brand when PurchasePro ran television ads on CNN and Headline News, which were now part of the merged company, AOL Time Warner Inc.

PurchasePro got little value from the ads it ran on the AOL service, according to sources and internal AOL documents that lay out where PurchasePro's ads would run.

The "carriage plan" showed that many of the PurchasePro ads would run on AOL's ICQ instant-messaging service. Instant messages allow users to converse by text in real time over the Internet. The ICQ service targets a largely teenage and international audience who would have little use for PurchasePro's business-to-business software. The ads appearing on ICQ's application also had "almost no click through," an AOL source said, meaning that few users actually clicked on the ads to find out more about the product being touted.

PurchasePro's ads also were to run on Winamp, AOL's music software player, another service that did not target PurchasePro's business clientele. A source familiar with PurchasePro's thinking said the company did not care where the ads ran. Each side was more interested in boosting its ad revenue, sources for both companies said.

The Deal's Demise

Eventually, the partnership between AOL and PurchasePro fell apart. In May 2001, Johnson stepped down as PurchasePro's CEO after the company badly missed its financial targets. In November 2001, Arthur Andersen LLP resigned as PurchasePro's independent auditor after noting what it considered deficiencies in the design and operation of PurchasePro's internal controls.

About a month after Johnson left PurchasePro, Eric Keller, an AOL senior vice president, was placed on administrative leave, pending an internal investigation of the company's relationship with PurchasePro, sources said. AOL has not publicly disclosed the internal inquiry, Keller's status or his subsequent departure. Keller declined to comment.

AOL stopped reselling PurchasePro software in the first half of 2001, according to PurchasePro officials. AOL ceased using PurchasePro's technology as the backbone of AOL's small-business portal around this February, PurchasePro said.

Chris Benyo, PurchasePro's senior vice president, said the company now has a new management team, and a different approach to marketing its products.

"Some weird [expletive] happened, but it was a valid business approach," Benyo said. "The strategy was valid, the partner was valid. The question is whether the execution was what we would have hoped it would've been."

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