Time Warner Sets Up $3 Billion Reserve to Settle Suits

Aug 3, 2005  •  Post A Comment

Time Warner said Wednesday it reached an agreement in principle with a number of shareholders who sued the media titan after it merged with America Online. The company also said the settlement contributed to a second-quarter loss.

As part of the agreement, Time Warner said it created a $3 billion reserve that will be used to pay out settlements related to claims that shareholders lost money following the merger.

Specifically, Time Warner said it set up a $2.4 billion fund to handle payments made to shareholders who alleged fraud at AOL. Another $600 million was set aside to cover additional lawsuits not covered by the AOL class-action fraud claim.

The creation of these funds comes after Time Warner paid $300 million to the Securities and Exchange Commission, which conducted a probe into AOL’s accounting. In addition, the company paid a $60 million criminal fine and set aside another $150 million to settle other fraud claims made against AOL, as part of a settlement with the Department of Justice, which had launched its own probe.

“By acting now to put these matters behind us, we avoid the cost and distraction of protracted litigation,” said Time Warner Chairman and CEO Richard Parsons, during a conference call Wednesday to discuss second-quarter results.

The creation of the multibillion-dollar funds took a toll on the company’s financial results. Time Warner reported that it swung to a loss of $321 million for the quarter, from a year-earlier profit of $777 million.

Revenue, meanwhile, slipped 1 percent to $10.7 billion, pushed down by revenue declines at the company’s filmed entertainment and AOL divisions, where the culprits were weaker box-office sales and subscriber losses, respectively.

Those declines were nearly offset by gains at the company’s cable unit, which reported a 12 percent surge in operating income to $495 million and an 11 percent rise in revenue to $2.4 billion, driven largely by subscriber growth in high-speed data and telephony and by higher revenues from advanced digital cable services.

Time Warner’s networks operation, which includes cable channels TNT, TBS and Cartoon Network, among others, saw its operating income fall 5 percent to $570 million, due to higher expenses associated with an increase in original programming. Revenue, however, rose 5 percent due to higher subscription and advertising revenue.