Time Warner settles shareholder suit, posts loss

Time Warner Inc. has settled a lawsuit filed by shareholders after it bought America Online Inc., establishing a US$3 billion reserve fund for that and other securities litigation, the company said Wednesday, also announcing that the settlement fund contributed to a $321 million second-quarter loss.

The loss compares to a profit of $777 million or $0.17 per share in the same period of last year and amounts to a loss of $0.07 per share for the second quarter of this year, which ended June 30. Revenue was down at $10.74 billion compared with $10.86 billion in the second quarter of last year. Decreases in the company’s Filmed Entertainment and AOL business units were offset by growth in Cable, Networks and Publishing, Time Warner said.

Time Warner reaffirmed its expected “high-single digit” full-year growth rate, from its $9.9 billion in revenue last year.

Excluding the reserve fund and other one-time charges, the company had earnings per share of $0.18 for the quarter. Thompson Financial analysts expected the company’s earnings per share to be $0.19, excluding any special charges.

Shareholders filed suit against Time Warner after it bought AOL, contending that the deal cost them money because Time Warner share prices dropped after the acquisition, which was announced in January 2000. Time Warner is authorizing a $5 billion share buy-back program over the next two years, which is something shareholders have wanted as a way to improve the company’s share price.

Despite the cost of establishing the reserve fund and the subsequent income loss, Time Warner remains on track with its financial objectives for the current fiscal year, Chairman and Chief Executive Officer Dick Parsons said in a statement. The settlement and reserve fund will avoid the “costs, risks and distractions of protracted litigation,” he said, and even after setting up the fund the company’s balance sheet is “strong.”

The $3 billion reserve includes $2.4 billion to pay shareholders involved in the lawsuit, including $150 million previously paid by the company in a settlement of a U.S. Department of Justice investigation into the matter. That money will also be available to those in the class-action securities lawsuit. The company also will “use its best efforts” to have another $300 million transferred to the settlement fund. That amount was paid to the U.S. Securities and Exchange Commission to settle its investigation into the shareholder claims. Ernst & Young has agreed to a $100 million settlement related to the securities lawsuit, Time Warner said.

The settlement amounts are based on agreements in principle that the company has hammered out with plaintiffs, but also includes estimates of what the company expects it will wind up paying out to settle remaining claims. The proposed settlement agreement has to be finalized and also must receive preliminary and final court approval, said Time Warner, which is based in New York.

As for its most recent quarterly financial performance, the company said that AOL revenue dropped 4 percent to $2.1 billion, with a 45 percent jump in advertising revenue offseting a 9 percent decline in revenue from subscriptions. The ISP (Internet service provider) had 20.8 million U.S. subscribers as of June 30, or 917,000 fewer than the previous quarter, and a 2.6 million decrease compared to the same period of last year. In Europe, AOL counted 6.2 million members, which is down 99,000 from the first quarter and 80,000 from the same period last year.

In midmorning trading on the New York Stock Exchange, Time Warner (TWX) shares were down $0.31, trading at $17.11 per share.

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