Time Warner Inc. said yesterday that it is creating a $500 million reserve in response to the federal investigations of its America Online unit and that it also will restate AOL Europe's financial results for 2000 and 2001.
By establishing the fund, Time Warner is quantifying for the first time what a settlement of the long-running investigation of AOL could cost the company. The investigations, by the Justice Department and the Securities and Exchange Commission, concern how Time Warner and America Online reported financial results and counted subscribers, before and after the companies announced their plan to merge in 2000.
"These are clearly significant matters. We take them very seriously," Time Warner chief executive Richard D. Parsons said.
(Judi Bottoni -- AP)
"This amount represents the Company's current best estimate of the amounts that would be involved ultimately to resolve these investigations," Time Warner said in a written statement issued with its third-quarter financial results. "The Company has not established any reserves associated with the shareholder and civil litigation due to their preliminary status and because it is unable to reasonably estimate a range of possible loss."
The company previously restated $190 million in revenue that it said AOL improperly booked as advertising. The $190 million was linked to a series of questionable transactions in which AOL and other companies, including HomeStore Inc., paid one another money funds in round-trip transactions that artificially increased ad revenue before the merger.
"These are clearly significant matters. We take them very seriously," Time Warner chief executive Richard D. Parsons said during a conference call with Wall Street analysts.
Parsons said he does not know when the SEC and Justice Department investigations will be over or what the cost of a settlement, including fines and penalties, might be.
Among other things, the investigations are complicating Time Warner's efforts to expand its cable television division through acquisitions because the SEC has indicated that it will not approve the issuance of stock for that unit while the investigations are pending.
For the third quarter, Time Warner reported a decline in profit as the $500 million AOL charge dragged down financial results that otherwise exceeded Wall Street's expectations. Quarterly profit was $499 million (11 cents a share), compared with $541 million (12 cents) in the third quarter of last year. Revenue was $10 billion, up from $9.5 billion.
In its announcement yesterday, the company confirmed plans to fire more than 700 AOL employees in early December. Time Warner said that it would take an estimated $50 million charge in the fourth quarter or in 2005 to account for the restructuring. The workforce cuts, mostly at AOL's Northern Virginia headquarters, are linked to the Internet firm's loss of subscribers.
Wall Street analysts were upbeat yesterday about the possibility that a legal settlement of some of AOL's accounting and financial problems might occur sooner rather than later. Time Warner stock closed yesterday at $16.59 a share, up 31 cents.