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Time Warner Nears Deal Over AOL Accounting

By David A. Vise
Washington Post Staff Writer
Tuesday, November 23, 2004; Page E01

The Securities and Exchange Commission and Time Warner Inc. are nearing agreement on a deal in which the media giant would pay about $750 million to settle wide-ranging allegations of accounting irregularities at Dulles-based America Online Inc.

As part of the agreement, neither Time Warner nor its AOL division would admit or deny SEC allegations that AOL improperly pumped up its revenue and profit before and after the high-flying Internet firm bought Time Warner in 2001, according to people familiar with the settlement talks.

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In a two-part series that ran in the summer of 2002, Washington Post reporter Alec Klein explored unconventional business deals at AOL and the corporate culture that rewarded aggressive practices in AOL's business affairs unit.
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The $750 million figure being discussed is 50 percent higher than the $500 million that Time Warner previously set aside for a possible settlement. It would cover all fines, penalties and other payments from Time Warner necessary to resolve the matter fully with the SEC and the Justice Department, said the sources, who spoke on condition of anonymity because an agreement has not been finalized.

While serious negotiations are continuing, and those involved are optimistic about a settlement, the situation remains fluid. For example, the final dollar figure agreed upon as part of the settlement could be somewhat higher or lower than $750 million.

Time Warner chairman and chief executive Richard D. Parsons has been involved in the settlement discussions, and he has directed corporate lawyers negotiating with government officials to get the matter resolved and behind the company as soon as possible, sources said.

A major catalyst for the deal is that Parsons wants Time Warner to have as much flexibility as possible in how it raises funds and pays for potential acquisitions of cable television properties and other businesses in 2005. The SEC will not allow Time Warner to issue new shares of stock in the company or any of its divisions until the AOL matter is resolved, the corporation has disclosed in public filings.

The proposed settlement between Time Warner and the federal government would not end ongoing SEC and Justice Department probes of various individuals who worked for America Online, many of whom remain under investigation.

Spokesmen for the SEC, the U.S. attorney's office for the Eastern District of Virginia and Time Warner declined comment yesterday. Senior executives at America Online are not involved in the settlement negotiations, which are being overseen by Parsons out of Time Warner headquarters in New York.

Parsons took over the helm of the corporate giant after allegations of accounting problems at AOL surfaced. At the time, the company was known as AOL Time Warner Inc., a celebrated blend of an Internet powerhouse and a venerable Time Warner empire that included the Time Inc. stable of magazines, Warner Brothers studio, HBO and the nation's second-largest cable television system.

But after AOL's business and legal troubles mounted and its stock price plummeted, America Online co-founder Steve Case was ousted as chairman (he remains on the board of directors), and the corporate giant erased "AOL" from its name. Time Warner finds itself the target of numerous lawsuits from shareholders who claim AOL used accounting tricks to hide its woes.

Parsons's hands-on role in the settlement negotiations has helped the talks make significant progress recently. Because any settlement would require the approval of the Time Warner board of directors, Parsons has told attorneys that he wants to know the details so that he is not left in the position of defending a settlement agreement that he has not embraced.

In addition, Parsons has directed attorneys representing Time Warner to negotiate language in the settlement agreement that minimizes the potential liability that the company faces in pending lawsuits filed by investors who lost billions of dollars following the mega-merger.

The SEC, for its part, has insisted that Time Warner restate the way it accounted for transactions with German media firm Bertelsmann AG in the months following the AOL merger, a request that Time Warner initially rejected. The SEC's chief accountant has accused both Time Warner and America Online of improperly counting $400 million from Bertelsmann as AOL advertising revenue, when portions reflected payments for other purposes.

That has been the largest issue separating the two sides, but the gap is closing. To minimize exposure to pending shareholder lawsuits, Time Warner would be permitted to restate the way it accounted for the Bertelsmann deals as part of an overall agreement in which it would neither admit nor deny wrongdoing. This approach would make it harder for shareholders to recover money based on the restatement alone.

Time Warner previously restated about $190 million in AOL revenue from deals with other companies. In addition, Time Warner recently restated financial results from AOL Europe, which allegedly had been accounted for in a way that enabled AOL to avoid booking hundreds of millions of dollars in losses in 2000 and 2001 that would have complicated its ability to buy Time Warner.

Beyond the legal issues, a settlement would not solve the core business problem AOL faces: The online service is losing hundreds of thousands of subscribers every quarter to faster or cheaper competitors.

Nevertheless, America Online remains the nation's biggest Internet firm, with more than 20 million subscribers, and its advertising has begun to rebound. In addition, the company has aggressively slashed costs, enabling the division to contribute about $1 billion annually to its corporate parent, Time Warner.


© 2004 The Washington Post Company