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Time Warner, SEC Settle for $300M

3/27/2005 7:00 PM Eastern

Time Warner Inc. last week said the Securities and Exchange Commission has approved a $300 million settlement agreement regarding accounting irregularities at its America Online unit dating back to 2000 — a move that allows the media giant to once again issue public stock as deal currency.

Although Time Warner first announced the SEC settlement back in December, the agency did not approve the deal until March 21. While Time Warner did not admit nor deny wrongdoing as part of the settlement, the SEC said its investigation is ongoing.

NO SURPRISES

The final agreement posed no surprises. According to the settlement agreement, Time Warner must restate revenue at its America Online unit by about $500 million for the years 2000 to 2002, which it had already done in earlier financial statements.

With the formalities of the settlement complete, the media giant is free to issue stock without the threat of SEC disapproval. That could come in handy in its proposed joint bid with Comcast Corp. for the cable assets of Adelphia Communications Corp. The Time Warner-Comcast bid — estimated at about $17.6 billion — will likely have some component of Time Warner stock if it is accepted as the winning offer for Adelphia. Adelphia is expected to make a decision by March 31.

Time Warner came under scrutiny in 2003, after the SEC began to probe the media giant’s purchase of Bertelsmann AG’s interest in AOL Europe. The crux of the investigation centered on $400 million in advertising revenue that was booked to Bertelsmann, but was essentially a discount to the purchase price.

In its complaint, the SEC said that an internal summary described the March 2001 online advertising deal as “pure gravy” and a “freebie.” Internal Bertelsmann memos were even more harsh, characterizing the advertising deal as “rubbish,” according to the complaint.

The SEC also alleged that AOL inflated its subscriber base in the second, third and fourth quarters of 2001 by counting bulk subscription sales to corporate customers as new subscribers, although it knew that most of those accounts would not be activated.

According to the complaint, AOL used the bulk deals to close the gap between its actual subscribers and the targets it had projected to Wall Street. In the second quarter of 2001, that gap was 350,000 subscribers, which it remedied by enticing a retailer to buy an equal amount of bulk subscriptions.

According to the complaint, the retailer first objected, but agreed to buy the subscriptions when AOL promised to reimburse more than 100% of the cost.

EXAMINER COMING

Time Warner said that it has also agreed to hire an independent examiner to review whether its historical accounting for transactions with 17 counterparties identified by SEC staff — including three cable-programming affiliation agreements with related advertising elements — were in compliance with generally accepted accounting principles. The independent examiner will provide a report to Time Warner’s Audit and Finance Committee within 180 days.

According to Time Warner, the transactions under review occurred between June 1, 2000 and Dec. 31, 2001.

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