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Disney, Katzenberg Settle Suit

Walt Disney Co. said Wednesday that it's agreed to settle the Jeffrey Katzenberg lawsuit, ending a three-year battle that had shaken the industry.

Former Disney studio head Katzenberg had sued Disney for more than $500 million in damages in 1996, claiming the company had failed to pay bonuses it owed him after he left Disney in 1994. Vicious countercharges had flown back and forth ever since.

Terms of the settlement weren't disclosed, but in a statement both Katzenberg and Disney Chairman and Chief Executive Michael Eisner said they were satisfied with the agreement.

The settlement was reached on the day Katzenberg's legal team was expected to rest its case, setting the stage for Disney to present its evidence.

Katzenberg, who left his post of studio chief at Disney in 1994 after he was denied a promotion, filed suit claiming the company owed him a 2 percent bonus for future profits of all films produced during his 10-year tenure, including Sister Act and The Lion King. He also sought profits from merchandise generated during his Disney decade.

Disney had argued Katzenberg forfeited that bonus because he left two years before the end of his six-year contract. Katzenberg went on to become one of the founders of DreamWorks SKG with Steven Spielberg and David Geffen.

Both sides reached the partial settlement two years ago and agreed to proceed to a second phase to determine which products fell under the bonus and the final dollar amount.

Midway into the second phase, retired Superior Court Judge Paul Breckenridge ruled that Disney breached its contract, a technical but important legal finding because it meant the company owed Katzenberg a potentially huge interest payment in addition to the bonus.

The lawsuit has proven to be not only expensive for Disney, but a major embarrassment, as the bad blood between Eisner and Katzenberg became painfully public. Observers have long wondered why a deal wasn't reached much sooner.

The final settlement announced Wednesday spares the company from at least one more potential nightmare: Eisner won't have to take the stand for a second time as a hostile witness for Katzenberg. Eisner was going to appear out of order during the Disney case because of scheduling issues.

The first time Eisner testified in May, it was a public relations disaster for Disney. Proving a prickly witness, Eisner had to acknowledge that he probably once said of the diminutive Katzenberg, "I hate the little midget."

Richard Read, an analyst at Credit Lyonnais, said news of the settlement should remove one of the drags on Disney's stock in recent months. "Some people were using this as a reason to downgrade Disney," he said.

Linda Bannister, an analyst at Edward Jones, said "it's difficult to evaluate" the impact of the settlement without knowing the terms, but on the face of it the deal is a good thing.

"Investors hate uncertaint, and anytime you can remove uncertainty it's a positive," Bannister said.

Shares of Disney (DIS) rose 11/16 to 28 5/8 in trading early Wednesday afternoon.

"The problem with Disney stock is that the sentiment is becoming overwhelmingly negative, but the stock isn't acting like it's overwhelmingly negative. The stock would be $23 if (that were the case)," Read said.

Read, who currently has a "hold" on Disney shares, said he'd become a buyer of the stock at $25.

Bannister is maintaining her "buy" recommendation on the stock. She said people have to bear in mind that the company has "been investing an awful lot of money in new businesses, which should start to pay off over the next three to five years." New-media initiatives, including Disney's significant stake in Infoseek (SEEK) and the jointly operated Go network, have accounted for some of that spending, as have theme parks, a cruise line, the expansion of the Disney Stores and other ventures.

Eisner should be successful, Bannister said, in "taking some costs out of Disney's structure," and the company's earnings growth, flattish for several quarters, "will resume."

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