Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

  þ

  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
  

for the quarterly period ended September 30, 2016 or

 

  ¨

  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
  

for the transition period from                                      to                                     

 

Commission file number 001-15062

 

 

TIME WARNER INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   13-4099534

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Time Warner Center

New York, NY 10019-8016

(Address of Principal Executive Offices) (Zip Code)

(212) 484-8000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ

   

Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)

 

Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Description of Class

   Shares Outstanding
          as of October 25, 2016          

Common Stock – $.01 par value

   771,129,567

 

 

 


Table of Contents

TIME WARNER INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND OTHER FINANCIAL INFORMATION

 

       Page    

PART I. FINANCIAL INFORMATION

  

Management’s Discussion and Analysis of Results of Operations and Financial Condition

     1   

Item 4. Controls and Procedures

     23   

Consolidated Balance Sheet at September 30, 2016 and December  31, 2015

     24   

Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2016 and 2015

     25   

Consolidated Statement of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015

     26   

Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

     27   

Consolidated Statement of Equity for the Nine Months Ended September  30, 2016 and 2015

     28   

Notes to Consolidated Financial Statements

     29   

Supplementary Information

     49   

PART II. OTHER INFORMATION

  

Item 1A. Risk Factors

     58   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     60   

Item 6. Exhibits

     60   


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on Time Warner Inc.’s (“Time Warner” or the “Company”) businesses, current developments, financial condition, cash flows and results of operations. MD&A is organized as follows:

 

   

Overview.   This section provides a general description of Time Warner’s business segments, as well as recent developments the Company believes are important in understanding the results of operations and financial condition or in understanding anticipated future trends.

 

   

Results of operations.   This section provides an analysis of the Company’s results of operations for the three and nine months ended September 30, 2016. This analysis is presented on both a consolidated and a business segment basis. In addition, a brief description of transactions and other items that affect the comparability of the results being analyzed is included.

 

   

Financial condition and liquidity.   This section provides an analysis of the Company’s financial condition as of September 30, 2016 and cash flows for the nine months ended September 30, 2016.

 

   

Caution concerning forward-looking statements.   This section provides a description of the use of forward-looking information appearing in this report, including in MD&A and the consolidated financial statements.

OVERVIEW

Time Warner is a leading media and entertainment company whose major businesses encompass an array of the most respected and successful media brands. Among the Company’s brands are TNT, TBS, Adult Swim, Cartoon Network, CNN, HBO, Cinemax, Warner Bros. and New Line Cinema. During the nine months ended September 30, 2016, the Company generated Revenues of $21.427 billion (up 2% from $21.039 billion in 2015), Operating Income of $5.856 billion (up 7% from $5.479 billion in 2015), Income from continuing operations of $3.597 billion (up 22% from $2.938 billion in 2015), Net Income attributable to Time Warner shareholders of $3.633 billion (up 22% from $2.976 billion in 2015) and Cash provided by operations of $3.534 billion (up 18% from $2.997 billion in 2015).

Time Warner Businesses

Time Warner classifies its operations into three reportable segments: Turner, Home Box Office and Warner Bros. For additional information regarding Time Warner’s segments, refer to Note 14, “Segment Information,” to the accompanying consolidated financial statements.

Turner.   The Turner segment consists of businesses managed by Turner Broadcasting System, Inc. (“Turner”). During the nine months ended September 30, 2016, the Turner segment recorded Revenues of $8.526 billion (39% of the Company’s total Revenues) and Operating Income of $3.531 billion.

Turner operates domestic and international television networks and related properties that offer entertainment, sports, kids and news programming on television and digital platforms for consumers around the world. The Turner networks and related properties include TNT, TBS, Adult Swim, truTV, Turner Classic Movies, Turner Sports, Cartoon Network, Boomerang, CNN and HLN. The Turner networks generate revenues principally from licensing programming to affiliates that have contracted to receive and distribute this programming to subscribers, from the sale of advertising and from licensing its original programming, including to over-the-top (“OTT”) services such as subscription-video-on-demand (“SVOD”) services, and its brands and characters for consumer products and other business ventures. Turner’s programming is available to audiences for viewing live and on demand across television, mobile devices and other digital platforms through services provided by affiliates and on Turner’s digital properties. Turner also owns and operates various digital media businesses, including Bleacher Report ; the CNN digital properties, including CNNgo , CNN.com and CNNMoney.com ; and other digital properties associated with its networks, all of which generate revenues principally from the sale of advertising and sponsorships. In addition, Turner manages and operates sports-related digital properties in conjunction with associated television rights, such as NBA Digital and NCAA.com , which also generate revenues primarily from the sale of advertising and sponsorships.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Home Box Office.   The Home Box Office segment consists of businesses managed by Home Box Office, Inc. (“Home Box Office”). During the nine months ended September 30, 2016, the Home Box Office segment recorded Revenues of $4.399 billion (21% of the Company’s total Revenues) and Operating Income of $1.488 billion.

Home Box Office operates the HBO and Cinemax multichannel premium pay television services, with the HBO service ranking as the most widely distributed multichannel premium pay television service. HBO- and Cinemax-branded premium pay, basic tier television or OTT services are distributed in over 60 countries in Latin America, Asia and Europe.

In the U.S., Home Box Office generates revenues principally from licensing programming to affiliates that have contracted to receive and distribute such programming to their customers who subscribe to the HBO or Cinemax services. HBO and Cinemax programming is available in the U.S. to subscribers of affiliates for viewing on Home Box Office’s main HBO and Cinemax channels and its multiplex channels, through its on demand services, HBO On Demand and Cinemax On Demand, and through its broadband-delivered on demand services, HBO GO and MAX GO. HBO GO and MAX GO are available on a variety of digital platforms, including mobile devices, gaming consoles and internet-connected streaming devices and televisions. In April 2015, Home Box Office launched HBO NOW, an OTT service available to consumers in the U.S. Home Box Office’s agreements with its domestic affiliates are typically long-term arrangements that provide for annual service fee increases and marketing support. While fees to Home Box Office under affiliate agreements are generally based on the number of subscribers served by the affiliates, the relationship between subscriber totals and the amount of revenues earned depends on the specific terms of the applicable agreement, which may include basic and/or pay television subscriber thresholds, volume discounts and other performance-based discounts. Marketing and promotional activities intended to retain existing subscribers and acquire new subscribers may also impact revenue earned.

Internationally, Home Box Office generates subscription revenues by providing country-specific HBO and Cinemax premium pay and basic tier television services to international affiliates that have contracted to receive and distribute such services to their local customers. In some countries, Home Box Office also generates subscription revenues from OTT services that are distributed to consumers either directly or through third parties. Additional sources of revenues for Home Box Office are the home entertainment sales of its original programming, including Game of Thrones , True Detective , True Blood and Girls , via physical and digital formats and the licensing of its original programming to OTT services, including SVOD services, and international television networks.

Warner Bros.   The Warner Bros. segment consists of businesses managed by Warner Bros. Entertainment Inc. (“Warner Bros.”) that principally produce and distribute television shows, feature films and videogames. Warner Bros.’ television, film and videogame businesses benefit from a shared infrastructure, including shared production, distribution, marketing and administrative functions and resources. During the nine months ended September 30, 2016, the Warner Bros. segment recorded Revenues of $9.169 billion (40% of the Company’s total Revenues) and Operating Income of $1.160 billion.

Warner Bros. is a leader in television production and distribution. For the 2016/2017 season, Warner Bros. is producing over 65 original series in the U.S., including (i) at least three series for each of the five broadcast networks (including 2 Broke Girls , Arrow , The Bachelor , The Big Bang Theory , Blindspot , DC’s Legends of Tomorrow , The Flash , Gotham , Little Big Shots , Lucifer , The Middle , Mom , Supergirl , Supernatural , Vampire Diaries and The Voice ), (ii) series for basic cable networks (including Animal Kingdom , People of Earth and Pretty Little Liars ), (iii) series for premium pay television services (including The Leftovers , Shameless and Westworld ), (iv) series for SVOD services (including Fuller House , Gilmore Girls: A Year in the Life and Longmire ), (v) series for first-run syndication (including The Ellen DeGeneres Show , Extra , The Real and TMZ ) and (vi) animated series for Cartoon Network and Adult Swim (including Be Cool, Scooby Doo! Mike Tyson Mysteries Teen Titans Go!  and  Wabbit ). Warner Bros. also licenses the rights to many of its U.S. original television series in international territories. Outside the U.S., Warner Bros. has a global network of production companies in many countries (located across Europe and South America and in Australia and New Zealand), which allows Warner Bros. to develop programming specifically tailored for the audiences in these territories. These local production companies also focus on developing non-scripted programs and formats that can be adapted and sold internationally and in the U.S. Warner Bros. generates television product revenues principally from the licensing of programs to broadcast and cable television networks and premium pay television and OTT services, including SVOD services.

Warner Bros. is a leader in the feature film industry and produces feature films under its Warner Bros. and New Line Cinema banners. The Warner Bros. segment’s theatrical product revenues are generated principally through rental fees from theatrical

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

exhibition of feature films, including the following recently released films: The Accountant , Barbershop: The Next Cut , Batman v Superman: Dawn of Justice , Central Intelligence , The Conjuring 2 , The Legend of Tarzan, Lights Out , Me Before You , Storks, Suicide Squad and Sully and subsequently through licensing fees received from the distribution of films on premium pay television, broadcast and cable television networks and OTT services, including SVOD services.

Warner Bros. is a leader in the home entertainment and videogame industries. The segment generates television and theatrical product revenues from the distribution of television and theatrical product in various physical and digital formats (e.g., electronic sell-through (“EST”) and video-on-demand). In addition, the segment generates revenues through the development and distribution of videogames, including the following recently released videogames: LEGO Marvel’s Avengers , LEGO Star Wars: The Force Awakens and Mortal Kombat XL .

The distribution and sale of home entertainment product in physical formats is a large contributor to the segment’s revenues and profits. For the past several years, sales of home entertainment product in physical formats have declined as the home entertainment industry has been undergoing significant changes as it transitions from the physical distribution of film and television content via physical discs to the electronic delivery of such content. Several factors have contributed to this decline, including consumers shifting to OTT services, which generate significantly less revenue per transaction for the Company than sales of home entertainment product in physical formats; changing retailer initiatives and strategies (e.g., reduction of floor space devoted to home entertainment product in physical formats); retail store closures; increasing competition for consumer discretionary time and spending; and piracy. During the first nine months of 2016, across the home entertainment industry, consumer spending on home entertainment product in physical formats continued to decline and consumer spending on electronic delivery continued to increase. The electronic delivery of film and television content is growing and becoming more important to the Warner Bros. segment, which has helped to offset some of the decline in sales of home entertainment product in physical formats.

Television Industry

The television industry is continuing to evolve, with changes in technology, rapid growth in new video services, and a corresponding increase in overall video content consumption and shift in consumer viewing patterns. Consumers are watching an increasing amount of programming on-demand and across a wide variety of services and devices, including smartphones, tablets, PCs and internet-connected televisions. Over the past few years, the number of multichannel video service (“MVPD”) subscribers in the U.S. declined slightly, and the Company expects further modest declines. To counteract this trend, some MVPD providers are placing greater emphasis on selling smaller bundles of cable networks, resulting in higher subscriber declines for most individual networks than for MVPDs in total.

At the same time, the penetration of broadband and internet-connected devices has grown, which has led to a growing number and variety of internet-delivered video services that do not require a traditional MVPD subscription or MVPD provider set-top box hardware. These include SVOD services such as Amazon Prime, Hulu and Netflix, which have continued to increase their number of subscribers and have been, and are expected to continue, making significant investments in acquired and original programming. Some television networks have launched OTT services, such as HBO NOW. In addition, MVPD providers as well as media and technology companies have launched, or have announced that they will launch, virtual MVPDs, which offer bundles of networks delivered via the internet. Ad-supported broadband video services, such as those offered through YouTube and Facebook, also have continued to gain in popularity.

As a result of these changes, consumers have more options for obtaining video content, including lower-cost alternatives. At the same time, however, the combination of new competitors, changes in viewing habits and declines in MVPD subscribers has negatively affected overall television ratings and, as a result, television advertising revenues for the industry and certain of the Company’s networks. There also has been a corresponding shift of advertising dollars to non-traditional video outlets.

To address these changes, the Company’s strategy over the past few years has focused on strengthening its position within the traditional TV ecosystem, enhancing the value of traditional pay television subscriptions for consumers, and pursuing new opportunities outside the traditional TV ecosystem. As part of this strategy, the Company plans to continue increasing its investment in high-quality distinctive programming to enhance the value of its networks. The Company is also working to enhance the value to consumers of the traditional MVPD bundle and capitalize on the shift in consumption habits in a number of ways, including by expanding the amount of its content that is available on demand and supporting the development of better user interfaces for on-demand multiplatform viewing. The Company is also pursuing a number of initiatives to capitalize on the new opportunities presented by these changes, including launching, investing in, and obtaining distribution through OTT services, including through

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

virtual MVPDs, as well as investing in short-form content production and digital-first news and entertainment networks. In addition, Turner has introduced new advertising products that provide greater data analytic tools and targeting capabilities to advertisers in order to compete more effectively with non-traditional outlets.

Recent Developments

AT&T and Time Warner Merger Agreement

On October 22, 2016, Time Warner entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AT&T Inc. (“AT&T”), pursuant to which Time Warner will combine with AT&T in a stock-and-cash transaction. The Merger Agreement has been approved unanimously by the boards of directors of both companies. Subject to the conditions in the Merger Agreement, at the effective time of the merger, Time Warner’s stockholders will receive $107.50 per share under the terms of the Merger Agreement, consisting of $53.75 per share in cash and $53.75 per share in AT&T stock. The stock portion will be subject to a collar such that Time Warner stockholders will receive 1.437 AT&T shares if AT&T’s stock price is below $37.411 at closing and 1.300 AT&T shares if AT&T’s stock price is above $41.349 at closing. If AT&T’s stock price at closing is between $37.411 and $41.349, Time Warner stockholders will receive a number of shares between 1.300 and 1.437, equal to $53.75 in value. The merger is subject to approval by Time Warner stockholders and the receipt of certain antitrust and other regulatory consents. The transaction is expected to close before year-end 2017. Should Time Warner terminate the Merger Agreement in specified circumstances, including in order to consummate a competing transaction, Time Warner will be required to pay AT&T a termination fee equal to $1.725 billion.

In connection with entering into the Merger Agreement, the Company granted a total of 4.8 million special retention restricted stock units (“Special Retention RSUs”) to certain employees of Time Warner and its divisions, including all executive officers of Time Warner other than its Chairman and CEO, on October 24, 2016. Half of the Special Retention RSUs will vest 25% per year on each of the first four anniversaries of February 15, 2017, and the remaining half will vest 25% per year on each of the first four anniversaries of February 15, 2018. Pursuant to the Special Retention RSU agreements, vesting as a result of retirement is not permitted unless the employee retires after the merger has closed. In addition, the awards do not accelerate automatically following the closing of the merger. Instead, the employee must remain employed following the closing, and the awards will vest only upon the scheduled vesting date or upon termination of employment under certain circumstances, such as termination without cause, for good reason or due to retirement.

In addition, certain employees of Time Warner and its divisions, including executive officers other than the Chairman and CEO, have received or will receive a cash retention award. Half of the award will become payable upon the closing of the merger, and the remaining half will become payable six months thereafter, in both cases, subject to continued employment on the relevant payment date. Payment will also be made upon termination without cause or for good reason.

Strategic Review

As part of its long-range planning process, the Company routinely reviews opportunities to streamline its operations and optimize its programming. In connection with that review, the Company will evaluate its future use of certain owned and licensed programming rights and could incur charges of approximately $60 million to $80 million in the fourth quarter of 2016.

Time Warner Pension Plan Amendment

On August 1, 2016, the Time Warner Pension Plan (the “Pension Plan”) was amended to provide for a one-time lump sum window program for eligible vested participants who (i) had terminated employment as of May 31, 2016, (ii) had not yet commenced payment of their benefits as of May 31, 2016, (iii) are not otherwise eligible for an immediate lump sum payment of their benefits and (iv) have benefits with a present value of less than $50,000. Eligible participants had the opportunity to elect, during the period beginning on August 16, 2016 and ending on October 7, 2016, to receive their benefits in the form of an immediate lump sum payment. Certain annuity options were also available. Payments to those eligible participants who elected to receive their benefit under the window program will be made or commence as of December 2016. During the three months ended December 31, 2016, the Company expects to recognize settlement losses of approximately $55 million to $70 million in connection with this amendment to the Pension Plan, the majority of which will be related to businesses the Company has previously disposed of.

Hulu

On August 2, 2016, Time Warner purchased a 10% ownership interest in Hulu, LLC, a company that provides OTT video services, for $590 million in cash, including transaction costs. Time Warner accounts for this investment under the equity method of accounting.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

2016 Debt Offering

On May 10, 2016, Time Warner issued $800 million aggregate principal amount of 2.95% Notes due 2026 under a shelf registration statement. See “Financial Condition and Liquidity — Outstanding Debt and Other Financing Arrangements” for further information.

NCAA

On March 14, 2016, Turner and CBS entered into an agreement with the National Collegiate Athletic Association (the “NCAA”) to license the television, digital and marketing rights to the NCAA Division I Men’s Basketball Championship Tournament (the “NCAA Tournament”) from 2025 through 2032 for an aggregate rights fee of $8.8 billion. While the aggregate rights fee will be paid by Turner to the NCAA, the rights fee, production costs, advertising revenues and sponsorship revenues related to the NCAA Tournament and related programming will continue to be shared by Turner and CBS. Annually, for 2025 through 2032, Turner will be allocated the first $90 million of revenue subject to the arrangement. However, if the amount paid for the rights fee and production costs in any year during that period exceeds advertising and sponsorship revenues for that year, including the $90 million of revenue allocated to Turner, CBS’ share of such shortfall will be limited to $45 million. Under the existing agreement among Turner, CBS and the NCAA, Turner and CBS have licensed rights to the NCAA Tournament through 2024.

Fandango

In April 2016, Warner Bros. sold its Flixster business to Fandango Media, LLC (“Fandango”), a subsidiary of NBCUniversal Media LLC, in exchange for a 25% interest in Fandango. For the nine months ended September 30, 2016, Warner Bros. recorded a pre-tax gain of $90 million in connection with this transaction.

Central European Media Enterprises Ltd.

On February 19, 2016, CME Media Enterprises B.V. (“CME BV”), a subsidiary of Central European Media Enterprises Ltd. (“CME”), entered into a credit agreement (the “2016 Credit Agreement”) with third-party financial institutions for an approximate €470 million senior unsecured term loan (the “2016 Term Loan”) that was funded in April 2016 and matures on February 19, 2021. Time Warner has guaranteed CME BV’s obligations under the 2016 Credit Agreement for a fee equal to a rate based on CME’s net leverage, which initially was 10.5%, less the interest rate on the 2016 Term Loan, which initially was approximately 1.78%, to be paid to Time Warner semi-annually. CME BV must pay a portion of the fee in cash and may, at CME BV’s option, pay the remainder in cash or in kind. In April 2016, CME used cash on hand and the proceeds of the 2016 Term Loan to repay in their entirety both its Senior Secured Notes due 2017 (the “Senior Secured Notes”) and the term loan Time Warner provided CME in 2014 (the “TW Term Loan”), which also was due in 2017. Time Warner received approximately $485 million in connection with CME’s repayment of the Senior Secured Notes and the TW Term Loan. As consideration for assisting CME in refinancing its debt due in 2017, Time Warner earned a fee equal to 1% of the aggregate principal amount of the 2016 Term Loan borrowed at funding. Prior to the funding, CME BV entered into unsecured interest rate hedge arrangements to protect against changes in the interest rate on the 2016 Term Loan during its term, and Time Warner has guaranteed CME BV’s obligations under such arrangements.

In addition, on February 19, 2016, CME entered into an amendment to extend the maturity of its €251 million senior unsecured term loan obtained in 2014 from third-party financial institutions (the “2014 Term Loan”) from November 1, 2017 to November 1, 2018. Time Warner continues to guarantee CME’s obligations under the 2014 Term Loan.

Time Warner and CME also agreed on February 19, 2016 to amend and restate the $115 million revolving credit facility Time Warner provided CME in 2014 to reduce the size of the facility to $50 million as of January 1, 2018 and to extend its term from December 2017 to February 2021. Amounts outstanding under the revolving credit facility bear interest at a rate based on CME’s net leverage. Beginning in April 2016, CME must pay a portion of the interest for each applicable quarterly interest period in cash and may, at CME’s option, pay the remainder in kind by adding such amount to the outstanding principal amount of the revolving credit facility. As of September 30, 2016, there were no amounts outstanding under the revolving credit facility.

The Company recorded a pretax gain of $95 million in Investment gains (losses), net in the accompanying Consolidated Statement of Operations in the second quarter of 2016 in connection with these transactions. Additionally, when recognizing CME’s results in the second quarter of 2016 under the equity method of accounting, the Company recorded a pretax charge of $150 million in Other loss, net in the accompanying Consolidated Statement of Operations related to these transactions.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

RESULTS OF OPERATIONS

Recent Accounting Guidance

See Note 1, “Description of Business and Basis of Presentation,” to the accompanying consolidated financial statements for a discussion of recent accounting guidance.

Transactions and Other Items Affecting Comparability

As more fully described herein and in the related notes to the accompanying consolidated financial statements, the comparability of Time Warner’s results from continuing operations has been affected by transactions and certain other items in each period as follows (millions):

 

                                                           
         Three Months Ended September 30,           Nine Months Ended September 30,    
     2016   2015   2016   2015

Asset impairments

   $ (30   $ (7   $ (35   $ (8

Gain (loss) on operating assets, net

     (12     2        77        (1

Venezuelan foreign currency loss

                          (22

Other

     (14     (3     (28     (8
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact on Operating Income

     (56     (8     14        (39

Investment gains (losses), net

     57        15        93        (70

Amounts related to the separation of Time Warner Cable Inc.

            (4            (8

Amounts related to the disposition of Warner Music Group

     (3            (4       

Amounts related to the separation of Time Inc.

     (5     (2     (13     (7

Premiums paid and costs incurred on debt redemption

            (21            (72

Items affecting comparability relating to equity method investments

     1        17        (139     (4
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax impact

     (6     (3     (49     (200

Income tax impact of above items

     35        9        (18     55   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of items affecting comparability on income from continuing operations

   $ 29      $ 6      $ (67   $ (145
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In addition to the items affecting comparability described above, the Company incurred Restructuring and severance costs of $11 million and $64 million for the three and nine months ended September 30, 2016, respectively, and $9 million and $31 million for the three and nine months ended September 30, 2015, respectively. For further discussion of Restructuring and severance costs, see “Consolidated Results” and “Business Segment Results.”

Asset Impairments

During the three and nine months ended September 30, 2016, the Company recognized asset impairments of $30 million and $35 million, respectively, which consisted of $25 million at Turner for both periods relating to an international broadcast license, $5 million and $6 million, respectively, at Warner Bros. relating to certain internally developed software and, for the nine months ended September 30, 2016, $4 million at Corporate relating to miscellaneous assets. During the three and nine months ended September 30, 2015, the Company recognized asset impairments of $7 million and $8 million, respectively, which consisted of $5 million and $6 million, respectively, at Corporate primarily related to certain internally developed software, and $1 million for both the three and nine months ended September 30, 2015 at both the Turner and Warner Bros. segments relating to miscellaneous assets.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Gain (Loss) on Operating Assets, Net

For the three months ended September 30, 2016, the Company recognized $12 million of loss on operating assets, primarily relating to the pending disposition of a business at the Turner segment. For the nine months ended September 30, 2016, the Company recognized $77 million of net gain on operating assets, consisting of $92 million of gains at the Warner Bros. segment, principally relating to the gain on the sale of Flixster’s net assets to Fandango, and $15 million of losses at the Turner segment, principally relating to the pending disposition of a business. For the three and nine months ended September 30, 2015, the Company recognized $2 million of net gains on operating assets at the Turner segment, reflecting a $3 million gain upon its acquisition of the controlling interest of iStreamPlanet and a $1 million loss on the sale of a business. For the nine months ended September 30, 2015, the Company also recognized $2 million of net losses at the Turner segment related to the remeasurement of certain previously held investments upon the Turner segment’s acquisition of controlling interests in those investments as well as a $1 million loss at the Warner Bros. segment.

Venezuelan Foreign Currency Loss

For the nine months ended September 30, 2015, the Company recognized a pretax foreign exchange loss of $22 million, consisting of $17 million at the Turner segment and $5 million at the Warner Bros. segment, related to a change in the foreign currency exchange rate used by the Company for remeasuring its Venezuelan net monetary assets from the SICAD 2 rate to the Simadi rate. The Venezuelan foreign currency loss is included in Selling, general and administrative expenses in the accompanying Consolidated Statement of Operations.

Other

For the three and nine months ended September 30, 2016, Other includes external costs related to mergers, acquisitions or dispositions of $4 million and $9 million, respectively, consisting of $3 million and $4 million, respectively, at the Turner segment and $1 million and $2 million, respectively, at the Warner Bros. segment and, for the nine months ended September 30, 2016, $3 million at Corporate. For the three and nine months ended September 30, 2016, Other also includes $10 million of pension settlement charges at Corporate, and for the nine months ended September 30, 2016, $9 million of expenses at the Home Box Office segment related to Home Box Office’s withdrawal from a multiemployer benefit plan. For the three and nine months ended September 30, 2015, Other reflects external costs related to mergers, acquisitions or dispositions of $3 million and $8 million, respectively, consisting of $0 and $1 million, respectively, at the Turner segment, $2 million and $5 million, respectively, at the Warner Bros. segment and $1 million and $2 million, respectively, at Corporate. External costs related to mergers, acquisitions or dispositions, the pension settlement charges and the accrued pension withdrawal expenses are included in Selling, general and administrative expenses in the accompanying Consolidated Statement of Operations.

Investment Gains (Losses), Net

For the three and nine months ended September 30, 2016, the Company recognized $57 million and $93 million, respectively, of investment gains, net, consisting of a $41 million gain for both periods associated with an agreement to dissolve a Home Box Office joint venture in the Netherlands, $18 million of gains and $44 million of losses, respectively, relating to fair value adjustments on warrants to purchase common stock of CME held by the Company, $2 million of miscellaneous investment losses and $1 million of miscellaneous investment gains, respectively, and, for the nine months ended September 30, 2016, a $95 million gain in connection with the 2016 CME financing transactions. For the three and nine months ended September 30, 2015, the Company recognized $15 million of net investment gains and $70 million of net investment losses, respectively, consisting of $5 million and $110 million, respectively, of losses related to fair value adjustments on warrants to purchase common stock of CME held by the Company and $20 million and $40 million, respectively, of net miscellaneous investment gains. Investment losses, net are included in Other loss, net in the accompanying Consolidated Statement of Operations.

Amounts Related to the Separation of Time Warner Cable Inc.

For the three and nine months ended September 30, 2015, the Company recognized $4 million of losses related to payments made to Time Warner Cable Inc. (“TWC”) in accordance with a tax sharing agreement with TWC and, for the nine months ended September 30, 2015, the Company also recognized $4 million of losses related to changes in the value of a TWC tax indemnification receivable. These amounts have been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

 

7


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Amounts Related to the Disposition of Warner Music Group

For the three and nine months ended September 30, 2016, the Company recognized $3 million and $4 million, respectively, of losses related to the disposition of Warner Music Group (“WMG”), primarily related to a legal settlement. These amounts have been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

Amounts Related to the Separation of Time Inc.

The Company recognized expenses of $5 million and $13 million for the three and nine months ended September 30, 2016, respectively, and $2 million and $7 million for the three and nine months ended September 30, 2015, respectively, primarily reflecting pension and other retirement benefit costs related to employees and former employees of Time Inc. These amounts have been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

Premiums Paid and Costs Incurred on Debt Redemption

For the three and nine months ended September 30, 2015, the Company recognized $21 million of premiums paid and costs incurred principally on the redemption of $313 million aggregate principal amount of its 5.875% Notes due 2016. For the nine months ended September 30, 2015, the Company also recognized $51 million of premiums paid and costs incurred on the purchase of $687 million aggregate principal amount of its 5.875% Notes due 2016 through a tender offer. The premiums paid and costs incurred on the debt redemptions were recorded in Other loss, net in the accompanying Consolidated Statement of Operations.

Items Affecting Comparability Relating to Equity Method Investments

For the three and nine months ended September 30, 2016, the Company recognized $1 million and $11 million of income, respectively, primarily related to net investment gains recorded by equity method investees and, for the nine months ended September 30, 2016, $150 million of losses related to the financing transactions with CME in 2016. For the three and nine months ended September 30, 2015, the Company recognized a $3 million asset impairment recorded by an equity method investee for both periods and $2 million of income and $1 million of losses, respectively, from discontinued operations recorded by an equity method investee. In addition, for the three months ended September 30, 2015, the Company recognized an $18 million reversal of an accrual related to government investigations recorded by an equity method investee. These amounts have been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

Income Tax Impact

The income tax impact reflects the estimated tax provision or tax benefit associated with each item affecting comparability using the effective tax rate for the item. The estimated tax provision or tax benefit can vary based on certain factors, including the taxability or deductibility of the item and the applicable tax jurisdiction for the item. Also included in the income tax impact for the three and nine months ended September 30, 2016 is a tax benefit of approximately $19 million related to the settlement of Netherlands tax liabilities associated with the repayment of the CME Senior Secured Notes and TW Term Loan.

Consolidated Results

The following discussion provides an analysis of the Company’s results of operations and should be read in conjunction with the accompanying Consolidated Statement of Operations.

 

8


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Revenues.    The components of Revenues are as follows (millions):

 

                                                                                                                 
    Three Months Ended September 30,   Nine Months Ended September 30,
    2016     2015         % Change       2016     2015         % Change    

Turner

  $           2,610       $           2,398       9%   $ 8,526       $ 7,935       7%

Home Box Office

    1,426         1,367       4%     4,399         4,203       5%

Warner Bros.

    3,402         3,190       7%     9,169         9,687       (5)%

Intersegment eliminations

    (271)        (391)      (31)%     (667)        (786)      (15)%
 

 

 

   

 

 

     

 

 

   

 

 

   

Total revenues

  $ 7,167       $ 6,564       9%   $           21,427       $           21,039       2%
 

 

 

   

 

 

     

 

 

   

 

 

   

For the three and nine months ended September 30, 2016, Revenues at the Turner segment increased primarily driven by higher Subscription and Advertising revenues. Revenues at the Home Box Office segment increased for the three and nine months ended September 30, 2016 due to higher Subscription revenues. For the three months ended September 30, 2016, Revenues increased at the Warner Bros. segment driven by higher Theatrical product revenues, partially offset by lower Videogames and other revenues. For the nine months ended September 30, 2016, Revenues at the Warner Bros. segment decreased primarily due to lower Videogames and other revenues. Changes in exchange rates associated with the foreign currencies to which the Company is exposed negatively impacted the Company’s Revenues by approximately $55 million and $230 million for the three and nine months ended September 30, 2016, respectively, as compared to the three and nine months ended September 30, 2015, with negative impacts of approximately $25 million and $120 million, respectively, at the Turner segment, $30 million and $100 million, respectively, at the Warner Bros. segment and $0 and $10 million, respectively, at the Home Box Office segment. If the foreign exchange rates relative to the U.S. Dollar remain at the levels they were at as of September 30, 2016 or if the U.S. Dollar strengthens further in 2016 relative to the foreign currencies to which the Company is exposed, the Company’s Revenues in 2016 will be negatively affected as compared to its Revenues in 2015. Each of the revenue categories is discussed in greater detail by segment in “Business Segment Results.”

Costs of Revenues.    For the three and nine months ended September 30, 2016, Costs of revenues were $3.873 billion and $11.718 billion, respectively, as compared to $3.526 billion and $11.802 billion for the three and nine months ended September 30, 2015, respectively. The increase in Costs of revenues for the three months ended September 30, 2016 reflected increases across all of the segments. The decrease in Costs of revenues for the nine months ended September 30, 2016 reflected a decrease at the Warner Bros. segment, partially offset by increases at the Turner and Home Box Office segments. The segment variations are discussed in “Business Segment Results.”

Selling, General and Administrative Expenses.   For the three months ended September 30, 2016, Selling, general and administrative expenses increased 3% to $1.179 billion from $1.143 billion for the three months ended September 30, 2015, primarily reflecting an increase at Corporate. For the nine months ended September 30, 2016, Selling, general and administrative expenses increased 3% to $3.688 billion from $3.580 billion for the nine months ended September 30, 2015, primarily reflecting increases at the Turner segment and Corporate, partially offset by a decline at the Warner Bros. segment. For the nine months ended September 30, 2015, Selling, general and administrative expenses included a $22 million foreign currency charge related to a change in the foreign currency exchange rate used by the Company for remeasuring its Venezuelan net monetary assets from the SICAD 2 rate to the Simadi rate. The segment variations are discussed in “Business Segment Results.”

Included in Costs of revenues and Selling, general and administrative expenses is depreciation expense of $118 million and $359 million for the three and nine months ended September 30, 2016, respectively, and $120 million and $363 million for the three and nine months ended September 30, 2015, respectively.

Amortization Expense.    Amortization expense was $48 million and $143 million for the three and nine months ended September 30, 2016, respectively, and $47 million and $138 million for the three and nine months ended September 30, 2015, respectively.

 

9


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Restructuring and Severance Costs.   For the three and nine months ended September 30, 2016 and 2015, the Company incurred Restructuring and severance costs primarily related to employee terminations and other exit activities. Restructuring and severance costs are as follows (millions):

 

                                       
    Three Months Ended September 30,   Nine Months Ended September 30,
    2016   2015   2016   2015

Turner

  $      $      $ 15       $ 23    

Home Box Office

    —         —         41           

Warner Bros.

                           

Corporate

                         —    
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total restructuring and severance costs

  $ 11       $      $ 64       $ 31    
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income.   Operating Income increased to $2.014 billion for the three months ended September 30, 2016 from $1.834 billion for the three months ended September 30, 2015. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $56 million and $8 million of expense for the three months ended September 30, 2016 and 2015, respectively, Operating Income increased $228 million, primarily reflecting an increase at the Turner segment.

Operating Income increased to $5.856 billion for the nine months ended September 30, 2016 from $5.479 billion for the nine months ended September 30, 2015. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $14 million of income and $39 million of expense for the nine months ended September 30, 2016 and 2015, respectively, Operating Income increased $324 million, primarily reflecting an increase at the Turner segment.

Interest Expense, Net.   Interest expense, net detail is shown in the table below (millions):

 

                                       
    Three Months Ended September 30,   Nine Months Ended September 30,
    2016   2015   2016   2015

Interest expense

  $ (350)      $ (346)      $ (1,045)      $ (1,035)   

Interest income

    52        52        171        161   
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

  $ (298)      $ (294)      $ (874)      $ (874)   
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The increase in interest expense for the nine months ended September 30, 2016 was primarily due to higher average debt balances, partially offset by lower average interest rates.

Other Loss, Net.   Other loss, net detail is shown in the table below (millions):

 

                                       
    Three Months Ended September 30,   Nine Months Ended September 30,
    2016   2015   2016   2015

Investment gains (losses), net

  $ 57      $ 15      $ 93      $ (70

Amounts related to the separation of TWC

           (4            (8

Amounts related to the disposition of WMG

    (3            (4       

Amounts related to the separation of Time Inc.

    (5     (2     (13     (7

Premiums paid and costs incurred on debt redemption

           (21            (72

Loss from equity method investees

    (59     (35     (261     (130

Other

    (17     (7     (13     (9
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other loss, net

  $ (27   $ (54   $ (198   $ (296
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment gains (losses), net, premiums paid and costs incurred on debt redemption and amounts related to the separations of TWC and Time Inc. and the disposition of WMG are discussed under “Transactions and Other Items Affecting Comparability.” The increase in loss from equity method investees for the nine months ended September 30, 2016 was mainly due to the Company’s share of losses from CME primarily related to the 2016 CME financing transactions.

 

10


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Income Tax Provision.   Income tax provision decreased to $217 million for the three months ended September 30, 2016 from $452 million for the three months ended September 30, 2015. The Company’s effective tax rate was 13% and 30% for the three months ended September 30, 2016 and 2015, respectively. Income tax provision decreased to $1.187 billion for the nine months ended September 30, 2016 from $1.371 billion for the nine months ended September 30, 2015. The Company’s effective tax rate was 25% and 32% for the nine months ended September 30, 2016 and 2015, respectively. The decreases in the effective tax rate for both the three and nine months ended September 30, 2016 were primarily due to a change in the Company’s tax method of accounting for film and television cost amortization that was approved by the Internal Revenue Service during the third quarter of 2016. The change in method generated a tax benefit related to extra-territorial income exclusions for tax years dating back to 2001.

Income from Continuing Operations.   Income from continuing operations was $1.472 billion and $1.034 billion for the three months ended September 30, 2016 and 2015, respectively. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $29 million and $6 million of income for the three months ended September 30, 2016 and 2015, respectively, Income from continuing operations increased $415 million, primarily reflecting higher Operating Income and lower income tax expense. Basic and Diluted income from continuing operations per common share were $1.89 and $1.87, respectively, for the three months ended September 30, 2016 and were $1.27 and $1.26, respectively, for the three months ended September 30, 2015.

Income from continuing operations was $3.597 billion and $2.938 billion for the nine months ended September 30, 2016 and 2015, respectively. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $67 million and $145 million of expense for the nine months ended September 30, 2016 and 2015, respectively, Income from continuing operations increased $581 million, primarily reflecting higher Operating Income, lower income tax expense and lower Other loss, net. Basic and Diluted income from continuing operations per common share were $4.58 and $4.53, respectively, for the nine months ended September 30, 2016 and were $3.57 and $3.52, respectively, for the nine months ended September 30, 2015.

Discontinued Operations, Net of Tax.   For the three months ended September 30, 2016, Discontinued operations, net of tax was expense of $5 million related to pension settlement charges related to businesses the Company previously disposed of. For the nine months ended September 30, 2016, Discontinued operations, net of tax was income of $35 million, which also included the recognition of additional tax benefits associated with certain foreign tax attributes of WMG, which the Company disposed of in 2004. For the nine months ended September 30, 2015, Discontinued operations, net of tax was income of $37 million, primarily related to the final resolution of a tax indemnification obligation associated with the disposition of WMG. Basic and Diluted income from discontinued operations per common share were both $0.04 for the nine months ended September 30, 2016 and $0.05 and $0.04, respectively, for the nine months ended September 30, 2015.

Net Income attributable to Time Warner shareholders.   Net income attributable to Time Warner shareholders was $1.467 billion and $3.633 billion for the three and nine months ended September 30, 2016, respectively, and $1.035 billion and 2.976 billion for the three and nine months ended September 30, 2015, respectively. Basic and Diluted net income per common share were $1.89 and $1.86, respectively, for the three months ended September 30, 2016 and $1.27 and $1.26, respectively, for the three months ended September 30, 2015. Basic and Diluted net income per common share were $4.62 and $4.57, respectively, for the nine months ended September 30, 2016 and were $3.62 and $3.56, respectively, for the nine months ended September 30, 2015.

 

11


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Business Segment Results

Turner.   Revenues and Operating Income of the Turner segment for the three and nine months ended September 30, 2016 and 2015 are as follows (millions):

 

                                                                                                                                                     
     Three Months Ended September 30,   Nine Months Ended September 30,
     2016   2015   % Change   2016   2015       % Change    

Revenues:

            

Subscription

   $ 1,480      $ 1,317        12%      $ 4,455      $ 4,007        11%   

Advertising

     996        980        2%        3,576        3,431        4%   

Content and other

     134        101        33%        495        497        —%   
  

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Total revenues

     2,610        2,398        9%        8,526        7,935        7%   

Costs of revenues (a)

     (935     (870     7%        (3,505     (3,269     7%   

Selling, general and
administrative (a)

     (415     (401     3%        (1,279     (1,160     10%   

Gain (loss) on operating assets

     (13     2        NM        (15            NM   

Asset impairments

     (25     (1     NM        (25     (1     NM   

Venezuelan foreign currency loss

                   NM               (17     NM   

Restructuring and
severance costs

     (8     (5     60%        (15     (23     (35)%   

Depreciation

     (48     (47     2%        (143     (143     —%   

Amortization

     (4     (4     —%        (13     (12     8%   
  

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Operating Income

   $ 1,162      $ 1,072        8%      $ 3,531      $ 3,310        7%   
  

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

(a)

Costs of revenues and Selling, general and administrative expenses exclude depreciation.

Domestic subscription revenues for the three and nine months ended September 30, 2016 increased $160 million and $462 million, respectively, primarily due to higher contractual rates, partially offset by a decrease in subscribers. For the three and nine months ended September 30, 2016, international subscription revenues increased $3 million and decreased $14 million, respectively, as growth mainly in Latin America was offset by the unfavorable impact of foreign exchange rates of approximately $15 million and $70 million, respectively.

The increase in Advertising revenues for the three months ended September 30, 2016 reflected domestic growth of $15 million primarily driven by Turner’s news business, mainly due to the 2016 U.S. Presidential election coverage, partially offset by lower audience delivery at certain entertainment networks. For the nine months ended September 30, 2016, the increase in Advertising revenues reflected domestic growth of $160 million primarily driven by Turner’s news business, mainly due to the 2016 U.S. Presidential election coverage, as well as the 2016 NCAA Tournament, partially offset by lower audience delivery at certain entertainment networks. For the three and nine months ended September 30, 2016, international advertising revenues increased $1 million and decreased $15 million, respectively, as growth mainly in Latin America was offset by the unfavorable impact of foreign exchange rates of approximately $10 million and $40 million, respectively.

The increase in Content and other revenue for the three months ended September 30, 2016 was primarily due to higher licensing revenues.

 

12


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

The components of Costs of revenues for the Turner segment are as follows (millions):

 

                                                                                         
     Three Months Ended September 30,   Nine Months Ended September 30,
     2016    2015      % Change     2016    2015      % Change  

Programming costs:

                

Originals and sports

   $ 506       $ 488         4%      $ 2,277       $ 2,112         8%   

Acquired films and
syndicated series

     203         185         10%        593         572         4%   
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

Total programming costs

     709         673         5%        2,870         2,684         7%   

Other direct operating
costs

     226         197         15%        635         585         9%   
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

Costs of revenues (a)

   $ 935       $ 870         7%      $ 3,505       $ 3,269         7%   
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

 

(a)

Costs of revenues exclude depreciation.

For the three and nine months ended September 30, 2016, programming costs increased mainly due to the 2016 U.S. Presidential election coverage and also, for the nine months ended September 30, 2016, higher costs for sports programming. The increase in other direct operating costs for the three and nine months ended September 30, 2016 primarily related to costs associated with Turner’s and Warner Bros.’ strategic partnership to grow their global kids businesses.

For the nine months ended September 30, 2016, Selling, general and administrative expenses increased primarily due to higher marketing expense for new original series.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Gain (loss) on operating assets, Asset impairments, Venezuelan foreign currency loss and external costs related to mergers, acquisitions and dispositions for the three and nine months ended September 30, 2016 and 2015, which affected the comparability of the Turner segment’s results.

Operating Income for the three and nine months ended September 30, 2016 increased driven by higher Revenues, partially offset by higher Costs of revenues and Selling, general and administrative expenses.

Home Box Office.   Revenues and Operating Income of the Home Box Office segment for the three and nine months ended September 30, 2016 and 2015 are as follows (millions):

 

                                                                                         
     Three Months Ended September 30,   Nine Months Ended September 30,
     2016   2015     % Change     2016   2015     % Change  

Revenues:

            

Subscription

   $ 1,262      $ 1,200        5%      $ 3,751      $ 3,560        5%   

Content and other

     164        167        (2)%        648        643        1%   
  

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Total revenues

     1,426        1,367        4%        4,399        4,203        5%   

Costs of revenues (a)

     (690     (627     10%        (2,181     (2,024     8%   

Selling, general and
administrative (a)

     (185     (199     (7)%        (623     (621     —%   

Restructuring and
severance costs

                   NM        (41     (5     NM   

Depreciation

     (17     (18     (6)%        (55     (57     (4)%   

Amortization

     (4     (4     —%        (11     (11     —%   
  

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Operating Income

   $ 530      $ 519        2%      $ 1,488      $ 1,485        —%   
  

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

(a)

Costs of revenues and Selling, general and administrative expenses exclude depreciation.

 

13


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

For the three and nine months ended September 30, 2016, the increase in Subscription revenues was driven by higher domestic subscription revenues of $51 million and $167 million, respectively, primarily due to higher contractual rates.

For the nine months ended September 30, 2016, Content and other revenues increased primarily due to higher licensing revenues of $42 million, partially offset by lower home entertainment revenues of $32 million.

The components of Costs of revenues for the Home Box Office segment are as follows (millions):

 

                                                                                                                 
                 Three Months Ended September 30,                            Nine Months Ended September 30,             
             2016                    2015                    % Change                   2016                    2015                    % Change        

Programming costs:

                

Originals and sports

   $    236       $    214         10%      $ 824       $ 731         13%   

Acquired films and
syndicated series

     281         237         19%        783         727         8%   
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

Total programming
costs

     517         451         15%        1,607         1,458         10%   

Other direct operating
costs

     173         176         (2)%        574         566         1%   
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

Costs of revenues (a)

   $ 690       $ 627         10%      $ 2,181       $ 2,024         8%   
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

 

(a)

Costs of revenues exclude depreciation.

During the second quarter of 2016, the Home Box Office segment revised its estimate of the period over which its original programming is utilized by its subscribers. The updated estimate gives consideration to Home Box Office’s original programming history and was driven by consumer viewing patterns, which are influenced by the increased availability of and on-demand access to Home Box Office’s content across a wide variety of devices and services, including HBO NOW, which launched in April 2015. As a result, in determining amortization under the film forecast computation method, the weighted average subscriber utilization period for the majority of Home Box Office’s original programming was increased by approximately five months. This change resulted in a reduction of amortization expense, as compared to the amount determined using Home Box Office’s previous estimate, of approximately $35 million and $130 million for the three and nine months ended September 30, 2016, respectively.

The increase in originals and sports programming costs for the three and nine months ended September 30, 2016 was primarily due to higher original programming expenses, partially offset by the impact of the change in the estimate of the utilization period of its original programming described in the preceding paragraph. For the nine months ended September 30, 2016, the higher original programming expenses also included higher original programming charges. The increase in acquired films and syndicated series programming costs for the three and nine months ended September 30, 2016 primarily related to acquired programming for both HBO’s domestic and international businesses.

For the three months ended September 30, 2016, Selling, general and administrative expenses decreased due to lower marketing expenses. For the nine months ended September 30, 2016, Selling, general and administrative expenses were essentially flat primarily due to $9 million of expenses related to Home Box Office’s withdrawal from a multiemployer benefit plan, partially offset by lower marketing expenses.

The results for the nine months ended September 30, 2016 included $41 million of Restructuring and severance costs principally related to executive severance costs.

The increase in Operating Income for the three and nine months ended September 30, 2016 was primarily due to higher Revenues, partially offset by higher Costs of revenues and, for the nine months ended September 30, 2016, higher Restructuring and severance costs.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Warner Bros.   Revenues and Operating Income of the Warner Bros. segment for the three and nine months ended September 30, 2016 and 2015 are as follows (millions):

 

                                                                                                                                         
     Three Months Ended September 30,   Nine Months Ended September 30,
     2016   2015   % Change   2016   2015   % Change

Revenues:

            

Theatrical product

   $ 1,605      $ 1,108        45%      $ 3,926      $ 3,836        2%   

Television product

     1,430        1,460        (2)%        4,058        4,116        (1)%   

Videogames and
other

     367        622        (41)%        1,185        1,735        (32)%   
  

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Total revenues

     3,402        3,190        7%        9,169        9,687        (5)%   

Costs of revenues (a)

     (2,447     (2,281     7%        (6,519     (7,000     (7)%   

Selling, general and
administrative (a)

     (436     (434     —%        (1,309     (1,365     (4)%   

Gain on operating
assets

     1               NM        92        (1     NM   

Asset impairments

     (5     (1     NM        (6     (1     NM   

Venezuelan foreign
currency loss

                   NM               (5     NM   

Restructuring and
severance costs

     (1     (1     —%        (6     (3     100%   

Depreciation

     (46     (49     (6)%        (142     (147     (3)%   

Amortization

     (40     (39     3%        (119     (115     3%   
  

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Operating Income

   $ 428      $ 385        11%      $ 1,160      $ 1,050        10%   
  

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

(a)

Costs of revenues and Selling, general and administrative expenses exclude depreciation.

The change in Revenues for the three and nine months ended September 30, 2016 included the net unfavorable impact of foreign exchange rates of approximately $30 million and $100 million, respectively. Revenues primarily relate to theatrical product (which is content made available for initial exhibition in theaters) and television product (which is content made available for initial airing on traditional television or OTT services, including SVOD services). The components of Revenues for the three and nine months ended September 30, 2016 and 2015 are as follows (millions):

 

                                                                                                                                         
     Three Months Ended September 30,   Nine Months Ended September 30,
     2016    2015    % Change   2016    2015    % Change

Theatrical product:

                

Film rentals

   $ 794       $ 259         207%      $ 1,603       $ 1,302         23%   

Home video and electronic

delivery

     368         355         4%        910         1,185         (23)%   

Television licensing

     369         399         (8)%        1,207         1,146         5%   

Consumer products and other

     74         95         (22)%        206         203         1%   
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

Total theatrical product

   $ 1,605       $ 1,108         45%      $ 3,926       $ 3,836         2%   
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

Television product:

                

Television licensing

     1,200         1,223         (2)%        3,451         3,469         (1)%   

Home video and

electronic delivery

     134         143         (6)%        313         341         (8)%   

Consumer products and other

     96         94         2%        294         306         (4)%   
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

Total television product

   $ 1,430       $ 1,460         (2)%      $ 4,058       $ 4,116         (1)%   
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Theatrical product revenue from film rentals increased for the three months ended September 30, 2016, primarily reflecting higher revenues of $483 million from theatrical films released during the third quarter of 2016 compared to the third quarter of 2015 and higher revenues of $52 million from international local language releases as well as from prior period releases. Theatrical product revenues from film rentals increased for the nine months ended September 30, 2016, reflecting higher revenues of $644 million from theatrical films released during first nine months of 2016 compared to the first nine months of 2015, partially offset by lower revenues of $343 million from prior period releases. The Company released six and seven theatrical films in the third quarters of 2016 and 2015, respectively, and fifteen and eighteen theatrical films in the first nine months of 2016 and 2015, respectively.

For the three months ended September 30, 2016, theatrical product revenues from home video and electronic delivery increased due to higher revenues of $122 million from releases during the third quarter of 2016 compared to the third quarter of 2015, partially offset by lower revenues of $109 million from prior period releases, including catalog titles, during the third quarter of 2016 compared to the third quarter of 2015. For the nine months ended September 30, 2016, theatrical product revenues from home video and electronic delivery decreased due to lower revenues of $241 million from releases during the first nine months of 2016 compared to the first nine months of 2015 and lower revenues of $34 million from prior period releases, including catalog titles, during the first nine months of 2016 compared to the first nine months of 2015. There were seven and four home video and electronic delivery releases in the third quarters of 2016 and 2015, respectively, and sixteen and fifteen home video and electronic delivery releases in the first nine months of 2016 and 2015, respectively.

The decrease in theatrical product revenues from television licensing for the three months ended September 30, 2016 was primarily due to lower international license fees. The increase in theatrical product revenues from television licensing for the nine months ended September 30, 2016 was primarily due to higher international license fees.

The decrease in television product revenues from television licensing for the three and nine months ended September 30, 2016 was primarily due to the unfavorable impact of the timing and mix of availabilities, partially offset by higher initial telecast revenues.

Videogames and other revenues decreased for the three months ended September 30, 2016 primarily due to lower revenues of $166 million from releases during the third quarter of 2016 compared to the third quarter of 2015 and lower carryover revenues of $111 million from prior period releases. Videogames and other revenues decreased for the nine months ended September 30, 2016 primarily due to lower revenues of $715 million from releases during the first nine months of 2016, respectively, compared to first nine months of 2015, partially offset by higher carryover revenues of $127 million from prior period releases. The Company released three and two videogames in the third quarters of 2016 and 2015, respectively, and eight and twelve videogames in the first nine months of 2016 and 2015, respectively.

The components of Costs of revenues for the Warner Bros. segment are as follows (millions):

 

                                                                                                     
     Three Months Ended September 30,   Nine Months Ended September 30,
                 2016                            2015                       % Change                      2016                            2015                       % Change       

Film and television
production costs

   $ 1,650       $ 1,468       12%   $ 4,430       $ 4,560       (3)%

Print and advertising
costs

     549         491       12%     1,410         1,584       (11)%

Other costs, including
merchandise and
related costs

     248         322       (23)%     679         856       (21)%
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

Costs of revenues (a)

   $ 2,447       $ 2,281       7%   $ 6,519       $ 7,000       (7)%
  

 

 

 

  

 

 

 

    

 

 

 

  

 

 

 

  

 

(a)

Costs of revenues excludes depreciation.

Included in film and television production costs are production costs related to videogames, as well as theatrical film and videogame valuation adjustments resulting primarily from revisions to estimates of ultimate revenue and/or costs for certain theatrical films and videogames. Theatrical film valuation adjustments were $1 million and $74 million for the nine months ended September 30, 2016 and 2015, respectively. Videogame valuation adjustments were $4 million and $17 million for the nine months ended September 30, 2016 and 2015, respectively. The increase in film and television production costs for the three months ended September 30, 2016 was primarily a result of higher revenues for theatrical product. The decrease in film and television production

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

costs for the nine months ended September 30, 2016 was primarily due to lower costs for videogames, partially offset by higher costs for television and theatrical product. The increase in print and advertising costs for the three months ended September 30, 2016 was primarily due to the type of theatrical and videogames releases. The decrease in print and advertising costs for the nine months ended September 30, 2016 was primarily due to the type and number of theatrical, home entertainment and videogames releases. Other costs, including merchandise and related costs decreased for the three and nine months ended September 30, 2016 primarily due to lower distribution-related costs of sales primarily as a result of lower revenues for videogames and, for the nine months ended September 30, 2016, lower revenues for home entertainment.

Selling, general and administrative expenses was essentially flat for the three months ended September 30, 2016 primarily due to higher third party distribution fees, mainly as a result of higher theatrical product revenues, partially offset by lower bad debt expense of $16 million. Selling, general and administrative expenses decreased for the nine months ended September 30, 2016 mainly due to lower bad debt expense of $23 million, lower third party distribution fees of $14 million and cost savings initiatives.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Gain on operating assets, Asset impairments, Venezuelan foreign currency loss and external costs related to mergers, acquisitions and dispositions for the three and nine months ended September 30, 2016 and 2015, which affected the comparability of the Warner Bros. segment’s results.

The increase in Operating Income for the three months ended September 30, 2016 was primarily due to higher Revenues, partially offset by higher Costs of revenues. The increase in Operating Income for the nine months ended September 30, 2016 was primarily due to lower Costs of revenues, a Gain on operating assets and lower Selling, general and administrative expenses, partially offset by lower Revenues.

Corporate.   Corporate’s Operating Loss for the three and nine months ended September 30, 2016 and 2015 was as follows (millions):

 

                                                                                                                 
                 Three Months Ended September 30,                             Nine Months Ended September 30,             
             2016                    2015                   % Change                   2016                    2015                 % Change     

Selling, general and
administrative (a)

   $ (86    $ (50    72%    $ (305    $ (235    30%

Asset impairments

             (5    NM      (4      (6    (33)%

Restructuring and
severance costs

     (2      (3    (33)%      (2            NM

Depreciation

     (7      (6    17%      (19      (16    19%
  

 

 

 

  

 

 

 

     

 

 

 

  

 

 

 

  

Operating Loss

   $ (95    $ (64    48%    $ (330    $ (257    28%
  

 

 

 

  

 

 

 

     

 

 

 

  

 

 

 

  

 

(a)

Selling, general and administrative expenses exclude depreciation.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments, pension settlements and external costs related to mergers, acquisitions and dispositions for the three and nine months ended September 30, 2016 and 2015, which affected the comparability of Corporate’s results.

Operating loss increased primarily due to higher equity-based compensation expense of $24 million and $34 million for the three and nine months ended September 30, 2016, respectively, which mainly reflected higher expenses for performance stock units due to an increase in the Company’s stock price, $10 million of pension settlement charges for both the three and nine months ended September 30, 2016 and, for the nine months ended September 30, 2016, higher costs of $14 million related to enterprise efficiency initiatives primarily focused on technology.

FINANCIAL CONDITION AND LIQUIDITY

Management believes that cash generated by or available to the Company should be sufficient to fund its capital and liquidity needs for the foreseeable future, including scheduled debt repayments, quarterly dividend payments and the purchase of common stock under the Company’s stock repurchase program. Time Warner’s sources of cash include Cash provided by operations, Cash and equivalents on hand, available borrowing capacity under its committed credit facilities and commercial paper program and access to capital markets. Time Warner’s unused committed capacity at September 30, 2016 was $7.336 billion, which included $2.308 billion of Cash and equivalents.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Current Financial Condition

At September 30, 2016, Time Warner had $24.471 billion of debt and $2.308 billion of Cash and equivalents, resulting in net debt of $22.163 billion, compared to $23.792 billion of debt and $2.155 billion of Cash and equivalents, or net debt of $21.637 billion, at December 31, 2015. At September 30, 2016, Total equity was $24.279 billion compared to $23.619 billion at December 31, 2015.

The following table shows the significant items contributing to the increase in net debt from December 31, 2015 to September 30, 2016 (millions):

 

Balance at December 31, 2015

   $ 21,637   

Cash provided by operations

     (3,534

Capital expenditures

     270   

Repurchases of common stock

     2,119   

Dividends paid to common stockholders

     954   

Investments and acquisitions, net of cash acquired, including available-for-sale securities

     982   

Proceeds from the exercise of stock options

     (127

Other investment proceeds, including available-for-sale securities

     (253

All other, net

     115   
  

 

 

 

Balance at September 30, 2016

   $           22,163   
  

 

 

 

In January 2016, Time Warner’s Board of Directors authorized up to $5.0 billion of share repurchases beginning January 1, 2016, including the amount remaining at December 31, 2015 under the prior authorization. Purchases under the stock repurchase program could be made on the open market or in privately negotiated transactions, with the size and timing of purchases based on a number of factors, including price and business and market conditions. From January 1, 2016 through October 21, 2016, the Company repurchased 31 million shares of common stock for $2.307 billion pursuant to trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In connection with entering into the Merger Agreement, the Company discontinued share repurchases.

Cash Flows

For the nine months ended September 30, 2016 and 2015, Cash and equivalents increased by $153 million and decreased by $844 million, respectively. Components of these changes are discussed below in more detail.

 

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Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Operating Activities

Details of Cash provided by operations are as follows (millions):

 

                                     
     Nine Months Ended September 30,
     2016   2015

Operating Income

   $ 5,856      $ 5,479   

Depreciation and amortization

     502        501   

Net interest payments (a)

     (903     (889

Net income taxes paid (b)

     (695     (726

All other, net, including working capital changes

     (1,226     (1,368
  

 

 

 

 

 

 

 

Cash provided by operations

   $ 3,534      $ 2,997   
  

 

 

 

 

 

 

 

 

 

(a)

Includes cash interest received of $110 million and $29 million for the nine months ended September 30, 2016 and 2015, respectively.

(b)

Includes income tax refunds received of $124 million and $108 million for the nine months ended September 30, 2016 and 2015, respectively, and payments to TWC of $4 million for the nine months ended September 30, 2015 in accordance with a tax sharing agreement with TWC.

Cash provided by operations for the nine months ended September 30, 2016 increased primarily due to higher Operating Income. For the nine months ended September 30, 2016, all other, net, including working capital changes was favorably impacted by approximately $280 million related to CME’s repayment of the Senior Secured Notes and the TW Term Loan.

Investing Activities

Details of Cash used by investing activities are as follows (millions):

 

                                     
     Nine Months Ended September 30,
     2016   2015

Investments in available-for-sale securities

   $ (7   $ (41

Investments and acquisitions, net of cash acquired:

    

Hulu

     (590       

Hudson Yards development project

     (179     (72

iStreamPlanet

            (149

All other

     (206     (123

Capital expenditures

     (270     (250

Other investment proceeds, including available-for-sale securities

     253        134   
  

 

 

 

 

 

 

 

Cash used by investing activities

   $ (999   $ (501
  

 

 

 

 

 

 

 

The increase in Cash used by investing activities for the nine months ended September 30, 2016 was primarily due to an increase in investments and acquisitions, net of cash acquired. Other investment proceeds for the nine months ended September 30, 2016 primarily related to CME’s repayment of the Senior Secured Notes and the TW Term Loan.

 

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Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Financing Activities

Details of Cash used by financing activities are as follows (millions):

 

                                     
     Nine Months Ended September 30,
     2016   2015

Borrowings

   $ 942      $ 2,877   

Debt repayments

     (304     (2,341

Proceeds from the exercise of stock options

     127        148   

Excess tax benefit from equity instruments

     59        141   

Principal payments on capital leases

     (11     (8

Repurchases of common stock

     (2,119     (3,030

Dividends paid

     (954     (869

Other financing activities

     (122     (258
  

 

 

 

 

 

 

 

Cash used by financing activities from continuing operations

   $ (2,382   $ (3,340
  

 

 

 

 

 

 

 

Cash used by financing activities for the nine months ended September 30, 2016 decreased primarily due to decreases in Debt repayments and Repurchases of common stock, partially offset by a decrease in Borrowings.

Outstanding Debt and Other Financing Arrangements

Outstanding Debt and Committed Financial Capacity

At September 30, 2016, Time Warner had total committed capacity, defined as maximum available borrowings under various existing debt arrangements and cash and short-term investments, of $31.835 billion. Of this committed capacity, $7.336 billion was unused and $24.471 billion was outstanding as debt. At September 30, 2016, total committed capacity, outstanding letters of credit, outstanding debt and total unused committed capacity were as follows (millions):

 

                                                                           
     Committed
Capacity (a)
   Letters of
Credit (b)
   Outstanding
Debt (c)
   Unused
Committed
Capacity

Cash and equivalents

   $ 2,308       $       $       $ 2,308   

Revolving credit facilities and commercial paper program (d)

     5,000                         5,000   

Fixed-rate public debt

     24,240                 24,240           

Other obligations (e)

     287         28         231         28   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

   $ 31,835       $ 28       $ 24,471       $ 7,336   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

(a)

The revolving credit facilities, commercial paper program and public debt of the Company rank pari passu with the senior debt of the respective obligors thereon. The weighted average maturity of the Company’s outstanding debt and other financing arrangements was 12.9 years as of September 30, 2016.

(b)

Represents the portion of committed capacity, including from bilateral letter of credit facilities, reserved for outstanding and undrawn letters of credit.

(c)

Represents principal amounts adjusted for premiums and discounts and $120 million of unamortized debt issuance costs. At September 30, 2016, the principal amounts of the Company’s publicly issued debt mature as follows: $500 million in 2017, $600 million in 2018, $650 million in 2019, $1.4 billion in 2020, $2.0 billion in 2021 and $19.317 billion thereafter. In the period after 2021, no more than $2.0 billion will mature in any given year.

(d)

The revolving credit facilities consist of two $2.5 billion revolving credit facilities. The Company may issue unsecured commercial paper notes up to the amount of the unused committed capacity under the revolving credit facilities.

(e)

Unused committed capacity includes committed financings of subsidiaries under local bank credit agreements. Other debt obligations totaling $52 million are due within the next twelve months.

2016 Debt Offering

On May 10, 2016, Time Warner issued $800 million aggregate principal amount of 2.95% Notes due 2026 under a shelf registration statement. The notes issued are guaranteed, on an unsecured basis, by Historic TW Inc. (“Historic TW”). In addition, Turner and Home Box Office guarantee, on an unsecured basis, Historic TW’s guarantee of the notes. The net proceeds to the Company from the debt offering were $785 million, after deducting underwriting discounts and offering expenses.

 

20


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Programming Licensing Backlog

Programming licensing backlog represents the amount of future revenues not yet recorded from cash contracts for the worldwide licensing of theatrical and television product for premium cable, basic cable, network and syndicated television and OTT exhibition. Backlog was $6.9 billion and $6.3 billion at September 30, 2016 and December 31, 2015, respectively. Included in the backlog amounts is licensing of theatrical and television product from the Warner Bros. segment to the Turner segment in the amount of $499 million and $619 million at September 30, 2016 and December 31, 2015, respectively. Also included in the backlog amounts is licensing of theatrical product from the Warner Bros. segment to the Home Box Office segment in the amount of $712 million and $737 million at September 30, 2016 and December 31, 2015, respectively.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. Examples of the forward-looking statements in this report include, but are not limited to, the statements regarding (i) the expected timing of the completion of the merger, (ii) expected pension settlement losses of approximately $55 million to $70 million during the three months ended December 31, 2016 in connection with an amendment to the Pension Plan and (iii) the possible incurrence of charges of approximately $60 million to $80 million during the three months ended December 31, 2016 in connection with the Company’s evaluation of its future use of certain programming rights.

The Company’s forward-looking statements are based on management’s current expectations and assumptions regarding the Company’s business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. The Company’s actual results may vary materially from those expressed or implied in its forward-looking statements. Important factors that could cause the Company’s actual results to differ materially from those in its forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors:

 

   

the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;

   

the risk that Time Warner’s stockholders may not adopt the Merger Agreement;

   

the risk that the necessary regulatory approvals for the proposed merger may not be obtained or may be obtained subject to conditions that are not anticipated;

   

risks that any of the closing conditions to the merger may not be satisfied in a timely manner;

   

risks related to disruption of management time from ongoing business operations due to the merger;

   

failure to realize the benefits expected from the merger;

   

the effect of the announcement of the merger on the ability of Time Warner to retain customers and retain and hire key personnel;

   

the effect of the announcement of the merger on the ability of Time Warner to maintain relationships with its suppliers;

   

the effect of the announcement of the merger on Time Warner’s operating results and businesses generally;

   

potential litigation in connection with the merger;

   

recent and future changes in technology, services and standards, including, but not limited to, alternative methods for the delivery, storage and consumption of digital media and evolving home entertainment formats;

   

changes in consumer behavior, including changes in spending behavior and viewing patterns;

   

the popularity of the Company’s content;

   

changes in the Company’s plans, initiatives and strategies, and consumer acceptance thereof;

   

changes in the plans, initiatives and strategies of the third parties that distribute, license and/or sell Time Warner’s content;

   

the Company’s ability to renew affiliate agreements on favorable terms;

   

competitive pressures, including as a result of audience fragmentation and changes in technology and consumer viewing patterns;

   

changes in advertising market conditions or advertising expenditures due to various factors, including decreasing numbers of multichannel video service subscribers, changes in consumer viewing patterns, economic conditions, pressure from public interest groups, changes in laws and regulations and other societal or political developments;

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

   

the Company’s ability to deal effectively with economic slowdowns or other economic or market difficulties, including impacts on the economies of the United Kingdom and European Economic Area resulting from the United Kingdom’s vote to exit the European Union (“Brexit”);

   

changes in foreign exchange rates, including as a result of Brexit;

   

increased volatility or decreased liquidity in the capital markets, including any limitation on the Company’s ability to access the capital markets for debt securities, refinance its outstanding indebtedness or obtain bank financings on acceptable terms;

   

piracy and the Company’s ability to exploit and protect its intellectual property rights in and to its content and other products;

   

the failure to achieve the anticipated benefits of the Company’s enterprise efficiency initiatives;

   

the effects of any significant acquisitions, dispositions and other similar transactions by the Company;

   

a disruption or failure of the Company’s or its vendors’ network and information systems or other technology relied on by the Company;

   

the failure to meet earnings expectations;

   

lower than expected valuations associated with the cash flows and revenues at Time Warner’s reporting units, which could result in Time Warner’s inability to realize the value recorded for intangible assets and goodwill at those reporting units;

   

the adequacy of the Company’s risk management framework;

   

changes in U.S. GAAP or other applicable accounting standards and policies;

   

changes in tax, federal communication and other laws and regulations;

   

currency exchange restrictions and currency devaluation risks in some foreign countries;

   

the effect of union or labor disputes or professional sports league player lockouts;

   

the impact of terrorist acts, hostilities, natural disasters (including extreme weather) and pandemic viruses; and

   

the other risks and uncertainties detailed in Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and Part II, Item 1A. “Risk Factors” in this Form 10-Q.

Any forward-looking statement made by the Company in this report speaks only as of the date on which it is made. The Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.

 

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TIME WARNER INC.

Item 4. CONTROLS AND PROCEDURES

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by the Company is accumulated and communicated to the Company’s management to allow timely decisions regarding the required disclosure.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

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TIME WARNER INC.

CONSOLIDATED BALANCE SHEET

(Unaudited; millions, except share amounts)

 

                                             
     September 30,
2016
  December 31,
2015

ASSETS

    

Current assets

    

Cash and equivalents

   $ 2,308      $ 2,155   

Receivables, less allowances of $772 and $1,055

     8,031        7,411   

Inventories

     1,915        1,753   

Prepaid expenses and other current assets

     1,010        1,194   
  

 

 

 

 

 

 

 

Total current assets

     13,264        12,513   

Noncurrent inventories and theatrical film and television production costs

     8,196        7,600   

Investments, including available-for-sale securities

     3,271        2,617   

Property, plant and equipment, net

     2,482        2,596   

Intangible assets subject to amortization, net

     809        949   

Intangible assets not subject to amortization

     7,005        7,029   

Goodwill

     27,694        27,689   

Other assets

     3,043        2,855   
  

 

 

 

 

 

 

 

Total assets

   $ 65,764      $ 63,848   
  

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities

    

Accounts payable and accrued liabilities

   $ 6,907      $ 7,188   

Deferred revenue

     580        616   

Debt due within one year

     52        198   
  

 

 

 

 

 

 

 

Total current liabilities

     7,539        8,002   

Long-term debt

     24,419        23,594   

Deferred income taxes

     2,603        2,454   

Deferred revenue

     436        352   

Other noncurrent liabilities

     6,459        5,798   

Redeemable noncontrolling interest

     29        29   

Commitments and Contingencies (Note 15)

    

Equity

    

Common stock, $0.01 par value, 1.652 billion and 1.652 billion shares issued and
772 million and 795 million shares outstanding

     17        17   

Additional paid-in capital

     147,032        148,041   

Treasury stock, at cost (879 million and 857 million shares)

     (47,409     (45,612

Accumulated other comprehensive loss, net

     (1,614     (1,446

Accumulated deficit

     (73,748     (77,381
  

 

 

 

 

 

 

 

Total Time Warner Inc. shareholders’ equity

     24,278        23,619   

Noncontrolling interest

     1          
  

 

 

 

 

 

 

 

Total equity

     24,279        23,619   
  

 

 

 

 

 

 

 

Total liabilities and equity

   $ 65,764      $ 63,848   
  

 

 

 

 

 

 

 

See accompanying notes.

 

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TIME WARNER INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited; millions, except per share amounts)

 

                                                                                   
     Three Months Ended September 30,   Nine Months Ended September 30,
             2016                   2015                   2016                   2015        

Revenues

   $ 7,167      $ 6,564      $ 21,427      $ 21,039   

Costs of revenues

     (3,873     (3,526     (11,718     (11,802

Selling, general and administrative

     (1,179     (1,143     (3,688     (3,580

Amortization of intangible assets

     (48     (47     (143     (138

Restructuring and severance costs

     (11     (9     (64     (31

Asset impairments

     (30     (7     (35     (8

Gain (loss) on operating assets, net

     (12     2        77        (1
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

     2,014        1,834        5,856        5,479   

Interest expense, net

     (298     (294     (874     (874

Other loss, net

     (27     (54     (198     (296
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

     1,689        1,486        4,784        4,309   

Income tax provision

     (217     (452     (1,187     (1,371
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

     1,472        1,034        3,597        2,938   

Discontinued operations, net of tax

     (5            35        37   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

     1,467        1,034        3,632        2,975   

Less Net loss attributable to noncontrolling interests

            1        1        1   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Time Warner Inc. shareholders

   $ 1,467      $ 1,035      $ 3,633      $ 2,976   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Time Warner Inc. shareholders:

        

Income from continuing operations

   $ 1,472      $ 1,035      $ 3,598      $ 2,939   

Discontinued operations, net of tax

     (5            35        37   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

   $ 1,467      $ 1,035      $ 3,633      $ 2,976   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share information attributable to Time Warner
Inc. common shareholders:

        

Basic income per common share from continuing
operations

   $ 1.89      $ 1.27      $ 4.58      $ 3.57   

Discontinued operations

                   0.04        0.05   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share

   $ 1.89      $ 1.27      $ 4.62      $ 3.62   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average basic common shares outstanding

     776.2        810.2        783.8        820.4   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income per common share from continuing
operations

   $ 1.87      $ 1.26      $ 4.53      $ 3.52   

Discontinued operations

     (0.01            0.04        0.04   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share

   $ 1.86      $ 1.26      $ 4.57      $ 3.56   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average diluted common shares outstanding

     787.5        824.1        795.1        835.5   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share of common stock

   $ 0.4025      $ 0.3500      $ 1.2075      $ 1.0500   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

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TIME WARNER INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited; millions)

 

                                                                                                   
     Three Months Ended September 30,   Nine Months Ended September 30,
     2016   2015   2016   2015

Net income

   $ 1,467      $ 1,034      $ 3,632      $ 2,975   

Other comprehensive loss, net of tax:

        

Foreign currency translation:

        

Unrealized losses occurring during the period

     (38     (14     (42     (258

Reclassification adjustment for losses realized in net income

                          5   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation

     (38     (14     (42     (253
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities:

        

Unrealized gains (losses) occurring during the period

            (3            2   

Benefit obligations:

        

Unrealized losses occurring during the period

     (143     (1     (125     (2

Reclassification adjustment for losses realized in net income

     17        5        28        16   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in benefit obligations

     (126     4        (97     14   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments:

        

Unrealized gains (losses) occurring during the period

     2        56        (8     74   

Reclassification adjustment for gains realized in net income

     (5     (39     (21     (65
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in derivative financial instruments

     (3     17        (29     9   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

     (167     4        (168     (228
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

     1,300        1,038        3,464        2,747   

Less Comprehensive loss attributable to noncontrolling interests

            1        1        1   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Time Warner Inc. shareholders

   $ 1,300      $ 1,039      $ 3,465      $ 2,748   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

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TIME WARNER INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

Nine Months Ended September 30,

(Unaudited; millions)

 

                                             
     2016   2015

OPERATIONS

    

Net income

   $ 3,632      $ 2,975   

Less Discontinued operations, net of tax

     (35     (37
  

 

 

 

 

 

 

 

Net income from continuing operations

     3,597        2,938   

Adjustments for noncash and nonoperating items:

    

Depreciation and amortization

     502        501   

Amortization of film and television costs

     5,884        5,739   

Asset impairments

     35        8   

(Gain) loss on investments and other assets, net

     (75     71   

Equity in losses of investee companies, net of cash distributions

     293        160   

Equity-based compensation

     201        154   

Deferred income taxes

     267        (176

Changes in operating assets and liabilities, net of acquisitions

     (7,160     (6,394
  

 

 

 

 

 

 

 

Cash provided by operations from continuing operations

     3,544        3,001   

Cash used by operations from discontinued operations

     (10     (4
  

 

 

 

 

 

 

 

Cash provided by operations

     3,534        2,997   
  

 

 

 

 

 

 

 

INVESTING ACTIVITIES

    

Investments in available-for-sale securities

     (7     (41

Investments and acquisitions, net of cash acquired

     (975     (344

Capital expenditures

     (270     (250

Investment proceeds from available-for-sale securities

     1        1   

Other investment proceeds

     252        133   
  

 

 

 

 

 

 

 

Cash used by investing activities

     (999     (501
  

 

 

 

 

 

 

 

FINANCING ACTIVITIES

    

Borrowings

     942        2,877   

Debt repayments

     (304     (2,341

Proceeds from exercise of stock options

     127        148   

Excess tax benefit from equity instruments

     59        141   

Principal payments on capital leases

     (11     (8

Repurchases of common stock

     (2,119     (3,030

Dividends paid

     (954     (869

Other financing activities

     (122     (258
  

 

 

 

 

 

 

 

Cash used by financing activities

     (2,382     (3,340
  

 

 

 

 

 

 

 

INCREASE IN CASH AND EQUIVALENTS

     153        (844

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD

     2,155        2,618   
  

 

 

 

 

 

 

 

CASH AND EQUIVALENTS AT END OF PERIOD

   $ 2,308      $ 1,774   
  

 

 

 

 

 

 

 

See accompanying notes.

 

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TIME WARNER INC.

CONSOLIDATED STATEMENT OF EQUITY

Nine Months Ended September 30,

(Unaudited; millions)

 

                                                                                                                                                     
     2016   2015
     Time Warner
Shareholders
  Noncontrolling
Interests (a)
   Total Equity   Time Warner
Shareholders
  Noncontrolling
Interests
   Total Equity

BALANCE AT BEGINNING OF PERIOD

   $ 23,619      $       $ 23,619        24,476      $       $ 24,476   

Net income

     3,633        1         3,634        2,976                2,976   

Other comprehensive loss

     (168             (168     (228             (228

Cash dividends

     (954             (954     (869             (869

Common stock repurchases

     (2,138             (2,138     (2,999             (2,999

Other, primarily related to stock options and restricted stock units

     286                286        292                292   
  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

BALANCE AT END OF PERIOD

   $ 24,278      $ 1       $ 24,279      $ 23,648      $       $ 23,648   
  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

(a) Net income excludes losses of $2 million and $1 million for the nine months ended September 30, 2016 and September 30, 2015, respectively, relating to redeemable noncontrolling interests.

See accompanying notes.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Time Warner Inc. (“Time Warner” or the “Company”) is a leading media and entertainment company, whose businesses include television networks, and film and TV entertainment. Time Warner classifies its operations into three reportable segments: Turner : consisting principally of cable networks and digital media properties; Home Box Office : consisting principally of premium pay television and over-the-top (“OTT”) services domestically and premium pay, basic tier television and OTT services internationally; and Warner Bros. : consisting principally of television, feature film, home video and videogame production and distribution.

Basis of Presentation

Interim Financial Statements

The consolidated financial statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles (“GAAP”) applicable to interim periods. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Time Warner included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).

Basis of Consolidation

The consolidated financial statements include all the assets, liabilities, revenues, expenses and cash flows of entities in which Time Warner has a controlling interest (“subsidiaries”). Intercompany accounts and transactions between consolidated entities have been eliminated in consolidation.

Reclassifications

Certain reclassifications have been made to the prior year financial information to conform to the September 30, 2016 presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. Actual results could differ from those estimates.

Significant estimates and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, multiple-element transactions, allowances for doubtful accounts, depreciation and amortization, the determination of ultimate revenues as it relates to amortization or impairment of capitalized film and programming costs and participations and residuals, home video and videogame product returns, business combinations, pension and other postretirement benefits, equity-based compensation, income taxes, contingencies, litigation matters, reporting revenue for certain transactions on a gross versus net basis, and the determination of whether the Company should consolidate certain entities.

Venezuela Currency

During the quarter ended March 31, 2015, the Company recognized a pretax foreign exchange loss of $22 million in the Consolidated Statement of Operations related to a change in the foreign currency exchange rate the Company used to remeasure its Venezuelan net monetary assets from the SICAD 2 rate to the Simadi rate. Approximately $15 million of such loss related to cash balances.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Accounting Guidance Adopted in 2016

Equity Method of Accounting

In March 2016, guidance was issued that changes the requirements for equity method accounting when an investment qualifies for use of the equity method as a result of an increase in the investor’s ownership interest in or degree of influence over an investee. The guidance (i) eliminates the need to retroactively apply the equity method of accounting upon qualifying for such treatment, (ii) requires that the cost of acquiring the additional interest in an investee be added to the basis of the previously held interest and (iii) requires that unrealized holding gains or losses for available-for-sale equity securities that qualify for the equity method of accounting be recognized in earnings at the date the investment becomes qualified for use of the equity method of accounting. The Company adopted this guidance on January 1, 2016 on a prospective basis and it did not impact the Company’s consolidated financial statements.

Accounting Guidance Not Yet Adopted

Classification of Certain Cash Receipts and Cash Payments

In August 2016, guidance was issued that clarifies the presentation of certain cash receipts and payments in a company’s statement of cash flows. The guidance primarily relates to the classification of cash flows associated with certain (i) debt transactions, (ii) contingent consideration arrangements related to business combinations, (iii) insurance claims and policies, (iv) distributions received from equity method investees and (v) securitization transactions. The guidance will become effective on a retrospective basis for the Company on January 1, 2018, although early adoption is permitted. The Company is evaluating the impact the new guidance will have on its Consolidated Statement of Cash Flows.

Share-Based Payments

In March 2016, guidance was issued that changes the reporting for certain aspects of share-based payments. One aspect of the guidance, which will become effective on a prospective basis beginning on January 1, 2017, requires that the income tax effects of share-based awards be recognized in the income statement when the awards vest or are settled. Under the current guidance, excess tax benefits and deficiencies have been recognized in Additional paid-in capital in the Consolidated Balance Sheet. For the year ended December 31, 2015, the amount of excess tax benefits, net of deficiencies, recognized in Additional paid-in capital was $150 million. Another aspect of the new guidance, which the Company will adopt on a prospective basis beginning on January 1, 2017, requires that excess tax benefits be classified as a cash flow from operating activities in the Consolidated Statement of Cash Flows. Under the current guidance, excess tax benefits have been classified as a cash flow from financing activities. Excess tax benefits presented as a cash flow from financing activities were $151 million for the year ended December 31, 2015. The other aspects of this new guidance are not expected to have a material effect on the Company’s consolidated financial statements.

Accounting for Leases

In February 2016, guidance was issued regarding accounting for leases. The main difference between the current guidance and the new guidance is the recognition by a lessee of lease assets and liabilities for those leases it classified as operating leases under the current guidance. Under the new guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease as well as the lessor accounting model have not significantly changed from current guidance. This guidance also requires qualitative and quantitative disclosures of key information about leasing arrangements. The new guidance will become effective on a modified retrospective basis for the Company on January 1, 2019. The Company is evaluating the impact the new guidance will have on its consolidated financial statements.

Recognition and Measurement of Financial Assets and Liabilities

In January 2016, guidance was issued that makes limited changes to the accounting for financial instruments. The changes primarily relate to (i) the requirement to measure equity investments in unconsolidated subsidiaries, other than those accounted for under the equity method of accounting, at fair value, with changes in the fair value recognized in earnings, (ii) an alternative approach for the measurement of equity investments that do not have a readily determinable fair value, (iii) the elimination of the other-than-temporary impairment model and its replacement with a requirement to perform a qualitative assessment to identify the impairment of equity investments, and a requirement to recognize impairment losses in earnings based on the difference between the fair value and the carrying value of the equity investment, (iv) the elimination of the requirement to disclose the methods and

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

significant assumptions used to estimate the fair value of financial instruments measured at amortized cost, (v) the addition of a requirement to use the exit price concept when measuring the fair value of financial instruments for disclosure purposes and (vi) the addition of a requirement to present financial assets and financial liabilities separately in the notes to the financial statements, grouped by measurement category (e.g., fair value, amortized cost, lower of cost or market) and by form of financial asset (e.g., loans, securities). This guidance will become effective for the Company on January 1, 2018. The Company does not expect the new guidance to have a material impact on its consolidated financial statements.

Revenue Recognition

In May 2014, guidance was issued that establishes a new revenue recognition framework in GAAP for all companies and industries. The core principle of the guidance is that an entity should recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to receive for those goods or services. The guidance includes a five-step framework to determine the timing and amount of revenue to recognize related to contracts with customers. In addition, this guidance requires new or expanded disclosures related to the judgments made by companies when following this framework. Based on the current guidance, the new framework will become effective on either a full or modified retrospective basis for the Company on January 1, 2018. Subsequent to the issuance of the May 2014 guidance, several clarifications and updates have been issued on this topic, the most recent of which was issued in May 2016. The Company is evaluating the impact the guidance will have on its consolidated financial statements.

 

2.

MERGER AGREEMENT WITH AT&T INC.

On October 22, 2016, Time Warner entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AT&T Inc. (“AT&T”). The Merger Agreement provides for the merger of a newly formed wholly owned subsidiary of AT&T with and into Time Warner, with Time Warner continuing as the surviving company in the merger. Immediately thereafter, Time Warner will merge with and into a limited liability company formed by AT&T, which will continue as the surviving entity and a wholly owned subsidiary of AT&T. The Merger Agreement was unanimously approved by all members of Time Warner’s and AT&T’s board of directors.

Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the merger, each share of the Company’s common stock, subject to certain exceptions set forth in the Merger Agreement, will be converted into the right to receive $53.75 in cash plus a number of shares of AT&T common stock equal to the Exchange Ratio. The Exchange Ratio is determined as follows:

 

   

If the Average AT&T Stock Price (as defined below) is an amount greater than $41.349, the Exchange Ratio will be 1.300;

 

   

If the Average AT&T Stock Price is an amount greater than or equal to $37.411 but less than or equal to $41.349, the Exchange Ratio will be an amount equal to the quotient obtained by dividing (x) $53.75 by (y) the Average AT&T Stock Price; or

 

   

If the Average AT&T Stock Price is an amount less than $37.411, the Exchange Ratio will be 1.437.

“Average AT&T Stock Price” means the average of the volume weighted averages of the trading prices of AT&T Common Stock on the New York Stock Exchange on each of the fifteen consecutive trading days ending on (and including) the trading day that is three trading days prior to the date of the effective time of the merger.

The transaction is expected to close before year-end 2017. Consummation of the merger is subject to various conditions, including, among others, customary conditions relating to the adoption of the Merger Agreement by the requisite vote of the Time Warner stockholders and the receipt of certain antitrust and other regulatory approvals. Should Time Warner terminate the Merger Agreement in specified circumstances, including in order to consummate a competing transaction, Time Warner will be required to pay AT&T a termination fee equal to $1.725 billion.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

3.

BUSINESS DISPOSITIONS AND ACQUISITIONS

Hulu

On August 2, 2016, Time Warner purchased a 10% ownership interest in Hulu, LLC (“Hulu”), a company that provides OTT video services, for $590 million in cash, including transaction costs. Time Warner accounts for this investment under the equity method of accounting.

Fandango

In April 2016, Warner Bros. sold its Flixster business to Fandango Media, LLC (“Fandango”), a subsidiary of NBCUniversal Media LLC, in exchange for a 25% interest in Fandango. For the nine months ended September 30, 2016, Warner Bros. recorded a pre-tax gain of approximately $90 million in connection with this transaction.

Summary of Discontinued Operations

For the three months ended September 30, 2016, Discontinued operations, net of tax was expense of $5 million ($0.01 of diluted loss from discontinued operations per common share) related to pension settlement charges related to businesses the Company previously disposed of. For the nine months ended September 30, 2016, Discontinued operations, net of tax was income of $35 million ($0.04 of diluted income from discontinued operations per common share), which also included the recognition of additional tax benefits associated with certain foreign tax attributes of Warner Music Group (“WMG”), which the Company disposed of in 2004.

For the nine months ended September 30, 2015, Discontinued operations, net of tax was income of $37 million ($0.04 of diluted income from discontinued operations per common share), primarily related to the final resolution of a tax indemnification obligation associated with the disposition of WMG.

 

4.

INVESTMENTS

Central European Media Enterprises Ltd.

As of September 30, 2016, the Company had an approximate 47% voting interest in Central European Media Enterprises Ltd.’s (“CME”) common stock and an approximate 76% economic interest in CME on a diluted basis.

As of September 30, 2016, the Company owned 61.4 million shares of CME’s Class A common stock and 1 share of Series A convertible preferred stock, which is convertible into 11.2 million shares of CME’s Class A common stock and votes with the Class A common stock on an as-converted basis. The Company accounts for its investment in CME’s Class A common stock and Series A convertible preferred stock under the equity method of accounting.

As of September 30, 2016, the Company owned all of the outstanding shares of CME’s Series B convertible redeemable preferred shares, which are non-voting and may be converted into 104.3 million shares of CME’s Class A common stock at the Company’s option at any time after June 25, 2016. The Company accounts for its investment in CME’s Series B convertible redeemable preferred shares under the cost method of accounting.

As of September 30, 2016, the Company held 101 million warrants each to purchase one share of CME Class A common stock. The warrants, which became exercisable in May 2016, have a four-year term that expires in May 2018 and an exercise price of $1.00 per share and do not contain any voting rights. The warrants are carried at fair value in the Consolidated Balance Sheet, which at September 30, 2016, was $135 million.

As of September 30, 2016, the Company has guaranteed an aggregate amount of €955 million of CME’s obligations. In connection with these guarantees, the Company recognized a liability at the inception of each respective arrangement based on the estimated fair value of the guarantee. At September 30, 2016, the carrying value of liabilities associated with such guarantees was $184 million.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Recent Transactions

On February 19, 2016, CME Media Enterprises B.V. (“CME BV”), a subsidiary of Central European Media Enterprises Ltd. (“CME”), entered into a credit agreement (the “2016 Credit Agreement”) with third-party financial institutions for an approximate €470 million senior unsecured term loan (the “2016 Term Loan”) that was funded in April 2016 and matures on February 19, 2021. Time Warner has guaranteed CME BV’s obligations under the 2016 Credit Agreement for a fee equal to a rate based on CME’s net leverage, which initially was 10.5%, less the interest rate on the 2016 Term Loan, which initially was 1.78%, to be paid to Time Warner semi-annually. CME BV must pay a portion of the fee in cash and may, at CME BV’s option, pay the remainder in cash or in kind. In April 2016, CME used cash on hand and the proceeds of the 2016 Term Loan to repay in their entirety both its Senior Secured Notes due 2017 (the “Senior Secured Notes”) and the term loan Time Warner provided CME in 2014 (the “TW Term Loan”), which also was due in 2017. Time Warner received approximately $485 million in connection with CME’s repayment of the Senior Secured Notes and the TW Term Loan. As consideration for assisting CME in refinancing its debt due in 2017, Time Warner earned a fee equal to 1% of the aggregate principal amount of the 2016 Term Loan borrowed at funding. Prior to the funding, CME BV entered into unsecured interest rate hedge arrangements to protect against changes in the interest rate on the 2016 Term Loan during its term, and Time Warner has guaranteed CME BV’s obligations under such arrangements.

In addition, on February 19, 2016, CME entered into an amendment to extend the maturity of its €251 million senior unsecured term loan obtained in 2014 from third-party financial institutions (the “2014 Term Loan”) from November 1, 2017 to November 1, 2018. Time Warner continues to guarantee CME’s obligations under the 2014 Term Loan.

Time Warner and CME also agreed on February 19, 2016 to amend and restate the $115 million revolving credit facility Time Warner provided CME in 2014 to reduce the size of the facility to $50 million as of January 1, 2018 and to extend its term from December 2017 to February 2021. Amounts outstanding under the revolving credit facility bear interest at a rate based on CME’s net leverage. Beginning in April 2016, CME must pay a portion of the interest for each applicable quarterly interest period in cash and may, at CME’s option, pay the remainder in kind by adding such amount to the outstanding principal amount of the revolving credit facility. As of September 30, 2016, there were no amounts outstanding under the revolving credit facility.

The Company recorded a pretax gain of $95 million in Investment gains (losses), net in the Consolidated Statement of Operations in the second quarter of 2016 in connection with these transactions. Additionally, when recognizing CME’s results in the second quarter of 2016 under the equity method of accounting, the Company recorded a pretax charge of $150 million in Other loss, net in the Consolidated Statement of Operations related to these transactions.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

5.

FAIR VALUE MEASUREMENTS

A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). The following table presents information about assets and liabilities required to be carried at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, respectively (millions):

 

                                                                                                                               
     September 30, 2016   December 31, 2015
     Level 1    Level 2   Level 3    Total   Level 1    Level 2   Level 3   Total

Assets:

                   

Trading securities:

                   

Diversified equity securities (a)

   $ 163       $      $       $ 163      $ 179       $      $      $ 179   

Available-for-sale securities:

                   

Equity securities

     16                        16        15                       15   

Debt securities

             79                79                70               70   

Derivatives:

                   

Foreign exchange contracts

             70                70                79               79   

Other

                    136         136                       180        180   

Liabilities:

                   

Derivatives:

                   

Foreign exchange contracts

             (32             (32             (2            (2

Other

                                                  (7     (7
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Total

   $ 179       $ 117      $ 136       $ 432      $ 194       $ 147      $ 173      $ 514   
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Consists of investments related to deferred compensation.

The Company primarily applies the market approach for valuing recurring fair value measurements. As of September 30, 2016 and December 31, 2015, assets valued using significant unobservable inputs (Level 3) primarily related to warrants to purchase shares of Class A common stock of CME valued at $135 million and $179 million, respectively. The Company estimates the fair value of these warrants using a Monte Carlo Simulation model. Significant unobservable inputs used in the fair value measurement at September 30, 2016 are an expected term of 0.96 years and an expected volatility of approximately 57%. As of September 30, 2016 and December 31, 2015, the other Level 3 assets consisted of equity instruments held by employees of a former subsidiary of the Company. As of December 31, 2015, Level 3 liabilities consisted of liabilities for contingent consideration and options to redeem securities.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table reconciles the beginning and ending balances of net derivative assets and liabilities classified as Level 3 and identifies the total gains (losses) the Company recognized during the nine months ended September 30, 2016 and 2015 on such assets and liabilities that were included in the Consolidated Balance Sheet as of September 30, 2016 and 2015 (millions):

 

                                                         
     September 30,
2016
  September 30,
2015

Balance as of the beginning of the period

   $ 173      $ 241   

Total losses, net:

    

Included in operating income

     2        (1

Included in other loss, net

     (44     (112

Included in other comprehensive loss

              

Purchases

              

Settlements

     5        (2

Issuances

              
  

 

 

 

 

 

 

 

Balance as of the end of the period

   $ 136      $ 126   
  

 

 

 

 

 

 

 

Net loss for the period included in net income related to assets and liabilities

still held as of the end of the period

   $ (44   $ (113
  

 

 

 

 

 

 

 

Other Financial Instruments

The Company’s other financial instruments, including debt, are not required to be carried at fair value. Based on the interest rates prevailing at September 30, 2016, the fair value of Time Warner’s debt exceeded its carrying value by approximately $5.056 billion and, based on interest rates prevailing at December 31, 2015, the fair value of Time Warner’s debt exceeded its carrying value by approximately $2.490 billion. The fair value of Time Warner’s debt is considered a Level 2 measurement as it is based on observable market inputs such as current interest rates and, where available, actual sales transactions. Unrealized gains or losses on debt do not result in the realization or expenditure of cash and generally are not recognized in the consolidated financial statements unless the debt is retired prior to its maturity.

Information as of September 30, 2016 about the Company’s investments in CME that are not required to be carried at fair value on a recurring basis is as follows (millions):

 

                                                                                      
     Carrying Value    Fair Value    Fair Value
Hierarchy

Class A common stock (a)

   $       $ 168       Level 1

Series B convertible redeemable preferred shares

   $       $ 241       Level 2

 

(a)

Includes 1 share of Series A convertible preferred stock.

The fair values of the Company’s investments in CME’s Class A common stock (including Series A convertible preferred stock) and Series B convertible redeemable preferred shares are primarily determined by reference to the September 30, 2016 closing price of CME’s common stock.

The carrying value for the majority of the Company’s other financial instruments approximates fair value due to the short-term nature of the financial instruments or because the financial instruments are of a longer-term nature and are recorded on a discounted basis.

Non-Financial Instruments

The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories and property, plant and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill and indefinite-lived intangible assets), a non-financial instrument is required to be evaluated for impairment. If the Company determines that the non-financial instrument is impaired, the Company would be required to write down the non-financial instrument to its fair value.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

During the three and nine months ended September 30, 2016, the Company performed an impairment review of a broadcast license at an international subsidiary of Turner. As a result, during the three and nine months ended September 30, 2016, the Company recorded a noncash impairment of $25 million to write down the value of the asset to $10 million. During the three and nine months ended September 30, 2015, the Company performed an impairment review of certain intangible assets at an international subsidiary of Turner. As a result, during the three and nine months ended September 30, 2015, the Company recorded a noncash impairment of $1 million to completely write off the value of these assets. The resulting fair value measurements were considered to be Level 3 measurements and were determined using a discounted cash flow (“DCF”) methodology with assumptions for cash flows associated with the use and eventual disposition of the assets.

During the three and nine months ended September 30, 2016 and September 30, 2015, the Company also performed fair value measurements related to certain theatrical films and television programs. In determining the fair value of its theatrical films, the Company employs a DCF methodology that includes cash flow estimates of a film’s ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on the weighted average cost of capital of the respective business (e.g., Warner Bros.) plus a risk premium representing the risk associated with producing a particular theatrical film. The fair value of any theatrical films and television programs that management plans to abandon is zero. Because the primary determination of fair value is made using a DCF model, the resulting fair value is considered a Level 3 measurement. The following table presents certain theatrical film and television production costs, which were recorded as inventory in the Consolidated Balance Sheet, that were written down to fair value (millions):

 

                                                         
     Carrying value
before

write down
   Carrying value
after write down

Fair value measurements made during the three months ended September 30,:

     

2016

   $ 27       $   

2015

   $ 15       $   

Fair value measurements made during the nine months ended September 30,:

     

2016

   $ 89       $ 3   

2015

   $ 303       $ 210   

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

6.

INVENTORIES AND THEATRICAL FILM AND TELEVISION PRODUCTION COSTS

Inventories and theatrical film and television production costs consist of (millions):

 

                                                             
     September 30,
     2016     
    December 31,
     2015     
 

Inventories:

    

Programming costs, less amortization (a)

   $ 3,532      $ 3,067   

Other inventory, primarily DVDs and Blu-ray Discs

     253        263   
  

 

 

   

 

 

 

Total inventories

     3,785        3,330   

Less: current portion of inventory

     (1,915     (1,753
  

 

 

   

 

 

 

Total noncurrent inventories

     1,870        1,577   
  

 

 

   

 

 

 
    

Theatrical film production costs: (b)

    

Released, less amortization

     697        570   

Completed and not released

     684        374   

In production

     1,405        1,612   

Development and pre-production

     135        123   
    

Television production costs: (b)

    

Released, less amortization

     1,549        1,301   

Completed and not released

     813        872   

In production

     1,024        1,158   

Development and pre-production

     19        13   
  

 

 

   

 

 

 

Total theatrical film and television production costs

     6,326        6,023   
  

 

 

   

 

 

 

Total noncurrent inventories and theatrical film and television production costs

   $ 8,196      $ 7,600   
  

 

 

   

 

 

 

 

(a)

Includes the costs of certain programming rights, primarily sports, for which payments have been made prior to the related rights being received.

(b)

Does not include $552 million and $656 million of acquired film library intangible assets as of September 30, 2016 and December 31, 2015, respectively, which are included in Intangible assets subject to amortization, net in the Consolidated Balance Sheet.

 

7.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Time Warner uses derivative instruments, primarily forward contracts, to manage the risk associated with the volatility of future cash flows denominated in foreign currencies and changes in fair value resulting from changes in foreign currency exchange rates. The principal currencies being hedged include the British Pound, Euro, Australian Dollar and Canadian Dollar. Time Warner uses foreign exchange contracts that generally have maturities of three to 18 months to hedge various foreign exchange exposures, including the following: (i) variability in foreign-currency-denominated cash flows, such as the hedges of unremitted or forecasted royalty and license fees owed to Time Warner’s domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad or cash flows for certain film production costs denominated in a foreign currency (i.e., cash flow hedges), and (ii) currency risk associated with foreign-currency-denominated operating assets and liabilities (i.e., fair value hedges).

The Company also enters into derivative contracts that economically hedge certain of its foreign currency risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. These economic hedges are used primarily to offset the change in certain foreign-currency-denominated long-term receivables and certain foreign-currency-denominated intercompany debt due to changes in the underlying foreign exchange rates.

The translation of revenues and expenses denominated in the functional currency of a foreign subsidiary may result in fluctuations in the U.S. Dollar-equivalent value of such revenues and expenses as compared to prior periods. Such transactions are not eligible for qualifying hedge accounting treatment, and the Company does not economically hedge this exposure.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Net gains and losses from hedging activities recognized in the Consolidated Statement of Operations were as follows (millions):

 

     Three Months Ended September 30,   Nine Months Ended September 30,
             2016                   2015                   2016                   2015        

Gains (losses) recognized in:

        

Costs of revenues

   $             21      $             56      $             30      $             107   

Selling, general and administrative

     3        6        8        15   

Other loss, net

     (8     (10     (8     (20

Amounts included in Other loss, net include the impact of forward points and option premiums, which are excluded from the assessment of hedge effectiveness. Other amounts included in Other loss, net relate to hedges of foreign-currency-denominated debt and hedge ineffectiveness, which are not material.

The Company monitors its positions with, and the credit quality of, the financial institutions that are party to its financial transactions and has entered into collateral agreements with these counterparties to further protect the Company in the event of deterioration of the credit quality of such counterparties on outstanding transactions. Additionally, netting provisions are included in agreements in situations where the Company executes multiple contracts with the same counterparty. For such foreign exchange contracts, the Company offsets the fair values of the amounts owed to or due from the same counterparty and classifies the net amount as a net asset or net liability within Prepaid expenses and other current assets or Accounts payable and accrued liabilities, respectively, in the Consolidated Balance Sheet. The following is a summary of amounts recorded in the Consolidated Balance Sheet pertaining to Time Warner’s use of foreign currency derivatives at September 30, 2016 and December 31, 2015 (millions):

 

                                                                                                               
               September 30,
    2016 (a)    
  December 31,
    2015 (b)    

Prepaid expenses and other current assets

         $ 70      $ 79   

Accounts payable and accrued liabilities

           (32     (2

 

(a)

Includes $207 million ($195 million of qualifying hedges and $12 million of economic hedges) and $169 million ($164 million of qualifying hedges and $5 million of economic hedges) of foreign exchange derivative contracts in asset and liability positions, respectively.

(b)

Includes $198 million ($194 million of qualifying hedges and $4 million of economic hedges) and $121 million ($116 million of qualifying hedges and $5 million of economic hedges) of foreign exchange derivative contracts in asset and liability positions, respectively.

At September 30, 2016 and December 31, 2015, $14 million of losses and $29 million of gains, respectively, related to cash flow hedges are recorded in Accumulated other comprehensive loss, net and are expected to be recognized in earnings at the same time the hedged items affect earnings. Included in Accumulated other comprehensive loss, net at September 30, 2016 and December 31, 2015 are net losses of $2 million and $9 million, respectively, related to hedges of cash flows associated with films that are not expected to be released within the next twelve months.

At September 30, 2016, the carrying amount of the Company’s €700 million aggregate principal amount of debt due 2023 is designated as a hedge of the variability in the Company’s Euro-denominated net investments. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within Accumulated other comprehensive loss, net in the Consolidated Balance Sheet. For the three and nine months ended September 30, 2016, such amounts totaled $0 and $17 million of losses, respectively. For the three and nine months ended September 30, 2015, such amounts totaled $21 million of losses.

 

8.

LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

2016 Debt Offering

On May 10, 2016, Time Warner issued $800 million aggregate principal amount of 2.95% Notes due 2026 under a shelf registration statement. The notes issued are guaranteed, on an unsecured basis, by Historic TW Inc. (“Historic TW”). In addition, Turner and Home Box Office guarantee, on an unsecured basis, Historic TW’s guarantee of the notes. The net proceeds to the Company from the debt offering were $785 million, after deducting underwriting discounts and offering expenses.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

9.

SHAREHOLDERS’ EQUITY

Common Stock Repurchase Program

In January 2016, Time Warner’s Board of Directors authorized up to $5.0 billion of share repurchases beginning January 1, 2016, including the amount remaining at December 31, 2015 under the prior authorization. Purchases under the stock repurchase program could be made on the open market or in privately negotiated transactions, with the size and timing of these purchases based on a number of factors, including price and business and market conditions. From January 1, 2016 through October 21, 2016, the Company repurchased 31 million shares of common stock for $2.307 billion pursuant to trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In connection with entering into the Merger Agreement, the Company discontinued share repurchases.

Comprehensive Income (Loss)

Comprehensive income (loss) is reported in the Consolidated Statement of Comprehensive Income and consists of Net income and other gains and losses affecting shareholders’ equity that, under GAAP, are excluded from Net income. For Time Warner, such items consist primarily of foreign currency translation gains (losses), unrealized gains and losses on certain derivative financial instruments and equity securities, and changes in benefit plan obligations.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following summary sets forth the activity within Other comprehensive loss (millions):

 

                                                                                                                             
     Three Months Ended September 30, 2016   Nine Months Ended September 30, 2016
     Pretax   Tax
(provision)
benefit
  Net of tax   Pretax   Tax
(provision)
benefit
  Net of tax

Unrealized losses on foreign currency translation

   $ (45   $ 7      $ (38   $ (54   $ 12      $ (42

Unrealized losses on benefit obligations

     (224     81        (143     (198     73        (125

Reclassification adjustment for losses on benefit obligations realized in net income (a)

     26        (9     17        43        (15     28   

Unrealized gains (losses) on derivative financial instruments

     4        (2     2        (11     3        (8

Reclassification adjustment for gains on derivative financial instruments realized in net income (c)

     (8     3        (5     (34     13        (21
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

   $ (247   $ 80      $ (167   $ (254   $ 86      $ (168
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Three Months Ended September 30, 2015   Nine Months Ended September 30, 2015
     Pretax   Tax
(provision)
benefit
  Net of tax   Pretax   Tax
(provision)
benefit
  Net of tax

Unrealized losses on foreign currency translation

   $ (29   $ 15      $ (14   $ (291   $ 33      $ (258

Reclassification adjustment for losses on foreign currency translation realized in net income (b)

                          5               5   

Unrealized gains (losses) on securities

     (4     1        (3     3        (1     2   

Unrealized losses on benefit obligations

     (1            (1     (4     2        (2

Reclassification adjustment for losses on benefit obligations realized in net income (a)

     8        (3     5        25        (9     16   

Unrealized gains on derivative financial instruments

     87        (31     56        115        (41     74   

Reclassification adjustment for gains on derivative financial instruments realized in net income (c)

     (62     23        (39     (102     37        (65
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

   $ (1   $ 5      $ 4      $ (249   $ 21      $ (228
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Pretax (gains) losses included in Selling, general and administrative expenses, with the exception of $8 million included in Discontinued operations, net of tax for the three and nine months ended September 30, 2016.

(b)

Pretax (gains) losses included in Gain (loss) on operating assets, net.

(c)

Pretax (gains) losses included in Selling, general and administrative expenses, Costs of revenues and Other loss, net are as follows (millions):

 

                                                                                               
     Three Months Ended September 30,   Nine Months Ended September 30,
     2016   2015   2016   2015

Selling, general and administrative expenses

   $ 3      $ (6   $ 2      $ (15

Costs of revenues

     (12     (56     (22     (87

Other loss, net

     1               (14       

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

10.

INCOME PER COMMON SHARE

Set forth below is a reconciliation of Basic and Diluted income per common share from continuing operations attributable to Time Warner Inc. common shareholders (millions, except per share amounts):

 

                                                                                                   
     Three Months Ended September 30,   Nine Months Ended September 30,
     2016   2015   2016   2015

Income from continuing operations attributable to Time

Warner Inc. shareholders

   $ 1,472      $ 1,035      $ 3,598      $ 2,939   

Income allocated to participating securities

     (2     (3     (8     (8
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to Time

Warner Inc. common shareholders— basic

   $ 1,470      $ 1,032      $ 3,590      $ 2,931   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average basic common shares outstanding

     776.2        810.2        783.8        820.4   

Dilutive effect of equity awards

     11.3        13.9        11.3        15.1   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average diluted common shares outstanding

     787.5        824.1        795.1        835.5   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive common share equivalents excluded from

computation

     5        5        6        4   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share from continuing operations

attributable to Time Warner Inc. common shareholders:

        

Basic

   $ 1.89      $ 1.27      $ 4.58      $ 3.57   

Diluted

   $ 1.87      $ 1.26      $ 4.53      $ 3.52   

 

11.

EQUITY-BASED COMPENSATION

The table below summarizes the weighted-average assumptions used to value stock options at their grant date and the weighted-average grant date fair value per share:

 

                                                                           
            Nine Months Ended September 30,
                        2016                           2015            

Expected volatility

        26.0     25.0

Expected term to exercise from grant date

        6.20 year s       5.80 year s  

Risk-free rate

        1.5     1.8

Expected dividend yield

        2.6     1.7

Weighted average grant date fair value per option

      $ 12.26       $ 18.17    

The following table sets forth the weighted-average grant date fair value of restricted stock units (“RSUs”) and target performance stock units (“PSUs”) granted during the period. For PSUs, the service inception date precedes the grant date and requires the Company to apply mark-to-market accounting that is reflected in the grant date fair values presented:

 

                                     
     Nine Months Ended September 30,
                 2016                            2015            

RSUs

   $ 62.90       $ 83.86   

PSUs

     88.13         81.04   

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table sets forth the number of stock options, RSUs and target PSUs granted (millions):

 

                                     
         Nine Months Ended September 30,    
     2016    2015

Stock options

     2.3         3.4   

RSUs

     2.9         2.0   

PSUs

     0.2         0.1   

The impact on Operating income for equity-based compensation awards is as follows (millions):

 

                                                                           
         Three Months Ended September 30,            Nine Months Ended September 30,    
     2016    2015    2016    2015

Stock options

     6         7       $ 34       $ 32   

RSUs and PSUs

   $ 39       $ 12         167         122   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total impact on operating income

   $ 45       $ 19       $ 201       $ 154   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Tax benefit recognized

   $ 15       $ 6       $ 70       $ 54   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total unrecognized compensation cost related to unvested Time Warner stock option awards as of September 30, 2016, without taking into account expected forfeitures, is $59 million and is expected to be recognized over a weighted-average period between one and two years. Total unrecognized compensation cost related to unvested RSUs and target PSUs as of September 30, 2016, without taking into account expected forfeitures, is $216 million and is expected to be recognized over a weighted-average period between one and two years.

 

12.

BENEFIT PLANS

Components of Net Periodic Benefit Costs

A summary of the components of the net periodic benefit costs from continuing operations recognized for substantially all of Time Warner’s defined benefit pension plans for the three and nine months ended September 30, 2016 and 2015 is as follows (millions):

 

                                                                           
         Three Months Ended September 30,           Nine Months Ended September 30,    
     2016   2015   2016   2015

Service cost

   $      $ 1      $ 2      $ 3   

Interest cost

     21        21        64        63   

Expected return on plan assets

     (22     (23     (64     (69

Amortization of prior service cost

     1        1        1        1   

Amortization of net loss

     4        4        13        13   

Settlements

     10               10          
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit costs (a)

   $ 14      $ 4      $ 26      $ 11   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions

   $ 8      $ 8      $ 23      $ 24   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Excludes net periodic benefit costs related to discontinued operations of $3 million and $10 million for the three and nine months ended September 30, 2016, respectively, and $1 million and $4 million for the three and nine months ended September 30, 2015, respectively, primarily related to employees and former employees of Time Inc. These amounts have been reflected in Other loss, net in the Consolidated Statement of Operations. In addition, net periodic benefit costs for the three and nine months ended September 30, 2016 also excludes $8 million of pension settlement charges related to businesses the Company previously disposed of. These amounts have been reflected in Discontinued Operations, net of tax, in the Consolidated Statement of Operations.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

13.

RESTRUCTURING AND SEVERANCE COSTS

The Company’s Restructuring and severance costs primarily related to employee termination costs, ranging from senior executives to line personnel, and other exit costs, including lease terminations and real estate consolidations. Restructuring and severance costs expensed as incurred for the three and nine months ended September 30, 2016 and 2015 are as follows (millions):

 

                                                                                                                           
     Three Months Ended September 30,    Nine Months Ended September 30,
     2016    2015    2016    2015

Turner

   $ 8       $ 5       $ 15       $ 23   

Home Box Office

                     41         5   

Warner Bros.

     1         1         6         3   

Corporate

     2         3         2           
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total restructuring and severance costs

   $ 11       $ 9       $ 64       $ 31   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

     Three Months Ended September 30,    Nine Months Ended September 30,
     2016    2015    2016    2015

2016 initiatives

   $ 11       $       $ 63       $   

2015 and prior initiatives

             9         1         31   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total restructuring and severance costs

   $ 11       $ 9       $ 64       $ 31   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Selected information relating to accrued restructuring and severance costs is as follows (millions):

 

                                                                                      
     Employee
    Terminations    
      Other Exit Costs           Total    

Remaining liability as of December 31, 2015

   $ 239      $ 14      $ 253   

Net accruals

     63        1        64   

Cash paid

     (156     (7     (163
  

 

 

 

 

 

 

 

 

 

 

 

Remaining liability as of September 30, 2016

   $ 146      $ 8      $ 154   
  

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2016, of the remaining $154 million liability, $99 million was classified as a current liability in the Consolidated Balance Sheet, with the remaining $55 million classified as a long-term liability. Amounts classified as long-term are expected to be paid through 2019.

 

14.

SEGMENT INFORMATION

Time Warner classifies its operations into three reportable segments: Turner : consisting principally of cable networks and digital media properties; Home Box Office : consisting principally of premium pay television and OTT services domestically and premium pay, basic tier television and OTT services internationally; and Warner Bros. : consisting principally of television, feature film, home video and videogame production and distribution. Time Warner’s reportable segments have been determined in accordance with its internal management structure and the financial information that is evaluated regularly by the Company’s chief operating decision maker.

In the ordinary course of business, Time Warner’s reportable segments enter into transactions with one another. The most common types of intersegment transactions include the Warner Bros. segment generating revenues by licensing television and theatrical programming to the Turner and Home Box Office segments. While intersegment transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses or assets recognized by the segment that is the counterparty to the transaction) are eliminated in consolidation and, therefore, do not affect consolidated results.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Information as to the Revenues, intersegment revenues, Operating Income (Loss) and Assets of Time Warner’s reportable segments is set forth below (millions):

 

                                                                           
         Three Months Ended September 30,           Nine Months Ended September 30,    
     2016   2015   2016   2015

Revenues

        

Turner

   $ 2,610      $ 2,398      $ 8,526      $ 7,935   

Home Box Office

     1,426        1,367        4,399        4,203   

Warner Bros.

     3,402        3,190        9,169        9,687   

Intersegment eliminations

     (271     (391     (667     (786
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

   $ 7,167      $ 6,564      $ 21,427      $ 21,039   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         Three Months Ended September 30,           Nine Months Ended September 30,    
     2016   2015   2016   2015

Intersegment Revenues

        

Turner

   $ 25      $ 23      $ 79      $ 81   

Home Box Office

     (3     4        2        22   

Warner Bros.

     249        364        586        683   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total intersegment revenues

   $ 271      $ 391      $ 667      $ 786   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         Three Months Ended September 30,           Nine Months Ended September 30,    
     2016   2015   2016   2015

Operating Income (Loss)

        

Turner

   $ 1,162      $ 1,072      $ 3,531      $ 3,310   

Home Box Office

     530        519        1,488        1,485   

Warner Bros.

     428        385        1,160        1,050   

Corporate

     (95     (64     (330     (257

Intersegment eliminations

     (11     (78     7        (109
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income

   $ 2,014      $ 1,834      $ 5,856      $ 5,479   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                 September 30,    
2016
      December 31,    
2015

Assets

        

Turner

       $ 26,008      $ 25,559   

Home Box Office

         14,470        14,314   

Warner Bros.

         21,519        20,699   

Corporate

         3,767        3,276   
      

 

 

 

 

 

 

 

Total assets

       $ 65,764      $ 63,848   
      

 

 

 

 

 

 

 

 

44


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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

15.

COMMITMENTS AND CONTINGENCIES

Commitments

Six Flags

In connection with the Company’s former investment in the Six Flags theme parks located in Georgia and Texas (collectively, the “Parks”), in 1997, certain subsidiaries of the Company (including Historic TW and, in connection with the separation of Time Warner Cable Inc. in 2009, Warner Bros. Entertainment Inc.) agreed to guarantee (the “Six Flags Guarantee”) certain obligations of the partnerships that hold the Parks (the “Partnerships”) for the benefit of the limited partners in such Partnerships, including: annual payments made at the Parks or to the limited partners and additional obligations at the end of the respective terms for the Partnerships in 2027 and 2028 (the “Guaranteed Obligations”). The aggregate undiscounted estimated future cash flow requirements covered by the Six Flags Guarantee over the remaining term (through 2028) are $895 million (for a net present value of $435 million). To date, no payments have been made by the Company pursuant to the Six Flags Guarantee.

Six Flags Entertainment Corporation (formerly known as Six Flags, Inc. and Premier Parks Inc.) (“Six Flags”), which has the controlling interest in the Parks, has agreed, pursuant to a subordinated indemnity agreement (the “Subordinated Indemnity Agreement”), to guarantee the performance of the Guaranteed Obligations when due and to indemnify Historic TW, among others, if the Six Flags Guarantee is called upon. If Six Flags defaults in its indemnification obligations, Historic TW has the right to acquire control of the managing partner of the Parks. Six Flags’ obligations to Historic TW are further secured by its interest in all limited partnership units held by Six Flags.

Because the Six Flags Guarantee existed prior to December 31, 2002 and no modifications to the arrangements have been made since the date the guarantee came into existence, the Company is required to continue to account for the Guaranteed Obligations as a contingent liability. Based on its evaluation of the current facts and circumstances surrounding the Guaranteed Obligations and the Subordinated Indemnity Agreement, the Company is unable to predict the loss, if any, that may be incurred under the Guaranteed Obligations, and no liability for the arrangements has been recognized at September 30, 2016. Because of the specific circumstances surrounding the arrangements and the fact that no active or observable market exists for this type of financial guarantee, the Company is unable to determine a current fair value for the Guaranteed Obligations and related Subordinated Indemnity Agreement.

Contingencies

In the ordinary course of business, the Company and its subsidiaries are defendants in or parties to various legal claims, actions and proceedings. These claims, actions and proceedings are at varying stages of investigation, arbitration or adjudication, and involve a variety of areas of law.

On April 4, 2007, the National Labor Relations Board (“NLRB”) issued a complaint against CNN America Inc. (“CNN America”) and Team Video Services, LLC (“Team Video”) related to CNN America’s December 2003 and January 2004 terminations of its contractual relationships with Team Video, under which Team Video had provided electronic news gathering services in Washington, DC and New York, NY. The National Association of Broadcast Employees and Technicians, under which Team Video’s employees were unionized, initially filed charges of unfair labor practices with the NLRB in February 2004, alleging that CNN America and Team Video were joint employers, that CNN America was a successor employer to Team Video, and/or that CNN America discriminated in its hiring practices to avoid becoming a successor employer or due to specific individuals’ union affiliation or activities. In the complaint, the NLRB sought, among other things, the reinstatement of certain union members and monetary damages. On November 19, 2008, the presiding NLRB Administrative Law Judge (“ALJ”) issued a non-binding recommended decision and order finding CNN America liable. On September 15, 2014, a three-member panel of the NLRB affirmed the ALJ’s decision and adopted the ALJ’s order with certain modifications. On November 12, 2014, both CNN America and the NLRB General Counsel filed motions with the NLRB for reconsideration of the panel’s decision. On March 20, 2015, the NLRB granted the NLRB General Counsel’s motion for reconsideration to correct certain inadvertent errors in the panel’s decision, and it denied CNN America’s motion for reconsideration. On July 9, 2015, CNN America filed a notice of appeal with the U.S. Court of Appeals for the D.C. Circuit regarding the panel’s decision and the denial of CNN America’s motion for reconsideration.

The Company establishes an accrued liability for legal claims when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company has estimated a range of possible loss for legal claims for which the Company has determined a loss is probable or reasonably possible, including the matter disclosed above. The Company believes the estimate of the aggregate range of possible loss for such matters in excess of accrued liabilities is between $0 and $100 million at September 30, 2016. The estimated aggregate range of possible loss is subject to significant judgment and a variety of assumptions. The matters represented in the estimated aggregate range of possible loss will change from time to time and actual results may vary significantly from the current estimate.

In view of the inherent difficulty of predicting the outcome of litigation and claims, the Company often cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be. An adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.

Income Tax Uncertainties

During the nine months ended September 30, 2016, the Company recorded net decreases to income tax reserves of approximately $55 million. During this period, the Company recorded increases to income tax reserves of approximately $95 million that increased the effective tax rate for continuing operations as well as decreases of approximately $40 million related to discontinued foreign operations. In addition, during this period, the Company recorded net increases to interest reserves related to the income tax reserves of approximately $35 million.

In the Company’s judgment, uncertainties related to certain tax matters are reasonably possible of being resolved during the next twelve months. The effect of such resolution, which could vary based on the final terms and timing of actual settlements with taxing authorities, is estimated to be a reduction of recorded unrecognized tax benefits ranging from $0 to $15 million, most of which would decrease the Company’s effective tax rate.

 

16.

RELATED PARTY TRANSACTIONS

The Company has entered into certain transactions in the ordinary course of business with unconsolidated investees accounted for under the equity method of accounting. The transactions that generate revenue and expenses primarily relate to the licensing by the Warner Bros. segment of content to The CW broadcast network, Hulu, and certain international networks, including networks owned by CME. Transactions that generate interest income and other income primarily relate to financing transactions with CME. Amounts included in the consolidated financial statements resulting from transactions with related parties consist of (millions):

 

                                                                                   
     Three Months Ended September 30,   Nine Months Ended September 30,
     2016   2015   2016   2015

Revenues

   $ 112      $ 66      $ 351      $ 289   

Expenses

     (1     (1     (2     (3

Interest income

     26        33        94        93   

Other income

     2        5        11        13   

 

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Table of Contents

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

17.

ADDITIONAL FINANCIAL INFORMATION

Additional financial information with respect to cash payments and receipts, Interest expense, net, Other loss, net, Accounts payable and accrued liabilities and Other noncurrent liabilities is as follows (millions):

 

                                         
     Nine Months Ended September 30,
     2016   2015

Cash Flows

    

Cash payments made for interest

   $ (1,013   $ (918

Interest income received

     110        29   
  

 

 

 

 

 

 

 

Cash interest payments, net

   $ (903   $ (889
  

 

 

 

 

 

 

 

    

Cash payments made for income taxes

   $ (819   $ (830

Income tax refunds received

     124        108   

TWC tax sharing payments (a)

            (4
  

 

 

 

 

 

 

 

Cash tax payments, net

   $ (695   $ (726
  

 

 

 

 

 

 

 

 

(a)

Represents net amounts paid to TWC in accordance with a tax sharing agreement with TWC.

 

                                                                                   
     Three Months Ended September 30,   Nine Months Ended September 30,
                 2016                           2015                           2016                           2015            

Interest Expense, Net

        

Interest income

   $ 52      $ 52      $ 171      $ 161   

Interest expense

     (350     (346     (1,045     (1,035
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense, net

   $ (298   $ (294   $ (874   $ (874
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Three Months Ended September 30,   Nine Months Ended September 30,
     2016   2015   2016   2015

Other Loss, Net

        

Investment gains (losses), net

   $ 57      $ 15      $ 93      $ (70

Loss on equity method investees

     (59     (35     (261     (130

Premiums paid and costs incurred on debt redemption

            (21            (72

Other

     (25     (13     (30     (24
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other loss, net

   $ (27   $ (54   $ (198   $ (296
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

             September 30,
2016
  December 31,
2015

Accounts Payable and Accrued Liabilities

        

Accounts payable

       $ 554      $ 653   

Other accrued expenses

         1,711        1,946   

Participations payable

         2,498        2,422   

Programming costs payable

         792        712   

Accrued compensation

         855        957   

Accrued interest

         367        341   

Accrued income taxes

         130        157   
      

 

 

 

 

 

 

 

Total accounts payable and accrued liabilities

       $ 6,907      $ 7,188   
      

 

 

 

 

 

 

 

 

47


Table of Contents

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

                                         
     September 30,
2016
   December 31,
2015

Other Noncurrent Liabilities

     

Noncurrent tax and interest reserves

   $ 1,568       $ 1,535   

Participations payable

     1,621         1,512   

Programming costs payable

     901         816   

Noncurrent pension and post-retirement liabilities

     1,112         908   

Deferred compensation

     477         471   

Other noncurrent liabilities

     780         556   
  

 

 

 

  

 

 

 

Total other noncurrent liabilities

   $ 6,459       $ 5,798   
  

 

 

 

  

 

 

 

Accounting for Collaborative Arrangements

The Company’s collaborative arrangements primarily relate to arrangements entered into with third parties to jointly finance and distribute theatrical productions and an arrangement entered into with CBS Broadcasting, Inc. (“CBS”) and The National Collegiate Athletic Association (the “NCAA”).

For the Company’s collaborative arrangements entered into with third parties to jointly finance and distribute theatrical productions, net participation costs of $74 million were recorded in Costs of revenues for both the three months ended September 30, 2016 and 2015 and $192 million and $322 million were recorded in Costs of revenues for the nine months ended September 30, 2016 and 2015, respectively.

The arrangement among Turner, CBS and the NCAA provides Turner and CBS with rights to the NCAA Division I Men’s Basketball Championship Tournament (the “NCAA Tournament”) in the United States and its territories and possessions through 2032. The aggregate rights fee, production costs, advertising revenues and sponsorship revenues related to the NCAA Tournament and related programming are shared by Turner and CBS. However, if the amount paid for the rights fee and production costs, in any given year, exceeds advertising and sponsorship revenues for that year, CBS’ share of such shortfall is limited to specified annual amounts, ranging from approximately $30 million to $45 million.

 

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Table of Contents

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Overview

Set forth below are condensed consolidating financial statements presenting the financial position, results of operations and cash flows of (i) Time Warner Inc. (the “Parent Company”), (ii) Historic TW Inc. (in its own capacity and as successor by merger to Time Warner Companies, Inc.), Home Box Office, Inc., and Turner Broadcasting System, Inc., each a wholly owned subsidiary of the Parent Company (collectively, the “Guarantor Subsidiaries”), on a combined basis, (iii) the direct and indirect non-guarantor subsidiaries of the Parent Company (the “Non-Guarantor Subsidiaries”), on a combined basis, and (iv) the eliminations necessary to arrive at the information for Time Warner Inc. on a consolidated basis. The Guarantor Subsidiaries fully and unconditionally, jointly and severally guarantee securities issued under certain of the Company’s indentures on an unsecured basis.

There are no legal or regulatory restrictions on the Parent Company’s ability to obtain funds from any of its wholly owned subsidiaries through dividends, loans or advances.

Basis of Presentation

In presenting the condensed consolidating financial statements, the equity method of accounting has been applied to (i) the Parent Company’s interests in the Guarantor Subsidiaries and (ii) the Guarantor Subsidiaries’ interests in the Non-Guarantor Subsidiaries, where applicable, even though all such subsidiaries meet the requirements to be consolidated under U.S. generally accepted accounting principles. All intercompany balances and transactions between the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been eliminated, as shown in the column “Eliminations.”

The Parent Company’s accounting bases in all subsidiaries, including goodwill and identified intangible assets, have been “pushed down” to the applicable subsidiaries. Corporate overhead expenses have been reflected as expenses of the Parent Company and have not been allocated to the Guarantor Subsidiaries or the Non-Guarantor Subsidiaries. Interest income (expense) is determined based on outstanding debt and the relevant intercompany amounts at the respective subsidiary.

All direct and indirect domestic subsidiaries are included in Time Warner Inc.’s consolidated U.S. tax return. In the condensed consolidating financial statements, tax provision has been allocated based on each such subsidiary’s relative pretax income to the consolidated pretax income. With respect to the use of certain consolidated tax attributes (principally operating and capital loss carryforwards), such benefits have been allocated to the respective subsidiary that generated the taxable income permitting such use (i.e., pro-rata based on where the income was generated). For example, to the extent a Non-Guarantor Subsidiary generated a gain on the sale of a business for which the Parent Company utilized tax attributes to offset such gain, the tax attribute benefit would be allocated to that Non-Guarantor Subsidiary. Deferred taxes of the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been determined based on the temporary differences between the book and tax basis of the respective assets and liabilities of the applicable entities.

Certain transfers of cash between subsidiaries and their parent companies and intercompany dividends are reflected as cash flows from investing and financing activities in the accompanying Condensed Consolidating Statements of Cash Flows. All other intercompany activity is reflected in cash flows from operations.

Management believes that the allocations and adjustments noted above are reasonable. However, such allocations and adjustments may not be indicative of the actual amounts that would have been incurred had the Parent Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries operated independently.

 

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Table of Contents

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Balance Sheet

September 30, 2016

(Unaudited; millions)

 

                                                                                              
     Parent
    Company    
  Guarantor
  Subsidiaries  
  Non-
Guarantor
  Subsidiaries  
    Eliminations     Time
Warner
  Consolidated  

ASSETS

          

Current assets

          

Cash and equivalents

   $ 1,492      $ 19      $ 797      $      $ 2,308   

Receivables, net

     16        1,248        6,787        (20     8,031   

Inventories

            554        1,373        (12     1,915   

Prepaid expenses and other current assets

     513        54        443               1,010   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

     2,021        1,875        9,400        (32     13,264   

Noncurrent inventories and theatrical film and television production costs

            1,959        6,336        (99     8,196   

Investments in amounts due to and from consolidated subsidiaries

     47,265        11,606        13,064        (71,935       

Investments, including available-for-sale securities

     279        440        2,558        (6     3,271   

Property, plant and equipment, net

     51        389        2,042               2,482   

Intangible assets subject to amortization, net

                   809               809   

Intangible assets not subject to amortization

            2,007        4,998               7,005   

Goodwill

            9,880        17,814               27,694   

Other assets

     507        366        2,397        (227     3,043   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

   $ 50,123      $ 28,522      $ 59,418      $ (72,299   $ 65,764   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

          

Current liabilities

          

Accounts payable and accrued liabilities

   $ 700      $ 770      $ 5,483      $ (46   $ 6,907   

Deferred revenue

            64        591        (75     580   

Debt due within one year

     38        12        2               52   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

     738        846        6,076        (121     7,539   

Long-term debt

     20,531        3,880        8               24,419   

Deferred income taxes

     2,603        2,920        2,229        (5,149     2,603   

Deferred revenue

            23        413               436   

Other noncurrent liabilities

     1,973        2,057        3,779        (1,350     6,459   

Redeemable noncontrolling interest

                   29               29   

Equity

          

Due to (from) Time Warner Inc. and subsidiaries

            (51,920     205        51,715          

Other shareholders’ equity

     24,278        70,716        46,678        (117,394     24,278   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Time Warner Inc. shareholders’ equity

     24,278        18,796        46,883        (65,679     24,278   

Noncontrolling interest

                   1               1   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

     24,278        18,796        46,884        (65,679     24,279   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

   $ 50,123      $ 28,522      $ 59,418      $ (72,299   $ 65,764   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50


Table of Contents

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Balance Sheet

December 31, 2015

(Unaudited; millions)

 

                                                                                              
     Parent
    Company    
  Guarantor
  Subsidiaries  
  Non-Guarantor
  Subsidiaries  
    Eliminations     Time
Warner
  Consolidated  

ASSETS

          

Current assets

          

Cash and equivalents

   $ 976      $ 288      $ 891      $      $ 2,155   

Receivables, net

     100        983        6,340        (12     7,411   

Inventories

            496        1,263        (6     1,753   

Prepaid expenses and other current assets

     494        94        606               1,194   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

     1,570        1,861        9,100        (18     12,513   

Noncurrent inventories and theatrical film and television production costs

            1,807        5,891        (98     7,600   

Investments in amounts due to and from consolidated subsidiaries

     46,025        11,146        12,538        (69,709       

Investments, including available-for-sale securities

     281        389        1,951        (4     2,617   

Property, plant and equipment, net

     93        372        2,131               2,596   

Intangible assets subject to amortization, net

                   949               949   

Intangible assets not subject to amortization

            2,007        5,022               7,029   

Goodwill

            9,880        17,809               27,689   

Other assets

     406        306        2,396        (253     2,855   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

   $ 48,375      $ 27,768      $ 57,787      $ (70,082   $ 63,848   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

          

Current liabilities

          

Accounts payable and accrued liabilities

   $ 752      $ 982      $ 5,553      $ (99   $ 7,188   

Deferred revenue

            89        587        (60     616   

Debt due within one year

     34        159        5               198   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

     786        1,230        6,145        (159     8,002   

Long-term debt

     19,719        3,866        9               23,594   

Deferred income taxes

     2,454        2,786        2,069        (4,855     2,454   

Deferred revenue

                   358        (6     352   

Other noncurrent liabilities

     1,797        1,731        3,390        (1,120     5,798   

Redeemable noncontrolling interest

                   29               29   

Equity

          

Due to (from) Time Warner Inc. and subsidiaries

            (48,141     3,779        44,362          

Other shareholders’ equity

     23,619        66,296        42,008        (108,304     23,619   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

     23,619        18,155        45,787        (63,942     23,619   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

   $ 48,375      $ 27,768      $ 57,787      $ (70,082   $ 63,848   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51


Table of Contents

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Operations

For The Three Months Ended September 30, 2016

(Unaudited; millions)

 

                                                                                                                            
     Parent
Company
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Time
Warner
Consolidated

Revenues

   $      $ 1,767      $ 5,612      $ (212   $ 7,167   

Costs of revenues

            (754     (3,303     184        (3,873

Selling, general and administrative

     (74     (264     (865     24        (1,179

Amortization of intangible assets

                   (48            (48

Restructuring and severance costs

     (1     (4     (6            (11

Asset impairments

                   (30            (30

Gain (loss) on operating assets, net

                   (12            (12
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

     (75     745        1,348        (4     2,014   

Equity in pretax income (loss) of consolidated subsidiaries

     2,018        1,354        503        (3,875       

Interest expense, net

     (241     (76     17        2        (298

Other loss, net

     (13     3        (14     (3     (27
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

     1,689        2,026        1,854        (3,880     1,689   

Income tax provision

     (217     (349     (259     608        (217
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

     1,472        1,677        1,595        (3,272     1,472   

Discontinued operations, net of tax

     (5                          (5
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Time Warner Inc. shareholders

   $ 1,467      $ 1,677      $ 1,595      $ (3,272   $ 1,467   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Time Warner Inc. shareholders

   $ 1,300      $ 1,520      $ 1,555      $ (3,075   $ 1,300   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52


Table of Contents

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Operations

For The Three Months Ended September 30, 2015

(Unaudited; millions)

 

                                                                                                                            
     Parent
Company
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Time
Warner
Consolidated

Revenues

   $      $ 1,673      $ 5,031      $ (140   $ 6,564   

Costs of revenues

            (699     (2,937     110        (3,526

Selling, general and administrative

     (51     (267     (850     25        (1,143

Amortization of intangible assets

                   (47            (47

Restructuring and severance costs

     (3            (6            (9

Asset impairments

     (6            (1            (7

Gain (loss) on operating assets, net

            2                      2   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

     (60     709        1,190        (5     1,834   

Equity in pretax income (loss) of consolidated subsidiaries

     1,818        1,179        478        (3,475       

Interest expense, net

     (249     (78     31        2        (294

Other loss, net

     (23     (5     (27     1        (54
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

     1,486        1,805        1,672        (3,477     1,486   

Income tax provision

     (452     (547     (501     1,048        (452
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

   $ 1,034      $ 1,258      $ 1,171      $ (2,429   $ 1,034   

Less Net loss attributable to noncontrolling interests

     1        1        1        (2     1   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Time Warner Inc. shareholders

   $ 1,035      $ 1,259      $ 1,172      $ (2,431   $ 1,035   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

   $ 1,038      $ 1,233      $ 1,185      $ (2,418   $ 1,038   

Less Comprehensive loss attributable to noncontrolling interests

     1        1        1      $ (2     1   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Time Warner Inc. shareholders

   $ 1,039      $ 1,234      $ 1,186      $ (2,420   $ 1,039   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53


Table of Contents

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Operations

For The Nine Months Ended September 30, 2016

(Unaudited; millions)

 

                                                                                                                            
     Parent
Company
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Time
Warner
Consolidated

Revenues

   $      $ 5,655      $ 16,396      $ (624   $ 21,427   

Costs of revenues

            (2,562     (9,651     495        (11,718

Selling, general and administrative

     (274     (875     (2,658     119        (3,688

Amortization of intangible assets

                   (143            (143

Restructuring and severance costs

     (1     (44     (19            (64

Asset impairments

     (4            (31            (35

Gain (loss) on operating assets, net

                   77               77   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

     (279     2,174        3,971        (10     5,856   

Equity in pretax income (loss) of consolidated subsidiaries

     5,939        3,996        1,432        (11,367       

Interest expense, net

     (725     (227     73        5        (874

Other loss, net

     (151     3        (47     (3     (198
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

     4,784        5,946        5,429        (11,375     4,784   

Income tax provision

     (1,187     (1,521     (1,409     2,930        (1,187
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

     3,597        4,425        4,020        (8,445     3,597   

Discontinued operations, net of tax

     35        40        40        (80     35   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

     3,632        4,465        4,060        (8,525     3,632   

Less Net loss attributable to noncontrolling interests

     1        1        1        (2     1   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Time Warner Inc. shareholders

   $ 3,633      $ 4,466      $ 4,061      $ (8,527   $ 3,633   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

   $ 3,464      $ 4,315      $ 4,008      $ (8,323   $ 3,464   

Less Comprehensive loss attributable to noncontrolling interests

     1        1        1        (2     1   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Time Warner Inc. shareholders        

   $ 3,465      $ 4,316      $ 4,009      $ (8,325   $ 3,465   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54


Table of Contents

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Operations

For The Nine Months Ended September 30, 2015

(Unaudited; millions)

 

                                                                                                                            
     Parent
Company
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Time
Warner
Consolidated

Revenues

   $      $ 5,305      $ 16,251      $ (517   $ 21,039   

Costs of revenues

            (2,361     (9,866     425        (11,802

Selling, general and administrative

     (235     (815     (2,609     79        (3,580

Amortization of intangible assets

                   (138            (138

Restructuring and severance costs

     (3     (14     (14            (31

Asset impairments

     (6            (2            (8

Gain (loss) on operating assets, net

            2        (3            (1
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

     (244     2,117        3,619        (13     5,479   

Equity in pretax income (loss) of consolidated subsidiaries

     5,408        3,610        1,408        (10,426       

Interest expense, net

     (741     (234     95        6        (874

Other loss, net

     (114     18        (197     (3     (296
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

     4,309        5,511        4,925        (10,436     4,309   

Income tax provision

     (1,371     (1,692     (1,565     3,257        (1,371
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

     2,938        3,819        3,360        (7,179     2,938   

Discontinued operations, net of tax

     37        37        37        (74     37   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

     2,975        3,856        3,397        (7,253     2,975   

Less Net loss attributable to noncontrolling interests

     1        1        1        (2     1   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Time Warner Inc. shareholders

   $ 2,976      $ 3,857      $ 3,398      $ (7,255   $ 2,976   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

   $ 2,747      $ 3,741      $ 3,173      $ (6,914   $ 2,747   

Less Comprehensive loss attributable to noncontrolling interests

     1        1        1        (2     1   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Time Warner Inc. shareholders

   $ 2,748      $ 3,742      $ 3,174      $ (6,916   $ 2,748   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55


Table of Contents

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Cash Flows

For The Nine Months Ended September 30, 2016

(Unaudited; millions)

 

                                                                                                                            
     Parent
    Company    
  Guarantor
    Subsidiaries    
  Non-
Guarantor
    Subsidiaries    
      Eliminations       Time
Warner
    Consolidated    

OPERATIONS

          

Net income

   $ 3,632      $ 4,465      $ 4,060      $ (8,525   $ 3,632   

Less Discontinued operations, net of tax

     (35     (40     (40     80        (35
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

     3,597        4,425        4,020        (8,445     3,597   

Adjustments for noncash and nonoperating items:

          

Depreciation and amortization

     8        78        416               502   

Amortization of film and television costs

            2,018        3,889        (23     5,884   

Asset impairments

     4               31               35   

(Gain) loss on investments and other assets, net

     8        1        (83     (1     (75

Excess (deficiency) of distributions over equity in pretax income of consolidated subsidiaries, net of cash distributions

     (5,939     (3,996     (1,432     11,367          

Equity in losses of investee companies, net of cash distributions

     2               289        2        293   

Equity-based compensation

     68        60        73               201   

Deferred income taxes

     267        223        202        (425     267   

Changes in operating assets and liabilities, net of acquisitions

     170        (1,330     (3,532     (2,468     (7,160

Intercompany

            2,582        (2,582              
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operations from continuing operations

     (1,815     4,061        1,291        7        3,544   

Cash used by operations from discontinued operations

                   (10            (10
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operations

     (1,815     4,061        1,281        7        3,534   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

          

Investments in available-for-sale securities

     (2            (5            (7

Investments and acquisitions, net of cash acquired

     (23     (54     (898            (975

Capital expenditures

     (8     (55     (207            (270

Investment proceeds from available-for-sale securities

     1                             1   

Advances to (from) parent and consolidated subsidiaries

     4,317        (263            (4,054       

Other investment proceeds

     15        17        220               252   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used by investing activities

     4,300        (355     (890     (4,054     (999
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

          

Borrowings

     940               2               942   

Debt repayments

     (150     (150     (4            (304

Proceeds from exercise of stock options

     127                             127   

Excess tax benefit from equity instruments

     59                             59   

Principal payments on capital leases

            (10     (1            (11

Repurchases of common stock

     (2,119                          (2,119

Dividends paid

     (954                          (954

Other financing activities

     128        (36     (207     (7     (122

Change in due to/from parent and investment in segment

            (3,779     (275     4,054          
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used by financing activities

     (1,969     (3,975     (485     4,047        (2,382
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCREASE IN CASH AND EQUIVALENTS

     516        (269     (94            153   

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD

     976        288        891               2,155   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH AND EQUIVALENTS AT END OF PERIOD

   $ 1,492      $ 19      $ 797      $      $ 2,308   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Cash Flows

For The Nine Months Ended September 30, 2015

(Unaudited; millions)

 

                                                                                                                            
     Parent
    Company    
  Guarantor
    Subsidiaries    
  Non-
Guarantor
    Subsidiaries    
      Eliminations       Time
Warner
    Consolidated    

OPERATIONS

          

Net income

   $ 2,975      $ 3,856      $ 3,397      $ (7,253   $ 2,975   

Less Discontinued operations, net of tax

     (37     (37     (37     74        (37
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

     2,938        3,819        3,360        (7,179     2,938   

Adjustments for noncash and nonoperating items:

          

Depreciation and amortization

     10        80        411               501   

Amortization of film and television costs

            1,849        3,914        (24     5,739   

Asset impairments

     6               2               8   

(Gain) loss on investments and other assets, net

     26        (21     66               71   

Excess (deficiency) of distributions over equity in pretax income of consolidated subsidiaries, net of cash distributions

     (5,408     (3,610     (1,408     10,426          

Equity in losses of investee companies, net of cash distributions

     (8            164        4        160   

Equity-based compensation

     35        52        67               154   

Deferred income taxes

     (176     (173     (97     270        (176

Changes in operating assets and liabilities, net of acquisitions

     757        (192     (3,466     (3,493     (6,394

Intercompany

            1,833        (1,833              
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operations from continuing operations

     (1,820     3,637        1,180        4        3,001   

Cash used by operations from discontinued operations

     7               (11            (4
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operations

     (1,813     3,637        1,169        4        2,997   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

          

Investments in available-for-sale securities

     (22            (19            (41

Investments and acquisitions, net of cash acquired

     (33     (1     (310            (344

Capital expenditures

     (12     (49     (189            (250

Investment proceeds from available-for-sale securities

     1                             1   

Advances to (from) parent and consolidated subsidiaries

     4,022        275               (4,297       

Other investment proceeds

     34        72        27               133   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used by investing activities

     3,990        297        (491     (4,297     (501
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

          

Borrowings

     2,865               12               2,877   

Debt repayments

     (2,100            (241            (2,341

Proceeds from exercise of stock options

     148                             148   

Excess tax benefit from equity instruments

     141                             141   

Principal payments on capital leases

            (7     (1            (8

Repurchases of common stock

     (3,030                          (3,030

Dividends paid

     (869                          (869

Other financing activities

     (83     (21     (152     (2     (258

Change in due to/from parent and investment in segment

            (4,122     (173     4,295          
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used by financing activities

     (2,928     (4,150     (555     4,293        (3,340
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCREASE IN CASH AND EQUIVALENTS

     (751     (216     123               (844

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD

     1,623        290        705               2,618   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH AND EQUIVALENTS AT END OF PERIOD

   $ 872      $ 74      $ 828      $      $ 1,774   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Part II. Other Information

Item 1A. Risk Factors.

Except as disclosed below, there have been no material changes in the Company’s risk factors as previously disclosed in Part I, Item 1A. Risk Factors, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

The proposed acquisition of Time Warner by AT&T may cause disruption in Time Warner’s business.

On October 22, 2016, the Company entered into the merger agreement with AT&T, pursuant to which Time Warner will combine with AT&T in a stock-and-cash transaction. The merger agreement generally requires the Company to operate its business in the ordinary course pending consummation of the proposed merger and restricts the Company, without AT&T’s consent, from taking certain specified actions until the merger is completed. These restrictions may affect the Company’s ability to execute its business strategies and attain its financial and other goals and may impact its financial condition, results of operations and cash flows.

In connection with the pending merger, current and prospective employees of Time Warner may experience uncertainty about their future roles with the combined company following the merger, which may materially adversely affect the ability of Time Warner to attract and retain key personnel while the merger is pending. Key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company following the merger, and may depart prior to payments that may be due pursuant to the retention plan put in place in connection with the merger. Accordingly, no assurance can be given that Time Warner will be able to attract and retain key employees to the same extent that Time Warner has been able to in the past.

The proposed merger further could cause disruptions to the Company’s business or business relationships, which could have an adverse impact on results of operations. Parties with which the Company has business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with the Company. Parties with whom the Company otherwise may have sought to establish business relationships may seek alternative relationships with third parties.

The pursuit of the merger and the preparation for the integration may place a significant burden on management and internal resources. The diversion of management’s attention away from day-to-day business concerns could adversely affect the Company’s financial results.

The Company also could be subject to litigation related to the proposed merger, which could result in significant costs and expenses. In addition to potential litigation-related expenses, the Company has incurred and will continue to incur other significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed merger, and many of these fees and costs are payable regardless of whether or not the proposed merger is consummated.

Failure to complete the merger in a timely manner or at all could negatively impact the market price of the Time Warner common stock, as well as the Company’s future business and its financial condition, results of operations and cash flows.

The Company currently anticipates the merger will close before year-end 2017, but it cannot be certain when or if the conditions for the proposed merger will be satisfied or (if permissible under applicable law) waived. The merger cannot be completed until the conditions to closing are satisfied or (if permissible under applicable law) waived, including the adoption of the merger agreement by the holders of Time Warner common stock and the receipt of required antitrust and other regulatory approvals. In the event that the merger is not completed for any reason, the holders of Time Warner common stock will not receive any payment for their shares of Time Warner common stock in connection with the proposed merger. Instead, Time Warner will remain an independent public company and holders of Time Warner common stock will continue to own their shares of Time Warner common stock.

Additionally, if the merger is not consummated in a timely manner or at all, Time Warner’s ongoing business may be adversely affected as follows:

 

   

Time Warner may experience negative reactions from financial markets and the stock price could decline;

   

it may experience negative reactions from employees, customers, suppliers or other third parties;

   

management’s focus would have been diverted from pursuing other opportunities that could have been beneficial to Time Warner; and

   

the costs of pursuing the merger may be higher than anticipated and would be born entirely by Time Warner.

 

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Table of Contents

If the merger with AT&T is not completed, there can be no assurance that these risks will not materialize and will not materially adversely affect Time Warner’s stock price, business, financial conditions, results of operations or cash flows.

Time Warner and AT&T may be unable to obtain the approvals required to complete the proposed merger.

The consummation of the proposed merger is subject to the satisfaction or waiver of certain closing conditions, including Time Warner stockholder approval and receipt of certain domestic and foreign antitrust and other regulatory approvals. If Time Warner and AT&T are unable to obtain these approvals, they may be unable to consummate the proposed merger. In addition, AT&T’s obligation to consummate the merger is subject to the condition that the required regulatory approvals be obtained without the imposition of certain divestiture requirements, capital expenditure requirements or other specified adverse effects. As a result, there can be no assurance that the various closing conditions will be satisfied and the proposed merger will be completed or that any required conditions will not materially adversely affect the combined company following the consummation of the merger or will not result in the abandonment or delay of the proposed merger.

The merger agreement contains provisions that could discourage a potential competing acquirer of Time Warner.

The merger agreement contains “no shop” provisions that, subject to limited exceptions, restrict Time Warner’s ability to solicit, initiate, or knowingly encourage and facilitate competing third-party proposals for the acquisition of its stock or assets. In addition, before the Time Warner board of directors withdraws, qualifies or modifies its recommendation of the proposed merger with AT&T or terminates the merger agreement to enter into a third-party acquisition proposal, AT&T generally has an opportunity to offer to modify the terms of the proposed merger. In some circumstances, upon termination of the merger agreement, Time Warner will be required to pay a termination fee of $1.725 billion.

These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of Time Warner from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the merger, or might otherwise result in a potential third-party acquirer proposing to pay a lower price to Time Warner stockholders than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.

If the merger agreement is terminated and Time Warner decides to seek another business combination, it may not be able to negotiate or consummate a transaction with another party on terms comparable to, or better than, the terms of the merger agreement.

 

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Table of Contents

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Company Purchases of Equity Securities

The following table provides information about the Company’s purchases of equity securities registered by the Company pursuant to Section 12 of the Exchange Act, as amended, during the quarter ended September 30, 2016.

Issuer Purchases of Equity Securities

 

                                                                                                                           

 Period

   Total Number of
    Shares Purchased    
   Average Price
    Paid Per Share (1)      
   Total Number of
  Shares Purchased as  
Part of Publicly
 Announced Plans or 
Programs (2)
   Approximate Dollar
Value of Shares that
May Yet Be
 Purchased Under the 
  Plans or Programs (1)   

 July 1, 2016 -
July 31, 2016

     2,880,982         $ 77.26          2,880,982         $       3,352,725,690    

 August 1, 2016 -
August 31, 2016

     3,221,335         $ 79.48          3,221,335         $       3,096,701,989    

 September 1, 2016 -
September 30, 2016

     3,026,784         $ 77.23          3,026,784         $       2,862,933,330    
  

 

 

 

     

 

 

 

  

Total

     9,129,101         $ 78.04          9,129,101         $       2,862,933,330    

 

(1)

These amounts do not give effect to any fees, commissions or other costs associated with the share repurchases.

(2)

On February 10, 2016, the Company announced that its Board of Directors had authorized a total of $5.0 billion in share repurchases beginning January 1, 2016, including the approximately $902 million remaining at December 31, 2015 from the prior $5.0 billion authorization. Purchases under the stock repurchase program could be made on the open market or in privately negotiated transactions., with the size and timing of these purchases based on a number of factors, including price and business and market conditions. The Company has repurchased shares of its common stock pursuant to trading plans under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended. In connection with entering into the Merger Agreement, the Company discontinued share repurchases.

Item 6. Exhibits.

The exhibits listed on the accompanying Exhibit Index are submitted with or incorporated by reference as a part of this report, and such Exhibit Index is incorporated herein by reference.

 

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Table of Contents

TIME WARNER INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

TIME WARNER INC.

(Registrant)

 

    /s/ Howard M. Averill
Date: November 2, 2016    

Name:   Howard M. Averill

   

Title:     Executive Vice President

   

              and Chief Financial Officer

 

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Table of Contents

EXHIBIT INDEX

Pursuant to Item 601 of Regulation S-K

 

Exhibit No.        

  

  Description of Exhibit

    2.1

   Agreement and Plan of Merger, dated as of October 22, 2016, among Time Warner Inc., AT&T Inc. and West Merger Sub, Inc. (incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 22, 2016).*

    3.1

   By-laws of Time Warner Inc. as amended through October 22, 2016.

  10.1

   Form of Special Retention Stock Units Agreement—2017 (for use from October 22, 2016 for special retention awards to executive officers under the 2013 Stock Incentive Plan).+

  10.2

   Form of Special Retention Stock Units Agreement—2018 (for use from October 22, 2016 for special retention awards to executive officers under the 2013 Stock Incentive Plan).+

  10.3

   Letter Agreement made October 22, 2016 between the Registrant and Howard Averill.+

  10.4

   Letter Agreement made October 22, 2016 between the Registrant and Paul T. Cappuccio.+

  10.5

   Letter Agreement made October 22, 2016 between the Registrant and Olaf Olafsson.+

  10.6

   Amended and Restated Employment Agreement made October 22, 2016, effective as of January 1, 2017, between the Registrant and Gary Ginsberg.+

  31.1

   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

  31.2

   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

  32

   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016. †

101

   The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheet at September 30, 2016 and December 31, 2015, (ii) Consolidated Statement of Operations for the three and nine months ended September 30, 2016 and 2015, (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015, (iv) Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2016 and 2015, (v) Consolidated Statement of Equity for the three and nine months ended September 30, 2016 and 2015, (vi) Notes to Consolidated Financial Statements and (vii) Supplementary Information—Condensed Consolidating Financial Statements.

 

 

   *

Incorporated by reference.

   +

This exhibit is a management contract or compensation plan or arrangement.

   †

This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

 

62

Exhibit 3.1

TIME WARNER INC.

BY-LAWS

As Amended Through October 22, 2016

ARTICLE I

Offices

SECTION 1.   Registered Office .  The registered office of TIME WARNER INC. (hereinafter called the “Corporation”) in the State of Delaware shall be at 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801, and the registered agent shall be The Corporation Trust Company, or such other office or agent as the Board of Directors of the Corporation (the “Board”) shall from time to time select.

SECTION 2.   Other Offices .  The Corporation may also have an office or offices, and keep the books and records of the Corporation, except as may otherwise be required by law, at such other place or places, either within or without the State of Delaware, as the Board may from time to time determine or the business of the Corporation may require.

ARTICLE II

Meetings of Stockholders

SECTION 1.   Place of Meeting .  All meetings of the stockholders of the Corporation (the “stockholders”) shall be at a place to be determined by the Board.

SECTION 2.   Annual Meetings .  The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on such date and at such hour as shall from time to time be fixed by the Board. Any previously scheduled annual meeting of the stockholders may be postponed by action of the Board taken prior to the time previously scheduled for such annual meeting of the stockholders.

SECTION 3.   Special Meetings .  (a)   General .  Except as otherwise required by law or the Restated Certificate of Incorporation of the Corporation (the “Certificate”), and subject to the rights of the holders of any series of Preferred Stock or Series Common Stock or any class or series of stock having a preference over the Common Stock as to dividends or upon dissolution, liquidation or winding up, special meetings of the stockholders for any purpose or purposes may be called by the Chief Executive Officer or a majority of the entire Board. Only such business as is specified in the Corporation’s notice of any special meeting of stockholders shall come before such meeting. A special meeting shall be held at such place, on such date and at such time as shall be fixed by the Board.

 

1


(b)   Stockholder Requested Special Meetings .  Subject to the provisions of this Section 3(b), a special meeting of stockholders shall be called by a majority of the entire Board, or a Committee delegated such authority by the Board, in accordance with this paragraph, following receipt by the Secretary of the Corporation of a written request for a special meeting (a “Special Meeting Request”) from the record holders of shares representing at least fifteen percent of the combined voting power of the then outstanding shares of all classes and series of capital stock of the Corporation entitled generally to vote in the election of directors of the Corporation, voting as a single class (the “Requisite Holders”), if such Special Meeting Request complies with the requirements of this Section 3(b) and all other applicable sections of these By-laws. The Board shall determine whether all requirements set forth in these By-laws have been satisfied and such determination shall be binding on the Corporation and its stockholders. If a Special Meeting Request is made that complies with this Section 3(b) and all other applicable sections of these By-laws, the Board may (in lieu of calling the special meeting requested in such Special Meeting Request) present an identical or substantially similar item (a “Similar Item”) for stockholder approval at any other meeting of stockholders that is held within 120 days after the Corporation receives such Special Meeting Request.

A Special Meeting Request must be delivered by hand or by mail by registered U.S. mail or courier service, postage prepaid, to the attention of the Secretary of the Corporation (the “Secretary”) during regular business hours. A Special Meeting Request shall only be valid if it is signed and dated by each of the Requisite Holders or its duly authorized agent and include: (i) a statement of the specific purpose(s) of the special meeting, the matter(s) proposed to be acted on at the special meeting and the reasons for conducting such business at the special meeting; (ii) the text of any proposed amendment to the By-laws to be considered at the special meeting; (iii) the name and address, as they appear on the Corporation’s books, of each stockholder of record signing such request, the date of each such stockholder’s signature and the name and address of any beneficial owner on whose behalf such request is made; (iv) the class or series and number of shares of the Corporation that are owned of record or beneficially by each such stockholder and any such beneficial owner and documentary evidence of such record or beneficial ownership; (v) any material interest of each stockholder or any such beneficial owner in the business proposed to be conducted at the special meeting; (vi) a representation that the stockholders and such beneficial owners submitting the Special Meeting Request intend to appear in person or by proxy at the special meeting to present the proposal(s) or business to be brought before the special meeting; (vii) if any stockholder submitting the Special Meeting Request intends to solicit proxies with respect to the stockholders’ proposal(s) or business to be presented at the special meeting, a representation to that effect; (viii) all information relating to each stockholder signing the Special Meeting Request that must be disclosed in solicitations for proxies for election of directors in an election contest (even if an election contest is not involved), or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; and (ix) if the purpose of the special meeting includes the election of one or more directors, all the information such stockholder or stockholders would be required to include in a notice delivered to the Corporation pursuant to the fourth sentence of the first paragraph of Section 3 of Article III.

 

2


In addition, a Special Meeting Request shall not be valid if (i) the Special Meeting Request relates to an item of business that is not a proper subject for stockholder action under applicable law; (ii) the Special Meeting Request is received by the Corporation during the period commencing 90 days prior to the first anniversary of the date of the immediately preceding annual meeting and ending on the date of the next annual meeting; (iii) an identical or substantially similar item (a “Similar Item”) was presented at any meeting of stockholders held within 120 days prior to receipt by the Corporation of such Special Meeting Request (and, for purposes of this clause (iii), the election of directors shall be deemed a “Similar Item” with respect to all items of business involving the election or removal of directors); (iv) a Similar Item is included in the Corporation’s notice as an item of business to be brought before a stockholder meeting that has been called but not yet held; or (v) such Special Meeting Request was made in a manner that involved a violation of Regulation 14A under the Securities Exchange Act of 1934, as amended, or other applicable law.

Stockholders may revoke a Special Meeting Request by written revocation delivered to the Corporation at any time prior to the special meeting; provided , however , the Board shall have the discretion to determine whether or not to proceed with the special meeting.

If none of the stockholders who submitted the Special Meeting Request for a special meeting of stockholders appears or sends a qualified representative to present the proposal(s) or business submitted by the stockholders for consideration at the special meeting, the Corporation need not present such proposal(s) or business for a vote at such meeting.

SECTION 4.   Notice of Meetings .  Except as otherwise provided by law, notice of each meeting of the stockholders, whether annual or special, shall be given by the Corporation not less than 10 days nor more than 60 days before the date of the meeting to each stockholder of record entitled to notice of the meeting and shall be called by the Corporation. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the Corporation. Each such notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Notice of any meeting of the stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy without protesting, prior to or at the commencement of the meeting, the lack of proper notice to such stockholder, or who shall waive notice thereof as provided in Article X of these By-laws. Notice of adjournment of a meeting of the stockholders need not be given if the time and place to which it is adjourned are announced at such meeting, unless the adjournment is for more than 30 days or, after adjournment, a new record date is fixed for the adjourned meeting.

SECTION 5.   Quorum .  Except as otherwise provided by law or by the Certificate, the holders of a majority of the votes entitled to be cast by the stockholders

 

3


entitled to vote generally, present in person or by proxy, shall constitute a quorum at any meeting of the stockholders; provided , however , that in the case of any vote to be taken by classes or series, the holders of a majority of the votes entitled to be cast by the stockholders of a particular class or series, present in person or by proxy, shall constitute a quorum of such class or series.

SECTION 6.   Adjournments .  The chairman of the meeting or the holders of a majority of the votes entitled to be cast by the stockholders who are present in person or by proxy may adjourn the meeting from time to time whether or not a quorum is present. In the event that a quorum does not exist with respect to any vote to be taken by a particular class or series, the chairman of the meeting or the holders of a majority of the votes entitled to be cast by the stockholders of such class or series who are present in person or by proxy may adjourn the meeting with respect to the vote(s) to be taken by such class or series. At any such adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called.

SECTION 7.   Order of Business .  At each meeting of the stockholders, the Chairman of the Board or, in the absence of the Chairman of the Board, the Chief Executive Officer, (if the position is held by an individual other than the Chairman of the Board), or in the absence of the Chairman of the Board and the Chief Executive Officer, such person as shall be selected by the Board shall act as chairman of the meeting. The order of business at each such meeting shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the opening and closing of the voting polls.

At any annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the annual meeting (i) by or at the direction of the chairman of the meeting or (ii) by any stockholder who is a holder of record at the time of the giving of the notice provided for in this Section 7, who is entitled to vote at the meeting and who complies with the procedures set forth in this Section 7.

For business properly to be brought before an annual meeting of stockholders by a stockholder, the stockholder must have given timely notice thereof in proper written form to the Secretary. To be timely, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days nor more than 120 days prior to the first anniversary of the date of the immediately preceding annual meeting; provided , however , that in the event that the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the stockholder to be timely must be so delivered or received not earlier than the 120th day prior to such annual meeting and not later than the

 

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close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made; provided , further , that for the purpose of calculating the timeliness of stockholder notices for the 2001 annual meeting of stockholders, the date of the immediately preceding annual meeting shall be deemed to be May 18, 2000. To be in proper written form, a stockholder’s notice to the Secretary shall set forth in writing as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the Corporation’s books, of the stockholder proposing such business; (iii) the class or series and number of shares of the Corporation which are beneficially owned by the stockholder; (iv) any material interest of the stockholder in such business; and (v) if the stockholder intends to solicit proxies in support of such stockholder’s proposal, a representation to that effect. The foregoing notice requirements shall be deemed satisfied by a stockholder if the stockholder has notified the Corporation of his or her intention to present a proposal at an annual meeting and such stockholder’s proposal has been included in a proxy statement that has been prepared by management of the Corporation to solicit proxies for such annual meeting; provided , however , that if such stockholder does not appear or send a qualified representative to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 7. The chairman of an annual meeting may refuse to permit any business to be brought before an annual meeting which fails to comply with the foregoing procedures or, in the case of a stockholder proposal, if the stockholder solicits proxies in support of such stockholder’s proposal without having made the representation required by clause (v) of the third preceding sentence.

SECTION 8.   List of Stockholders .  It shall be the duty of the Secretary or other officer who has charge of the stock ledger to prepare and make, at least 10 days before each meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in such stockholder’s name. Such list shall be produced and kept available at the times and places required by law.

SECTION 9.   Voting .  Except as otherwise provided by law or by the Certificate, each stockholder of record of any series of Preferred Stock or Series Common Stock shall be entitled at each meeting of the stockholders to such number of votes, if any, for each share of such stock as may be fixed in the Certificate or in the resolution or resolutions adopted by the Board providing for the issuance of such stock, and each stockholder of record of Common Stock shall be entitled at each meeting of the stockholders to one vote for each share of such stock, in each case, registered in such stockholder’s name on the books of the Corporation:

 

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(1) on the date fixed pursuant to Section 6 of Article VII of these By-laws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting; or

(2) if no such record date shall have been so fixed, then at the close of business on the day next preceding the day on which notice of such meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.

Each stockholder entitled to vote at any meeting of the stockholders may authorize not in excess of three persons to act for such stockholder by proxy. Any such proxy shall be delivered to the secretary of such meeting at or prior to the time designated for holding such meeting, but in any event not later than the time designated in the order of business for so delivering such proxies. No such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period.

At each meeting of the stockholders, all corporate actions to be taken by vote of the stockholders (except as otherwise required by law and except as otherwise provided in the Certificate or these By-laws) shall be authorized by a majority of the votes cast by the stockholders entitled to vote thereon who are present in person or represented by proxy, and where a separate vote by class or series is required, a majority of the votes cast by the stockholders of such class or series who are present in person or represented by proxy shall be the act of such class or series.

Unless required by law or determined by the chairman of the meeting to be advisable, the vote on any matter, including the election of directors, need not be by written ballot.

SECTION 10.   Inspectors .  The chairman of the meeting shall appoint two or more inspectors to act at any meeting of the stockholders. Such inspectors shall perform such duties as shall be required by law or specified by the chairman of the meeting. Inspectors need not be stockholders. No director or nominee for the office of director shall be appointed such inspector.

SECTION 11.   Public Announcements .  For the purpose of Section 7 of this Article II and Section 3 of Article III, “public announcement” shall mean disclosure (i) in a press release reported by the Dow Jones News Service, Reuters Information Service or any similar or successor news wire service or (ii) in a communication distributed generally to stockholders and in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934 or any successor provisions thereto.

 

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ARTICLE III

Board of Directors

SECTION 1.   General Powers .  The business and affairs of the Corporation shall be managed by or under the direction of the Board, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate directed or required to be exercised or done by the stockholders.

SECTION 2.   Number, Qualification and Election .  Except as otherwise fixed by or pursuant to the provisions of Article IV of the Certificate relating to the rights of the holders of any series of Preferred Stock or Series Common Stock or any class or series of stock having preference over the Common Stock as to dividends or upon dissolution, liquidation or winding up, the number of directors constituting the Whole Board shall be determined from time to time by the Board. The term “Whole Board” shall mean the total number of authorized directors, whether or not there exist any vacancies or unfilled previously authorized directorships.

The directors, other than those who may be elected by the holders of shares of any series of Preferred Stock or Series Common Stock or any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or upon dissolution, liquidation or winding up pursuant to the terms of Article IV of the Certificate or any resolution or resolutions providing for the issuance of such stock adopted by the Board, shall be elected by the stockholders entitled to vote thereon at each annual meeting of the stockholders, and shall hold office until the next annual meeting of the stockholders and until each of their successors shall have been duly elected and qualified.

Each director shall be at least 21 years of age. Directors need not be stockholders of the Corporation.

In any uncontested election of directors, each person receiving a majority of the votes cast shall be deemed elected. For purposes of this paragraph, a ‘majority of the votes cast’ shall mean that the number of votes cast ‘for’ a director must exceed the number of votes cast ‘against’ that director (with ‘abstentions’ and ‘broker non-votes’ not counted as a vote cast with respect to that director). In any contested election of directors, the persons receiving a plurality of the votes cast, up to the number of directors to be elected in such election, shall be deemed elected. Any incumbent director who fails to receive a majority of the votes cast shall submit an offer to resign from the Board no later than two weeks after the certification by the Corporation of the voting results. An uncontested election is one in which the number of individuals who have been nominated for election as a director is equal to, or less than, the number of directors constituting the Whole Board. A contested election is one in which the number of persons nominated exceeds the number of directors to be elected as of the date that is ten days prior to the date that the Corporation first mails its notice of meeting for such meeting to the stockholders.

 

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The Board shall consider the resignation offer and may either (i) accept the offer of resignation or (ii) reject the offer and seek to address the underlying cause(s) of the majority-withheld vote. While the Board may delegate to a committee the authority to assist the Board in its review of the matter, the Board shall decide whether to accept or reject the resignation offer within 90 days following the certification of the stockholder vote. Once the Board makes this decision, the Corporation will promptly make a public announcement of the Board’s decision in the manner described in Section 11 of Article II. If the Board rejects the offer of resignation, the public announcement will include a statement regarding the reasons for its decision.

The chairman of the nominating and governance committee described in Section 1 of Article IV will have the authority to manage the Board’s review of the resignation offer. In the event it is the chairman of the nominating and governance committee who received a majority-withheld vote, the independent directors who did not receive majority-withheld votes shall select a director to manage the process, and that director shall have the authority otherwise delegated to the chairman of the nominating and governance committee by this Section 2 of Article III. Any director who tenders his or her offer of resignation as a result of a majority-withheld vote shall not participate in the committee’s or the Board’s deliberations or vote on whether to accept or reject the resignation offer.

A majority of the members of the Board shall be persons determined by the Board to be independent directors. In order to determine that a director is independent pursuant to this Section 2, the Board shall make an affirmative determination that the director satisfies applicable regulatory requirements to be an independent director of the Corporation, that the director has no material relationship with the Corporation and its consolidated subsidiaries (collectively, the “Company”), and that the director is free of any other relationship (with the Company or otherwise) that would interfere with the exercise of independent judgment by such director. In making this determination, the Board shall consider all relevant facts and circumstances, including commercial, charitable, and familial relationships that exist between the director and the Company, or between entities with which the director is affiliated and the Company. The Board may, from time to time, adopt categorical standards to guide its determination of materiality.

SECTION 3.   Notification of Nominations .  Subject to the rights of the holders of any series of Preferred Stock or Series Common Stock or any class or series of stock having a preference over the Common Stock as to dividends or upon dissolution, liquidation or winding up, nominations for the election of directors may be made by the Board or by any stockholder (x) who is a stockholder of record at the time of giving of the notice of nomination provided for in this Section 3 and who is entitled to vote for the election of directors and who complies with the procedures set forth in this Section 3 or (y) pursuant to and in compliance with the procedures set forth in Section 15 of this Article III. Any stockholder of record entitled to vote for the election of directors at a meeting may nominate persons for election as directors pursuant to this Section 3 only if timely written notice of such stockholder’s intent to make such nomination is given,

 

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either by personal delivery or by United States mail, postage prepaid, to the Secretary. To be timely, a stockholder’s notice pursuant to this Section 3 must be delivered to or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at an annual meeting of the stockholders, not less than 90 days nor more than 120 days prior to the first anniversary of the date of the immediately preceding annual meeting; provided , however , that in the event that the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the stockholder to be timely must be so delivered or received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made; provided , further , that for the purpose of calculating the timeliness of stockholder notices for the 2001 annual meeting of stockholders, the date of the immediately preceding annual meeting shall be deemed to be May 18, 2000 and (ii) with respect to an election to be held at a special meeting of the stockholders for the election of directors, not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees to be elected at such meeting. Each such notice shall set forth: (a) the name and address, as they appear on the Corporation’s books, of the stockholder who intends to make the nomination and the name and address of the person or persons to be nominated; (b) the class or series and number of shares of the Corporation which are beneficially owned by the stockholder; (c) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote in the election of directors and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (d) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (e) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board; (f) the executed written consent of each nominee to serve as a director of the Corporation if so elected; and (g) if the stockholder intends to solicit proxies in support of such stockholder’s nominee(s), a representation to that effect. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure or if the stockholder solicits proxies in favor of such stockholder’s nominee(s) without having made the representations required by the immediately preceding sentence. If such stockholder does not appear or send a qualified representative to present such proposal at such meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. Only such persons who are nominated in accordance with the procedures set forth in this Section 3 or Section 15 of this Article III shall be eligible to serve as directors of the Corporation.

Notwithstanding anything in the immediately preceding paragraph of this Section 3 to the contrary, in the event that the number of directors to be elected to the

 

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Board at an annual meeting of the stockholders is increased and there is no public announcement naming all of the nominees for directors or specifying the size of the increased Board made by the Corporation at least 90 days prior to the first anniversary of the date of the immediately preceding annual meeting, a stockholder’s notice required by this Section 3 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to or mailed to and received by the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation.

SECTION 4.   Quorum and Manner of Acting .  Except as otherwise provided by law, the Certificate or these By-laws, a majority of the Whole Board shall constitute a quorum for the transaction of business at any meeting of the Board, and, except as so provided, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. The chairman of the meeting or a majority of the directors present may adjourn the meeting to another time and place whether or not a quorum is present. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called.

SECTION 5.   Place of Meeting .  Subject to Sections 6 and 7 of this Article III, the Board may hold its meetings at such place or places within or without the State of Delaware as the Board may from time to time determine, or as shall be specified or fixed in the respective notices or waivers of notice thereof.

SECTION 6.   Regular Meetings .  No fewer than six regular meetings per year of the Board shall be held at such times as the Board shall from time to time by resolution determine, at such locations as the Board may determine. If any day fixed for a regular meeting shall be a legal holiday under the laws of the place where the meeting is to be held, the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day.

SECTION 7.   Special Meetings .  Special meetings of the Board shall be held whenever called by the Chairman of the Board, the Chief Executive Officer or by a majority of the non-employee directors, and shall be held at such place, on such date and at such time as he or they, as applicable, shall fix.

SECTION 8.   Notice of Meetings .  Notice of regular meetings of the Board or of any adjourned meeting thereof need not be given. Notice of each special meeting of the Board shall be given by overnight delivery service or mailed to each director, in either case addressed to such director at such director’s residence or usual place of business, at least two days before the day on which the meeting is to be held or shall be sent to such director at such place by telecopy or by electronic transmission or shall be given personally or by telephone, not later than the day before the meeting is to be held, but notice need not be given to any director who shall, either before or after the

 

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meeting, submit a waiver of such notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to such director. Unless otherwise required by these By-laws, every such notice shall state the time and place but need not state the purpose of the meeting.

SECTION 9.   Rules and Regulations .  The Board may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate or these By-laws for the conduct of its meetings and management of the affairs of the Corporation as the Board may deem proper.

SECTION 10.   Participation in Meeting by Means of Communications Equipment .  Any one or more members of the Board or any committee thereof may participate in any meeting of the Board or of any such committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other or as otherwise permitted by law, and such participation in a meeting shall constitute presence in person at such meeting.

SECTION 11.   Action Without Meeting .  Any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting if all of the members of the Board or of any such committee consent thereto in writing or as otherwise permitted by law and, if required by law, the writing or writings are filed with the minutes or proceedings of the Board or of such committee.

SECTION 12.   Resignations .  Any director of the Corporation may at any time resign by giving written notice to the Board, the Chairman of the Board, the Chief Executive Officer or the Secretary. Such resignation shall take effect at the time specified therein or, if the time be not specified therein, upon receipt thereof; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

SECTION 13.   Vacancies .  Subject to the rights of the holders of any series of Preferred Stock or Series Common Stock or any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or upon dissolution, liquidation or winding up, any vacancies on the Board resulting from death, resignation, removal or other cause shall only be filled by the Board, and not by the stockholders, by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board, or by a sole remaining director, and newly created directorships resulting from any increase in the number of directors, shall only be filled by the Board, or if not so filled, by the stockholders at the next annual meeting thereof or at a special meeting called for that purpose in accordance with Section 3 of Article II of these By-laws. Any director elected in accordance with the preceding sentence of this Section 13 shall hold office until the next annual meeting of the stockholders and until such director’s successor shall have been elected and qualified.

SECTION 14.   Compensation .  Each director, in consideration of such person serving as a director, shall be entitled to receive from the Corporation such

 

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amount per annum and such fees (payable in cash or stock-based compensation) for attendance at meetings of the Board or of committees of the Board, or both, as the Board shall from time to time determine. In addition, each director shall be entitled to receive from the Corporation reimbursement for the reasonable expenses incurred by such person in connection with the performance of such person’s duties as a director. Nothing contained in this Section 14 shall preclude any director from serving the Corporation or any of its subsidiaries in any other capacity and receiving compensation therefor.

SECTION 15.   Proxy Access .

(a)    The Corporation shall include in its proxy statement and on its form of proxy for an annual meeting of the stockholders the name of, and shall include in its proxy statement the required information specified below relating to, any person nominated for election to the Board by a stockholder that satisfies, or by a group of no more than 20 stockholders that together satisfy, the requirements of this Section 15, and who expressly elects at the time of providing the notice required by this Section 15 to have its nominee included in the Corporation’s proxy materials pursuant to this Section 15. For purposes of this Section 15, the information that the Corporation will be required to include in its proxy statement is: (i) the information concerning the nominee and the stockholder or group of stockholders who nominated such nominee that is required to be disclosed in the Corporation’s proxy statement by the regulations promulgated under the Securities Exchange Act of 1934, as amended; and (ii) if such stockholder or group of stockholders so elects, a statement pursuant to paragraph (j) of this Section 15. No person may be a member of more than one group of persons constituting a group that satisfies the requirements of this Section 15. In determining whether a stockholder or group of stockholders is qualified to make a nomination under this Section 15, two or more funds that are (A) under common management and investment control, (B) under common management and funded primarily by the same employer, or (C) a “group of investment companies,” as such term is defined in Section 12(d)(1)(G)(ii) of the Investment Company Act of 1940, as amended, shall be treated as one stockholder.

(b)    For nominations pursuant to this Section 15 to be properly submitted by a stockholder or group of stockholders, such stockholder or group of stockholders must give timely written notice of such nominations to the Secretary. To be considered timely under this Section 15, a stockholder’s notice, together with the other information required by this Section 15, must be received by the Secretary at the principal executive offices of the Corporation not less than 150 calendar days nor more than 180 calendar days before the anniversary date of the Corporation’s proxy statement being released to stockholders in connection with the prior year’s annual meeting; provided , however , that in the event that the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the stockholder to be timely must be so delivered or received not earlier than the 180th day prior to such annual meeting and not later than the close of business on the later of the 150th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made.

 

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(c)    The number of stockholder nominees nominated pursuant to this Section 15 (including any nominees that were submitted by a stockholder or group of stockholders for inclusion in the Corporation’s proxy materials pursuant to this Section 15, but either are subsequently withdrawn or that the Board decides to nominate as Board nominees) appearing in the Corporation’s proxy materials with respect to an annual meeting of stockholders, together with any nominees who were previously elected to the Board after being nominated pursuant to this Section 15 at any of the preceding two annual meetings and who are re-nominated for election at such annual meeting by the Board, shall not exceed the greater of (i) two or (ii) 20% of the number of directors in office as of the last day on which notice of a nomination in accordance with the procedures set forth in this Section 15 may be received by the Secretary pursuant to this Section 15, or if the number of directors calculated in this clause (ii) is not a whole number, the closest whole number below 20%. In the event that one or more vacancies for any reason occurs on the Board after the last day on which notice of a nomination in accordance with the procedures set forth in this Section 15 may be received by the Secretary pursuant to this Section 15, but before the date of the annual meeting of stockholders, and the Board resolves to reduce the size of the Board in connection therewith, the maximum number of stockholder nominees nominated pursuant to this Section 15 included in the Corporation’s proxy materials shall be calculated based on the number of directors in office as so reduced. Any stockholder or group of stockholders submitting more than one nominee for inclusion in the Corporation’s proxy materials pursuant to this Section 15 shall rank its nominees based on the order that such stockholder or group of stockholders desires such nominees to be selected for inclusion in the Corporation’s proxy materials in the event that the total number of stockholder nominees submitted by stockholders or groups of stockholders pursuant to this Section 15 exceeds the maximum number of stockholder nominees provided for in this Section 15. In such event, the highest ranking stockholder nominee who meets the requirements of this Section 15 from each stockholder or group of stockholders will be selected for inclusion in the Corporation’s proxy materials until the maximum number is reached, going in order of the amount (largest to smallest) of shares of common stock of the Corporation each stockholder or group of stockholders disclosed as owned in its respective notice of a nomination submitted to the Corporation in accordance with the procedures set forth in this Section 15. If the maximum number is not reached after the highest ranking stockholder nominee who meets the requirements of this Section 15 from each stockholder or group of stockholders has been selected, this process will continue as many times as necessary, following the same order each time, until the maximum number is reached.

(d)    For purposes of this Section 15, a stockholder or group of stockholders shall be deemed to “own” only those outstanding shares of common stock of the Corporation as to which the stockholder or any member of a group of stockholders possesses both (i) the full voting and investment rights pertaining to the shares and (ii) the full economic interest in (including the opportunity for profit and risk of loss on) such shares; provided that the number of shares calculated in accordance with clauses (i) and (ii) shall not include any shares (x) sold by such stockholder or any of its affiliates in any transaction that has not been settled or closed, (y) borrowed by such stockholder or any of its affiliates for any purposes or purchased by such stockholder or any of its affiliates

 

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pursuant to an agreement to resell or (z) subject to any option, warrant, forward contract, swap, contract of sale, other derivative or similar agreement entered into by such stockholder or any of its affiliates, whether any such instrument or agreement is to be settled with shares or with cash based on the notional amount or value of shares of outstanding common stock of the Corporation, in any such case which instrument or agreement has, or is intended to have, the purpose or effect of (1) reducing in any manner, to any extent or at any time in the future, such stockholder’s or affiliates’ full right to vote or direct the voting of any such shares, and/or (2) hedging, offsetting or altering to any degree gain or loss arising from the full economic ownership of such shares by such stockholder or affiliate. A person’s ownership of shares shall continue notwithstanding (i) the loaning of such shares if, during the period such shares are loaned, the person has the power to recall such loaned shares on five business days’ notice; or (ii) such person having delegated any voting power by means of a proxy, power of attorney or other instrument or arrangement if, during the period such arrangement exists, the proxy, power of attorney or other instrument or arrangement is revocable at any time by such person. The terms “owned,” “owning” and other variations of the word “own” shall have correlative meanings. Whether outstanding shares of the common stock of the Corporation are “owned” for these purposes shall be determined by the Board. For purposes of this Section 15, the term “affiliate” or “affiliates” shall have the meaning ascribed thereto under the General Rules and Regulations under the Securities Exchange Act of 1934, as amended.

(e)    In order to make a nomination pursuant to this Section 15, a stockholder or group of stockholders must have owned 3% or more of the Corporation’s outstanding common stock continuously for at least three years as of both the date the written notice of the nomination is received by the Corporation in accordance with this Section 15 and the record date for determining stockholders entitled to vote at the annual meeting of stockholders, and must continue to own at least 3% of the Corporation’s outstanding common stock through the meeting date. Together with any notice of a nomination in accordance with the procedures set forth in this Section 15, a stockholder or group of stockholders must also provide the following information in writing to the Secretary (in addition to the information required by Section 3 of this Article III): (i) one or more written statements from the record holder of the shares (and from each intermediary through which the shares are or have been held during the requisite three-year holding period) verifying that, as of a date within seven calendar days prior to the date the written notice of the nomination is delivered to or mailed and received by the Secretary, the stockholder or group of stockholders owns, and has owned continuously for the preceding three years, at least 3% of the Corporation’s outstanding common stock, and the stockholder or group of stockholders’ agreement to provide, within five business days after the record date for the annual meeting of stockholders, written statements from the record holder and intermediaries verifying such stockholder or group of stockholders’ continuous ownership of at least 3% of the Corporation’s outstanding common stock through the record date; (ii) the executed written consent of each stockholder nominee to being named in the proxy materials as a nominee and to serve as a director of the Corporation if elected; and (iii) a copy of the Schedule 14N that has been filed with the Securities and Exchange Commission as required by Rule 14a-18 under the Securities Exchange Act of 1934, as amended. For purposes of Rule 14a-18 under the Securities Exchange Act of 1934, as amended, the applicable “date specified by the registrant’s advance notice provision” shall be the date determined pursuant to Section 15(b) of this Article III.

 

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(f)    Together with any notice of a nomination in accordance with the procedures set forth in this Section 15, a stockholder or group of stockholders must also provide a written representation and agreement that such stockholder or group of stockholders (including each member thereof): (i) acquired at least 3% of the Corporation’s outstanding common stock in the ordinary course of business and not with the intent to change or influence control of the Corporation, and does not presently have such intent, (ii) presently intends to maintain qualifying ownership of at least 3% of the Corporation’s outstanding common stock through the date of the annual meeting, (iii) has not nominated and will not nominate for election to the Board at the annual meeting of stockholders any person other than the nominee or nominees being nominated pursuant to this Section 15, (iv) has not engaged and will not engage in, and has not and will not be a “participant” in another person’s, “solicitation” within the meaning of Rule 14a-1(l) under the Securities Exchange Act of 1934, as amended, in support of the election of any individual as a director at the annual meeting of stockholders other than its nominee or a nominee of the Board, (v) will not distribute to any stockholder any proxy statement or form of proxy for the annual meeting of stockholders other than the proxy statement and form of proxy distributed by the Corporation and (vi) will provide facts, statements and other information in all communications with the Corporation and stockholders of the Corporation that are or will be true and correct in all material respects and do not and will not omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

(g)    Together with any notice of a nomination in accordance with the procedures set forth in this Section 15, a stockholder or group of stockholders must provide a written undertaking that the stockholder or group of stockholders (including each member thereof) agrees to: (i) assume all liability stemming from any legal or regulatory violation arising out of the stockholder or group of stockholders’ communications with the stockholders of the Corporation or out of the information that the such stockholder or group of stockholders provided to the Corporation, (ii) comply with all other laws and regulations applicable to any solicitation in connection with the annual meeting of stockholders, and (iii) indemnify and hold harmless the Corporation and each of its directors, officers and employees individually against any liability, loss or damages in connection with any threatened or pending action, suit or proceeding, whether legal, administrative or investigative, against the Corporation or any of its directors, officers or employees arising out of any nomination submitted by the stockholder or group of stockholders pursuant to this Section 15. The inspector of elections shall not give effect to the stockholder or group of stockholders’ votes with respect to the election of directors if such stockholder or group of stockholders does not comply with the undertakings in paragraph (f) above or this paragraph (g).

(h)    Together with any notice of a nomination in accordance with the procedures set forth in this Section 15, a stockholder nominee must deliver to the Secretary a written representation and agreement that such person (i) is not and will not

 

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become a party to (x) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the Corporation or (y) any Voting Commitment that could limit or interfere with the person’s ability to comply, if elected as a director of the Corporation, with the person’s fiduciary duties under applicable law, (ii) is not and will not become a party to any compensatory, payment, indemnification or other financial agreement, arrangement or understanding with any person or entity other than the Corporation in connection with service or action as a stockholder nominee or a director of the Corporation that has not been disclosed to the Corporation, and (iii) will comply with all of the Corporation’s corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines, and any other Corporation policies and guidelines applicable to directors. At the request of the Corporation, the stockholder nominee must submit all completed and signed questionnaires required of directors of the Corporation.

The Corporation may request such additional information as necessary to permit the Board to determine if each stockholder nominee is independent under the listing standards of the principal U.S. securities exchange upon which the common stock of the Corporation is listed, any applicable rules of the Securities and Exchange Commission and any publicly disclosed standards used by the Board in determining and disclosing the independence of the Corporation’s directors, including those set forth in Section 2 of this Article III.

(i)    In the event that any information or communications provided by the stockholder or group of stockholders or the stockholder nominee to the Corporation or its stockholders ceases to be true and correct in all material respects or omits a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, each stockholder or group of stockholders or stockholder nominee, as the case may be, shall promptly notify the Secretary of any defect in such previously provided information and of the information that is required to correct any such defect.

(j)    The stockholder or group of stockholders may provide to the Secretary, at the time the information required by this Section 15 is provided, a written statement for inclusion in the Corporation’s proxy statement for the annual meeting of stockholders, not to exceed 500 words, in support of the stockholder nominee’s candidacy. Notwithstanding anything to the contrary contained in this Section 15, the Corporation may omit from its proxy materials any information or statement that it, in good faith, believes would violate any applicable law or regulation.

(k)    The Corporation shall not be required to include, pursuant to this Section 15, any stockholder nominee in its proxy materials for any meeting of stockholders: (i) for which the Secretary receives a notice that a stockholder or group of stockholders has nominated a person for election to the Board pursuant to the advance notice requirements for stockholder nominees for director set forth in Section 3 of this Article III, (ii) if the stockholder nominee is, or has been within the three years preceding

 

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the date the Corporation first mails to the stockholders its notice of meeting that includes the name of the stockholder nominee, an officer or director of a company that is a competitor, as defined in Section 8 of the Clayton Antitrust Act of 1914, of the Corporation, as determined by the Board, (iii) if the Board determines that the stockholder nominee is not independent under the listing standards of the principal U.S. securities exchange upon which the common stock of the Corporation is listed, any applicable rules of the Securities and Exchange Commission or any publicly disclosed standards used by the Board in determining and disclosing the independence of the Corporation’s directors, including those set forth in Section 2 of this Article III, (iv) if the stockholder nominee or the stockholder or group of stockholders (including any member thereof) who has nominated such stockholder nominee has engaged in or is currently engaged in, or has been or is a “participant” in another person’s, “solicitation” within the meaning of Rule 14a-1(l) under the Securities Exchange Act of 1934, as amended, in support of the election of any individual as a director at the meeting other than such stockholder nominee or a nominee of the Board, (v) if the stockholder nominee is or becomes a party to (x) any Voting Commitment that has not been disclosed to the Corporation or any Voting Commitment that could limit or interfere with the person’s ability to comply, if elected as a director of the Corporation, with the person’s fiduciary duties under applicable law or (y) any compensatory, payment, indemnification or other financial agreement, arrangement or understanding with any person or entity other than the Corporation in connection with service or action as a stockholder nominee or a director of the Corporation that has not been disclosed to the Corporation, (vi) if the stockholder nominee is a named subject of a criminal proceeding (excluding traffic violations and other minor offenses) pending as of the date the Corporation first mails to the stockholders its notice of meeting that includes the name of the stockholder nominee or has, within the 10 years preceding such date, been convicted in such a criminal proceeding, (vii) if the stockholder nominee, upon becoming a member of the Board, would cause the Corporation to be in violation of these By-Laws, the Certificate of Incorporation, the rules and listing standards of the principal U.S. exchange upon which the common stock of the Corporation is listed or any applicable state or federal law, rule or regulation, (viii) if the stockholder nominee or the applicable stockholder or group of stockholders (including any member thereof) shall have provided information to the Corporation in respect of such nomination that was untrue in any material respect or omitted to state a material fact necessary in order to make the statement made, in light of the circumstances under which it was made, not misleading, as determined by the Board, or (ix) if the stockholder or group of stockholders (including any member thereof) or applicable stockholder nominee otherwise shall have breached or contravened any of its or their agreements, representations or undertakings or failed to comply with this Section 15, as determined by the Board or the chairman of the annual meeting of stockholders.

(l)    Notwithstanding anything to the contrary set forth in this Section 15, the Board or the chairman of the annual meeting of stockholders shall declare a nomination by a stockholder or group of stockholders to be invalid, and such nomination shall be disregarded notwithstanding that proxies in respect of such vote may have been received by the Corporation, if: (i) the stockholder or group of stockholders (including any member thereof) or the applicable stockholder nominee otherwise shall have breached or contravened any of its or their agreements, representations or undertakings or

 

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failed to comply with this Section 15, as determined by the Board or the chairman of the annual meeting of stockholders, (ii) the stockholder or group of stockholders (including any member thereof) or the applicable stockholder nominee shall have provided information to the Corporation in respect of such nomination that was untrue in any material respect or omitted to state a material fact necessary in order to make the statement made, in light of the circumstances under which it was made, not misleading, as determined by the Board or (iii) the stockholder or group of stockholders (or a qualified representative thereof) does not appear at the annual meeting of stockholders to present any nomination pursuant to this Section 15. The Board (and any other person or body authorized by the Board) shall determine whether all requirements set forth in this Section 15 have been satisfied, including, without limitation (i) whether one or more stockholders qualifies to make a nomination pursuant to this Section 15, (ii) whether a notice of a nomination submitted to the Corporation complies with this Section 15 and has otherwise met the requirements of this Section 15, (iii) whether a stockholder nominee satisfies the qualifications and requirements in this Section 15, and (iv) making any interpretations necessary or advisable to determine whether any and all requirements of this Section 15 have been satisfied. Any such determination by the Board (or any other person or body authorized by the Board) shall be binding on the Corporation and its stockholders.

(m)    Any stockholder nominee who is included in the Corporation’s proxy materials for a particular annual meeting of stockholders but either: (i) withdraws from or becomes ineligible or unavailable for election at the annual meeting of stockholders, or (ii) does not receive at least 25% of the votes cast in favor of the stockholder nominee’s election, will be ineligible to be a stockholder nominee pursuant to this Section 15 for the next two annual meetings of stockholders.

(n)    The stockholder or group of stockholders shall file with the Securities and Exchange Commission any solicitation or other communication with the Corporation’s stockholders relating to the meeting at which such stockholder’s or such group’s nominee will be nominated, regardless of whether any such filing is required under Regulation 14A of the Securities Exchange Act of 1934, as amended, or whether any exemption from filing is available for such solicitation or other communication under Regulation 14A of the Securities Exchange Act of 1934, as amended. Any such solicitation or other communication must comply with Rule 14a-2(b)(8) of the Securities Exchange Act of 1934, as amended, as if it applied by its terms to the foregoing activities.

ARTICLE IV

Committees of the Board of Directors

SECTION 1.   Establishment of Committees of the Board of Directors; Election of Members of Committees of the Board of Directors; Functions of Committees of the Board of Directors .

 

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(a)    The Corporation shall have such committees of the Board as the Board shall determine from time to time in accordance with this Section 1 of Article IV, including the following committees of the Board with the following powers and authority: the nominating and governance committee, the audit and finance committee, and the compensation and human development committee.

(b)    The nominating and governance committee shall have the following powers and authority: (i) evaluating and recommending director candidates to the Board, (ii) overseeing the assessment of Board and committee performance not less frequently than every year, (iii) recommending director compensation and benefits policies for the Board, (iv) evaluating and recommending to the Board candidates for Chief Executive Officer, (v) reviewing individual director performance as issues arise, (vi) reviewing and recommending to the Board changes to the size and composition of the Board, (vii) periodically reviewing the Corporation’s corporate governance profile, (viii) overseeing and monitoring the Corporation’s development and articulation of its core values, its public reputation, and its involvement in the communities in which it does business and (ix) performing such other functions as the Board shall determine in accordance with this Section 1 of Article IV. The nominating and governance committee shall also have the powers and authority set forth in any nominating and governance committee charter adopted by the Board in accordance with this Section 1 of Article IV as may from time to time be required by any rule or regulation to which the Corporation is subject. Only directors who are determined by the Board, pursuant to Section 2 of Article III of these By-laws, to be independent and to satisfy applicable regulatory requirements may serve as members of the nominating and governance committee.

(c)    The audit and finance committee shall have the following powers and authority: (i) approving the appointment or removal of independent public accountants to audit the books of account, accounting procedures and financial statements of the Corporation and to perform such other duties from time to time as the audit and finance committee may prescribe, (ii) receiving the reports and comments of the Corporation’s internal auditors and of the independent public accountants selected by the committee and taking such action with respect thereto as it deems appropriate, (iii) requesting the Corporation’s consolidated subsidiaries and affiliated companies to employ independent public accountants to audit their respective books of account, accounting procedures and financial statements, (iv) requesting the independent public accountants to furnish to the compensation committee the certifications required under any present or future stock option, incentive compensation or employee benefit plan of the Corporation, (v) reviewing the adequacy of the Corporation’s internal financial controls, (vi) reviewing the accounting principles employed in the Corporation’s financial reporting, (vii) reviewing and making recommendations to the Board concerning the financial structure and financial condition of the Corporation and its subsidiaries, including annual budgets, long-term financial plans, corporate borrowings, investments, capital expenditures, long-term commitments and the issuance of stock, (viii) approving such matters that are consistent with the general financial policies and direction from time to time determined by the Board and (ix) performing such other functions as the Board shall determine in accordance with this Section 1 of Article IV. The audit and finance committee shall also

 

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have the powers and authority set forth in any audit and finance committee charter adopted by the Board in accordance with this Section 1 of Article IV as may from time to time be required by any rule or regulation to which the Corporation is subject. Only directors who are determined by the Board, pursuant to Section 2 of Article III of these By-laws, to be independent and to satisfy applicable regulatory requirements may serve as members of the audit and finance committee.

(d)    The compensation and human development committee shall have the following powers and authority: (i) determining and fixing the compensation for all senior officers of the Corporation and its subsidiaries and divisions that the compensation and human development committee shall from time to time consider appropriate, as well as all employees of the Corporation compensated at a rate in excess of such amount per annum as may be fixed or determined from time to time by the Board, (ii) performing the duties of the committees of the Board provided for in any present or future stock option, restricted stock, incentive compensation or employee benefit plan of the Corporation and administering the stock option, restricted stock and stock incentive plans of the Corporation, (iii) delegating, to the extent permitted by law and to the extent it deems appropriate, any of its powers in connection with the administration of the stock option, stock incentive, restricted stock plans and other employee benefit plans of the Corporation, (iv) reviewing the operations of and policies pertaining to any present or future stock option, incentive compensation or employee benefit plan of the Corporation that the compensation and human development committee shall from time to time consider appropriate, (v) overseeing and monitoring the Corporation’s human resources initiatives, including but not limited to efforts related to workforce diversity, and (vi) performing such other functions as the Board shall determine in accordance with this Section 1 of Article IV. The compensation and human development committee shall also have the powers and authority set forth in any compensation and human development committee charter adopted by the Board in accordance with this Section 1 of Article IV as may from time to time be required by any rule or regulation to which the Corporation is subject. Only directors who are determined by the Board, pursuant to Section 2 of Article III of these By-laws, to be independent and to satisfy applicable regulatory requirements may serve as members of the compensation and human development committee.

(e)    Except as otherwise provided by law or the Certificate, the Board may, from time to time, establish, eliminate and modify the power and authority of any of the Board’s committee; change the size of a committee; and add, remove, or replace the chairman or member of any committee.

SECTION 2.   Procedure; Meetings; Quorum .  Regular meetings of committees of the Board, of which no notice shall be necessary, may be held at such times and places as shall be fixed by resolution adopted by a majority of the total number of authorized committee members, whether or not there exist any vacancies or unfilled previously authorized committee seats. Special meetings of any committee of the Board shall be called at the request of any member thereof. Notice of each special meeting of any committee of the Board shall be sent by overnight delivery service, or mailed to each

 

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member thereof, in either case addressed to such member at such member’s residence or usual place of business, at least two days before the day on which the meeting is to be held or shall be sent to such member at such place by telecopy or by electronic transmission or be given personally or by telephone, not later than the day before the meeting is to be held, but notice need not be given to any member who shall, either before or after the meeting, submit a waiver of such notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of such notice to such member. Unless otherwise required by these By-laws, every such notice shall state the time and place but need not state the purpose of such meeting. Any special meeting of any committee of the Board shall be a legal meeting without any notice thereof having been given, if all the members thereof shall be present thereat and no member shall protest the lack of notice to such member. Notice of any adjourned meeting of any committee of the Board need not be given. Any committee of the Board may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate or these By-laws for the conduct of its meetings as such committee of the Board may deem proper. A majority of the authorized members of any committee of the Board shall constitute a quorum for the transaction of business at any meeting, and the vote of a majority of the members thereof present at any meeting at which a quorum is present shall be the act of such committee. Each committee of the Board shall keep written minutes of its proceedings and shall report on such proceedings to the Board.

ARTICLE V

Officers

SECTION 1.   Number; Term of Office .  The officers of the Corporation shall be elected by the Board and may consist of: a Chairman of the Board, a Chief Executive Officer, a Chief Operating Officer, a Chief Financial Officer and one or more Vice Chairmen and Vice Presidents (including, without limitation, Assistant, Executive, Senior and Group Vice Presidents) and a Treasurer, Secretary and Controller and such other officers and agents with such titles and such duties as the Board may from time to time determine, each to have such authority, functions or duties as in these By-laws provided or as the Board may from time to time determine, and each to hold office for such term as may be prescribed by the Board and until such person’s successor shall have been chosen and shall qualify, or until such person’s death or resignation, or until such person’s removal in the manner hereinafter provided. The Chairman of the Board, the Chief Executive Officer and the Vice Chairmen shall be elected from among the directors. One person may hold the offices and perform the duties of any two or more of said officers; provided , however , that no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, the Certificate or these By-laws to be executed, acknowledged or verified by two or more officers. The Board may require any officer or agent to give security for the faithful performance of such person’s duties.

SECTION 2.   Removal .  Subject to Section 14 of this Article V, any officer may be removed, either with or without cause, by the Board at any meeting thereof called for the purpose or by any superior officer upon whom such power may be conferred by the Board.

 

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SECTION 3.   Resignation .  Any officer may resign at any time by giving notice to the Board, the Chief Executive Officer or the Secretary. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

SECTION 4.   Chairman of the Board .  The Chairman of the Board may be an officer of the Corporation, subject to the control of the Board, and shall report directly to the Board.

SECTION 5.   Chief Executive Officer .  The Chief Executive Officer shall have general supervision and direction of the business and affairs of the Corporation, subject to the control of the Board, and shall report directly to the Board.

SECTION 6.   Chief Operating Officer .  The Chief Operating Officer shall perform such senior duties in connection with the operations of the Corporation as the Board or the Chief Executive Officer shall from time to time determine, and shall report directly to the Chief Executive Officer. The Chief Operating Officer shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as may be agreed with the Chief Executive Officer or as the Board may from time to time determine.

SECTION 7.   Vice Chairmen .  Any Vice Chairman shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine.

SECTION 8.   Chief Financial Officer .  The Chief Financial Officer shall perform all the powers and duties of the office of the chief financial officer and in general have overall supervision of the financial operations of the Corporation. The Chief Financial Officer shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine. The Chief Financial Officer shall report directly to the Chief Executive Officer.

SECTION 9.   Vice Presidents .  Any Vice President shall have such powers and duties as shall be prescribed by his superior officer or the Board. A Vice President shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine. A Vice President need not be an officer of the Corporation and shall not be deemed an officer of the Corporation unless elected by the Board.

 

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SECTION 10.   Treasurer .  The Treasurer, if one shall have been elected, shall supervise and be responsible for all the funds and securities of the Corporation; the deposit of all moneys and other valuables to the credit of the Corporation in depositories of the Corporation; borrowings and compliance with the provisions of all indentures, agreements and instruments governing such borrowings to which the Corporation is a party; the disbursement of funds of the Corporation and the investment of its funds; and in general shall perform all of the duties incident to the office of the Treasurer. The Treasurer shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine.

SECTION 11.   Controller .  The Controller shall be the chief accounting officer of the Corporation. The Controller shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer, the Chief Financial Officer or as the Board may from time to time determine.

SECTION 12.   Secretary .  It shall be the duty of the Secretary to act as secretary at all meetings of the Board, of the committees of the Board and of the stockholders and to record the proceedings of such meetings in a book or books to be kept for that purpose; the Secretary shall see that all notices required to be given by the Corporation are duly given and served; the Secretary shall be custodian of the seal of the Corporation and shall affix the seal or cause it to be affixed to all certificates of stock of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these By-laws; the Secretary shall have charge of the books, records and papers of the Corporation and shall see that the reports, statements and other documents required by law to be kept and filed are properly kept and filed; and in general shall perform all of the duties incident to the office of Secretary. The Secretary shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine.

SECTION 13.   Assistant Treasurers, Assistant Controllers and Assistant Secretaries .  Any Assistant Treasurers, Assistant Controllers and Assistant Secretaries shall perform such duties as shall be assigned to them by the Board or by the Treasurer, Controller or Secretary, respectively, or by the Chief Executive Officer. An Assistant Treasurer, Assistant Controller or Assistant Secretary need not be an officer of the Corporation and shall not be deemed an officer of the Corporation unless elected by the Board.

SECTION 14.   Additional Matters .  The Chairman of the Board, the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer of the Corporation shall have the authority to designate employees of the Corporation to have the title of Vice President, Assistant Vice President, Assistant Treasurer, Assistant

 

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Controller or Assistant Secretary. Any employee so designated shall have the powers and duties determined by the officer making such designation. The persons upon whom such titles are conferred shall not be deemed officers of the Corporation unless elected by the Board.

ARTICLE VI

Indemnification

SECTION 1.   Right to Indemnification .  The Corporation, to the fullest extent permitted or required by the DGCL or other applicable law, as the same exists or may hereafter be amended (but, in the case of any such amendment and unless applicable law otherwise requires, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), shall indemnify and hold harmless any person who is or was a director or officer of the Corporation and who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, any action, suit or proceedings by or in the right of the Corporation to procure a judgment in its favor) (a “Proceeding”) by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, any employee benefit plan) (a “Covered Entity”) against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding; provided , however , that the foregoing shall not apply to a director or officer of the Corporation with respect to a Proceeding that was commenced by such director or officer unless the proceeding was commenced after a Change in Control (as hereinafter defined in Section 4(e) of this Article VI). Any director or officer of the Corporation entitled to indemnification as provided in this Section 1 is hereinafter called an “Indemnitee”. Any right of an Indemnitee to indemnification shall be a contract right and shall include the right to receive, prior to the conclusion of any Proceeding, payment of any expenses incurred by the Indemnitee in connection with such Proceeding, consistent with the provisions of the DGCL or other applicable law, as the same exists or may hereafter be amended (but, in the case of any such amendment and unless applicable law otherwise requires, only to the extent that such amendment permits the Corporation to provide broader rights to payment of expenses than such law permitted the Corporation to provide prior to such amendment), and the other provisions of this Article VI.

SECTION 2.   Insurance, Contracts and Funding .  The Corporation may purchase and maintain insurance to protect itself and any director, officer, employee or agent of the Corporation or of any Covered Entity against any expenses, judgments, fines and amounts paid in settlement as specified in Section 1 of this Article VI or incurred by any such director, officer, employee or agent in connection with any Proceeding referred

 

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to in Section 1 of this Article VI, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL. The Corporation may enter into contracts with any director, officer, employee or agent of the Corporation or of any Covered Entity in furtherance of the provisions of this Article VI and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided or authorized in this Article VI.

SECTION 3.   Indemnification Not Exclusive Right .  The right of indemnification provided in this Article VI shall not be exclusive of any other rights to which an Indemnitee may otherwise be entitled, and the provisions of this Article VI shall inure to the benefit of the heirs and legal representatives of any Indemnitee under this Article VI and shall be applicable to Proceedings commenced or continuing after the adoption of this Article VI, whether arising from acts or omissions occurring before or after such adoption.

SECTION 4.   Advancement of Expenses; Procedures; Presumptions and Effect of Certain Proceedings; Remedies .  In furtherance, but not in limitation of the foregoing provisions, the following procedures, presumptions and remedies shall apply with respect to advancement of expenses and the right to indemnification under this Article VI:

(a)   Advancement of Expenses .  All reasonable expenses (including attorneys’ fees) incurred by or on behalf of the Indemnitee in connection with any Proceeding shall be advanced to the Indemnitee by the Corporation within 20 days after the receipt by the Corporation of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the expenses incurred by the Indemnitee and, if required by law at the time of such advance, shall include or be accompanied by an undertaking by or on behalf of the Indemnitee to repay the amounts advanced if ultimately it should be determined that the Indemnitee is not entitled to be indemnified against such expenses pursuant to this Article VI.

(b)   Procedure for Determination of Entitlement to Indemnification .

(i)  To obtain indemnification under this Article VI, an Indemnitee shall submit to the Secretary a written request, including such documentation and information as is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification (the “Supporting Documentation”). The determination of the Indemnitee’s entitlement to indemnification shall be made not later than 60 days after receipt by the Corporation of the written request for indemnification together with the Supporting Documentation. The Secretary shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification.

 

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(ii)  The Indemnitee’s entitlement to indemnification under this Article VI shall be determined in one of the following ways: (A) by a majority vote of the Disinterested Directors (as hereinafter defined in Section 4(e) of this Article VI), whether or not they constitute a quorum of the Board, or by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors; (B) by a written opinion of Independent Counsel (as hereinafter defined in Section 4(e) of this Article VI) if (x) a Change in Control shall have occurred and the Indemnitee so requests or (y) there are no Disinterested Directors or a majority of such Disinterested Directors so directs; (C) by the stockholders of the Corporation; or (D) as provided in Section 4(c) of this Article VI.

(iii)  In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 4(b)(ii) of this Article VI, a majority of the Disinterested Directors shall select the Independent Counsel, but only an Independent Counsel to which the Indemnitee does not reasonably object; provided , however , that if a Change in Control shall have occurred, the Indemnitee shall select such Independent Counsel, but only an Independent Counsel to which a majority of the Disinterested Directors does not reasonably object.

(c)   Presumptions and Effect of Certain Proceedings . Except as otherwise expressly provided in this Article VI, if a Change in Control shall have occurred, the Indemnitee shall be presumed to be entitled to indemnification under this Article VI (with respect to actions or omissions occurring prior to such Change in Control) upon submission of a request for indemnification together with the Supporting Documentation in accordance with Section 4(b)(i) of this Article VI, and thereafter the Corporation shall have the burden of proof to overcome that presumption in reaching a contrary determination. In any event, if the person or persons empowered under Section 4(b) of this Article VI to determine entitlement to indemnification shall not have been appointed or shall not have made a determination within 60 days after receipt by the Corporation of the request therefor, together with the Supporting Documentation, the Indemnitee shall be deemed to be, and shall be, entitled to indemnification unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. The termination of any Proceeding described in Section 1 of this Article VI, or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal proceeding, that the Indemnitee had reasonable cause to believe that such conduct was unlawful.

(d)   Remedies of Indemnitee .  (i)  In the event that a determination is made pursuant to Section 4(b) of this Article VI that the Indemnitee is not entitled to indemnification under this Article VI, (A) the Indemnitee shall be entitled to seek an

 

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adjudication of entitlement to such indemnification either, at the Indemnitee’s sole option, in (x) an appropriate court of the State of Delaware or any other court of competent jurisdiction or (y) an arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association; (B) any such judicial proceeding or arbitration shall be de novo and the Indemnitee shall not be prejudiced by reason of such adverse determination; and (C) if a Change in Control shall have occurred, in any such judicial proceeding or arbitration, the Corporation shall have the burden of proving that the Indemnitee is not entitled to indemnification under this Article VI (with respect to actions or omissions occurring prior to such Change in Control).

(ii)  If a determination shall have been made or deemed to have been made, pursuant to Section 4(b) or (c) of this Article VI, that the Indemnitee is entitled to indemnification, the Corporation shall be obligated to pay the amounts constituting such indemnification within five days after such determination has been made or deemed to have been made and shall be conclusively bound by such determination unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. In the event that (X) advancement of expenses is not timely made pursuant to Section 4(a) of this Article VI or (Y) payment of indemnification is not made within five days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to Section 4(b) or (c) of this Article VI, the Indemnitee shall be entitled to seek judicial enforcement of the Corporation’s obligation to pay to the Indemnitee such advancement of expenses or indemnification. Notwithstanding the foregoing, the Corporation may bring an action, in an appropriate court in the State of Delaware or any other court of competent jurisdiction, contesting the right of the Indemnitee to receive indemnification hereunder due to the occurrence of an event described in sub-clause (A) or (B) of this clause (ii) (a “Disqualifying Event”); provided, however, that in any such action the Corporation shall have the burden of proving the occurrence of such Disqualifying Event.

(iii)  The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 4(d) that the procedures and presumptions of this Article VI are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Article VI.

(iv)  In the event that the Indemnitee, pursuant to this Section 4(d), seeks a judicial adjudication of or an award in arbitration to enforce rights under, or to recover damages for breach of, this Article VI, the Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any expenses actually and reasonably incurred by the Indemnitee if the Indemnitee prevails in such judicial adjudication or arbitration. If it shall be determined in such judicial adjudication or arbitration that the Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by the Indemnitee in connection with such judicial adjudication or arbitration shall be prorated accordingly.

 

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(e)   Definitions .  For purposes of this Article VI:

(i)  “ Authorized Officer ” means any one of the Chairman of the Board, the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, any Vice President or the Secretary of the Corporation.

(ii)  “ Change in Control ” means the occurrence of any of the following: (w) any merger or consolidation of the Corporation in which the Corporation is not the continuing or surviving corporation or pursuant to which shares of the Corporation’s Common Stock would be converted into cash, securities or other property, other than a merger of the Corporation in which the holders of the Corporation’s Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (x) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Corporation, or the liquidation or dissolution of the Corporation or (y) individuals who would constitute a majority of the members of the Board elected at any meeting of stockholders or by written consent (without regard to any members of the Board elected pursuant to the terms of any series of Preferred Stock) shall be elected to the Board and the election or the nomination for election by the stockholders of such directors was not approved by a vote of at least two-thirds of the directors in office immediately prior to such election.

(iii)  “ Disinterested Director ” means a director of the Corporation who is not or was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee.

(iv)  “ Independent Counsel ” means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent: (x) the Corporation or the Indemnitee in any matter material to either such party or (y) any other party to the Proceeding giving rise to a claim for indemnification under this Article VI. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing under the law of the State of Delaware, would have a conflict of interest in representing either the Corporation or the Indemnitee in an action to determine the Indemnitee’s rights under this Article VI.

SECTION 5.   Severability .  If any provision or provisions of this Article VI shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Article VI (including, without limitation, all portions of any paragraph of this Article VI containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Article VI (including, without limitation, all portions of any paragraph of this Article VI containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or enforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

 

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SECTION 6.   Indemnification of Employees Serving as Directors .  The Corporation, to the fullest extent of the provisions of this Article VI with respect to the indemnification of directors and officers of the Corporation, shall indemnify any person who is or was an employee of the Corporation and who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed Proceeding by reason of the fact that such employee is or was serving (a) as a director of a corporation in which the Corporation had at the time of such service, directly or indirectly, a 50% or greater equity interest (a “Subsidiary Director”) or (b) at the written request of an Authorized Officer, as a director of another corporation in which the Corporation had at the time of such service, directly or indirectly, a less than 50% equity interest (or no equity interest at all) or in a capacity equivalent to that of a director for any partnership, joint venture, trust or other enterprise (including, without limitation, any employee benefit plan) in which the Corporation has an interest (a “Requested Employee”), against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such Subsidiary Director or Requested Employee in connection with such Proceeding. The Corporation may also advance expenses incurred by any such Subsidiary Director or Requested Employee in connection with any such Proceeding, consistent with the provisions of this Article VI with respect to the advancement of expenses of directors and officers of the Corporation.

SECTION 7.   Indemnification of Employees and Agents .  Notwithstanding any other provision or provisions of this Article VI, the Corporation, to the fullest extent of the provisions of this Article VI with respect to the indemnification of directors and officers of the Corporation, may indemnify any person other than a director or officer of the Corporation, a Subsidiary Director or a Requested Employee, who is or was an employee or agent of the Corporation and who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed Proceeding by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation or of a Covered Entity against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding. The Corporation may also advance expenses incurred by such employee or agent in connection with any such Proceeding, consistent with the provisions of this Article VI with respect to the advancement of expenses of directors and officers of the Corporation.

ARTICLE VII

Capital Stock

SECTION 1.   Certificates for Shares .  The shares of stock of the Corporation shall be represented by certificates, or shall be uncertificated shares that may

 

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be evidenced by a book-entry system maintained by the registrar of such stock, or a combination of both. To the extent that shares are represented by certificates, such certificates whenever authorized by the Board, shall be in such form as shall be approved by the Board. The certificates representing shares of stock of each class shall be signed by, or in the name of, the Corporation by the Chairman of the Board and the Chief Executive Officer, or by any Vice President, and by the Secretary or any Assistant Secretary or the Treasurer or any Assistant Treasurer of the Corporation, and sealed with the seal of the Corporation, which may be a facsimile thereof. Any or all such signatures may be facsimiles if countersigned by a transfer agent or registrar. Although any officer, transfer agent or registrar whose manual or facsimile signature is affixed to such a certificate ceases to be such officer, transfer agent or registrar before such certificate has been issued, it may nevertheless be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were still such at the date of its issue.

The stock ledger and blank share certificates shall be kept by the Secretary or by a transfer agent or by a registrar or by any other officer or agent designated by the Board.

SECTION 2.   Transfer of Shares .  Transfers of shares of stock of each class of the Corporation shall be made only on the books of the Corporation upon authorization by the registered holder thereof, or by such holder’s attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary or a transfer agent for such stock, if any, and if such shares are represented by a certificate, upon surrender of the certificate or certificates for such shares properly endorsed or accompanied by a duly executed stock transfer power (or by proper evidence of succession, assignment or authority to transfer) and the payment of any taxes thereon; provided , however , that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. The person in whose name shares are registered on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation; provided , however , that whenever any transfer of shares shall be made for collateral security and not absolutely, and written notice thereof shall be given to the Secretary or to such transfer agent, such fact shall be stated in the entry of the transfer. No transfer of shares shall be valid as against the Corporation, its stockholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred.

SECTION 3.   Registered Stockholders and Addresses of Stockholders .  The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments a person registered on its records as the owner of shares of stock, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

 

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Each stockholder shall designate to the Secretary or transfer agent of the Corporation an address at which notices of meetings and all other corporate notices may be given to such person, and, if any stockholder shall fail to designate such address, corporate notices may be given to such person by mail directed to such person at such person’s post office address, if any, as the same appears on the stock record books of the Corporation or at such person’s last known post office address.

SECTION 4.   Lost, Destroyed and Mutilated Certificates .  The holder of any certificate representing any shares of stock of the Corporation shall immediately notify the Corporation of any loss, theft, destruction or mutilation of such certificate; the Corporation may issue to such holder a new certificate or certificates for shares, upon the surrender of the mutilated certificate or, in the case of loss, theft or destruction of the certificate, upon satisfactory proof of such loss, theft or destruction; the Board, or a committee designated thereby, or the transfer agents and registrars for the stock, may, in their discretion, require the owner of the lost, stolen or destroyed certificate, or such person’s legal representative, to give the Corporation a bond in such sum and with such surety or sureties as they may direct to indemnify the Corporation and said transfer agents and registrars against any claim that may be made on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.

SECTION 5.   Regulations .  The Board may make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificated or uncertificated shares of stock of each class and series of the Corporation and may make such rules and take such action as it may deem expedient concerning the issue of certificates in lieu of certificates claimed to have been lost, destroyed, stolen or mutilated.

SECTION 6.   Fixing Date for Determination of Stockholders of Record .  In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than 60 days nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders entitled to notice of or to vote at a meeting of the stockholders shall apply to any adjournment of the meeting; provided, however , that the Board may fix a new record date for the adjourned meeting.

SECTION 7.   Transfer Agents and Registrars .  The Board may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars.

 

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ARTICLE VIII

Seal

The Board shall approve a suitable corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation and shall be in the charge of the Secretary. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.

ARTICLE IX

Fiscal Year

The fiscal year of the Corporation shall end on the 31st day of December in each year.

ARTICLE X

Waiver of Notice

Whenever any notice whatsoever is required to be given by these By-laws, by the Certificate or by law, the person entitled thereto may, either before or after the meeting or other matter in respect of which such notice is to be given, waive such notice in writing or as otherwise permitted by law, which shall be filed with or entered upon the records of the meeting or the records kept with respect to such other matter, as the case may be, and in such event such notice need not be given to such person and such waiver shall be deemed equivalent to such notice.

ARTICLE XI

Amendments

These By-laws may be altered, amended or repealed, in whole or in part, or new By-laws may be adopted by the stockholders or by the Board at any meeting thereof; provided , however , that notice of such alteration, amendment, repeal or adoption of new By-laws is contained in the notice of such meeting of the stockholders or in the notice of such meeting of the Board and, in the latter case, such notice is given not less than twenty-four hours prior to the meeting. All such amendments must be approved by either the holders of a majority of the votes cast by the stockholders entitled to vote thereon who are present in person or represented by proxy, or by a majority of the Board.

 

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ARTICLE XII

Miscellaneous

SECTION 1.   Execution of Documents .  The Board or any committee thereof shall designate the officers, employees and agents of the Corporation who shall have power to execute and deliver deeds, contracts, mortgages, bonds, debentures, notes, checks, drafts and other orders for the payment of money and other documents for and in the name of the Corporation and may authorize (including authority to redelegate) by written instrument to other officers, employees or agents of the Corporation. Such delegation may be by resolution or otherwise and the authority granted shall be general or confined to specific matters, all as the Board or any such committee may determine. In the absence of such designation referred to in the first sentence of this Section, the officers of the Corporation shall have such power so referred to, to the extent incident to the normal performance of their duties.

SECTION 2.   Deposits .  All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation or otherwise as the Board or any committee thereof or any officer of the Corporation to whom power in respect of financial operations shall have been delegated by the Board or any such committee or in these By-laws shall select.

SECTION 3.   Checks .  All checks, drafts and other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed on behalf of the Corporation in such manner as shall from time to time be determined by resolution of the Board or of any committee thereof or by any officer of the Corporation to whom power in respect of financial operations shall have been delegated by the Board or any such committee thereof or as set forth in these By-laws.

SECTION 4.   Proxies in Respect of Stock or Other Securities of Other Corporations .  The Board or any committee thereof shall designate the officers of the Corporation who shall have authority from time to time to appoint an agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation or other entity, and to vote or consent in respect of such stock or securities; such designated officers may instruct the person or persons so appointed as to the manner of exercising such powers and rights; and such designated officers may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, such written proxies, powers of attorney or other instruments as they may deem necessary or proper in order that the Corporation may exercise its said powers and rights.

SECTION 5.   Subject to Law and Certificate of Incorporation .  All powers, duties and responsibilities provided for in these By-laws, whether or not explicitly so qualified, are qualified by the provisions of the Certificate and applicable laws.

SECTION 6.   Forum Selection By-law .  Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of

 

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Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any current or former director, officer or stockholder of the Corporation to the Corporation or the Corporation’s stockholders, (c) any action or proceeding asserting a claim arising pursuant to, or seeking to enforce any right, obligation or remedy under, any provision of the General Corporation Law of the State of Delaware, the Certificate or these By-laws (as each may be amended from time to time), (d) any action or proceeding as to which the General Corporation Law of the State of Delaware confers jurisdiction on the Court of Chancery of the State of Delaware, or (e) any action or proceeding asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring or holding or owning (or continuing to hold or own) any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this By-law.

 

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Exhibit 10.1

TIME WARNER INC. 2013 STOCK INCENTIVE PLAN

Special Retention RSU Agreement – 2017 (13RUMR17)

For Use From October 22, 2016

Special Retention Restricted Stock Units Agreement — 2017

General Terms and Conditions

WHEREAS, the Company has adopted the Plan (as defined below), the terms of which are hereby incorporated by reference and made a part of this Agreement; and

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to make a special retention grant of the restricted stock units (the “ RSUs ”) provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

 

1. Definitions . Whenever the following terms are used in this Agreement, they shall have the meanings set forth below. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.

 

  a) Cause means “Cause” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there is no such agreement, “Cause” means (i) the Participant’s continued failure substantially to perform such Participant’s duties (other than as a result of total or partial incapacity due to physical or mental illness) for a period of ten (10) days following written notice by the Company or any of its Affiliates to the Participant of such failure, (ii) dishonesty in the performance of the Participant’s duties, (iii) the Participant’s conviction of, or plea of nolo contendere to, a crime constituting (A) a felony under the laws of the United States or any state thereof or (B) a misdemeanor involving moral turpitude, (iv) the Participant’s insubordination, willful malfeasance or willful misconduct in connection with the Participant’s duties or any act or omission which is injurious to the financial condition or business reputation of the Company or any of its Affiliates, or (v) the Participant’s breach of any non-competition, non-solicitation or confidentiality provisions to which the Participant is subject. Unless otherwise provided in an employment agreement between the Company or any of its Affiliates and the Participant, the determination of the Committee as to the existence of “Cause” will be conclusive on the Participant and the Company.

 

  b)

Disability means “Disability” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there shall be no such agreement, “disability” of the Participant shall have the meaning ascribed to such term in the Company’s


 

long-term disability plan or policy, as in effect from time to time, to the extent that such definition also constitutes such Participant being considered “disabled” under Section 409A(a)(2)(C) of the Code.

 

  c) Good Reason means “Good Reason” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there is no such agreement, “Good Reason” means (i) the failure of the Company to pay or cause to be paid the Participant’s base salary or annual bonus when due, (ii) any substantial and sustained diminution in the Participant’s authority or responsibilities materially inconsistent with the Participant’s position, (iii) a reduction in such Participant’s annual base salary or target annual bonus in effect as of the date of this Award without the Participant’s written consent or (iv) without the Participant’s written consent, any requirement that the Participant’s principal place of employment be relocated to a location that increases such Participant’s commute from his or her primary residence by more than thirty-five (35) miles; provided that any of the events described in clauses (i), (ii), (iii) and (iv) will constitute Good Reason only if the Company fails to cure such event within 30 days after receipt from the Participant of written notice of the event which constitutes Good Reason; provided , further , that, unless otherwise provided in an employment agreement between the Company or any of its Affiliates and the Participant, “Good Reason” will cease to exist for an event on the sixtieth (60 th ) day following the later of its occurrence or the Participant’s knowledge thereof, unless the Participant has given the Company written notice of his or her termination of employment for Good Reason prior to such date.

 

  d) Merger Agreement means the Agreement and Plan of Merger among Time Warner Inc., AT&T Inc. and West Merger Sub, Inc., dated as of October 22, 2016, as may be amended, modified or supplemented from time to time.

 

  e) Notice means (i) the Notice of Grant of Restricted Stock Units that accompanies this Agreement, if this Agreement is delivered to the Participant in “hard copy,” and (ii) the screen of the website for the stock plan administration with the heading “Vesting Schedule and Details,” which contains the details of the grant governed by this Agreement, if this Agreement is delivered electronically to the Participant.

 

  f) Participant means an individual to whom RSUs have been awarded pursuant to the Plan and shall have the same meaning as may be assigned to the terms “Holder” or “Participant” in the Plan.

 

  g) Plan means the equity plan maintained by the Company that is specified in the Notice, which equity plan has been provided to the Participant separately and forms a part of this Agreement, as such plan may be amended, supplemented or modified from time to time.

 

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  h) Prior Option Agreement has the meaning set forth in Section 11(b) below.

 

  i) Prior Options has the meaning set forth in Section 11(b) below.

 

  j) Prior RSU Agreement has the meaning set forth in Section 11(a) below.

 

  k) Prior RSUs has the meaning set forth in Section 11(a) below.

 

  l) Retirement means a voluntary termination of employment by the Participant following the attainment of age 55 with ten (10) or more years of service as an employee or a director with the Company or any Affiliate, provided that such voluntary termination occurs on or after the closing of the transactions contemplated by the Merger Agreement (or, if the Merger Agreement is terminated and such closing does not occur, on or after termination of the Merger Agreement).

 

  m) Severance Period means the period of time following a termination of Employment during which a Participant is entitled to receive both salary continuation payments and continued participation under the health benefit plans of the Company or any of its Affiliates, whether pursuant to an employment contract with, or a severance plan or other arrangement maintained by, the Company or any Affiliate.

 

  n) Shares means shares of Common Stock of the Company.

 

  o) Vesting Date means each vesting date set forth below:

 

Vesting Date   % of 2017 RSUs Vested
February 15, 2018   25%
February 15, 2019   50%
February 15, 2020   75%
February 15, 2021   100%

 

  p) Vesting Commencement Date means February 15, 2017.

 

2. Grant of Restricted Stock Units . The Company hereby grants to the Participant (the “ Award ”), on the terms and conditions hereinafter set forth, the number of RSUs set forth on the Notice. Each RSU represents the unfunded, unsecured right of the Participant to receive a Share on the applicable Vesting Date, subject to the terms and conditions set forth herein. RSUs do not constitute issued and outstanding shares of Common Stock for any corporate purposes and do not confer on the Participant any right to vote on matters that are submitted to a vote of holders of Shares.

 

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3. Dividend Equivalents and Retained Distributions . If on any date while RSUs are outstanding hereunder the Company shall pay any regular cash dividend on the Shares, then, for each RSU held by the Participant on the record date, the Participant shall be paid an amount of cash equal to the dividend paid on a Share (the “ Dividend Equivalents ”), with such payment made at the time that such dividends are paid to holders of Shares. If on any date while RSUs are outstanding hereunder the Company shall pay any dividend other than a regular cash dividend or make any other distribution on the Shares, the Participant shall be credited with a bookkeeping entry equivalent to such dividend or distribution for each RSU held by the Participant on the record date for such dividend or distribution, but the Company shall retain custody of all such dividends and distributions unless the Board has in its sole discretion determined that an amount equivalent to such dividend or distribution shall be paid currently to the Participant (the “ Retained Distributions ”); provided , however , that if the Retained Distribution relates to a dividend paid in Shares, the Participant shall receive an additional amount of RSUs equal to the product of (I) the aggregate number of RSUs held by the Participant pursuant to this Agreement through the related dividend record date, multiplied by (II) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Retained Distributions will not bear interest and will be subject to the same restrictions as the RSUs to which they relate. Notwithstanding anything else contained in this Section 3, no payment of Dividend Equivalents or Retained Distributions shall occur before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”).

 

4. Vesting and Delivery of Vested Securities .

 

  a) Except as otherwise provided in Sections 5, 6 and 7, the vesting of the RSUs and any Retained Distributions relating thereto shall occur only if the Participant has continued in Employment of the Company or any of its Affiliates on the Vesting Date and has continuously been so employed since the Date of Grant (as set forth in the Notice). Subject to the requirements and limitations in the immediately preceding sentence and the other terms and provisions of this Agreement and the Plan, no later than 60 days after each Vesting Date with respect to the Award, the Company shall issue or transfer to the Participant the number of Shares corresponding to such Vesting Date and the Retained Distributions, if any, covered by that portion of the Award.

 

  b) RSUs Extinguished . Upon each issuance or transfer of Shares in accordance with this Agreement, a number of RSUs equal to the number of Shares issued or transferred to the Participant shall be extinguished and such number of RSUs will not be considered to be held by the Participant for any purpose.

 

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  c) Final Issuance . Upon the final issuance or transfer of Shares and Retained Distributions, if any, to the Participant pursuant to this Agreement, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share.

 

  d) Section 409A . Notwithstanding anything else contained in this Agreement, no Shares shall be issued or transferred to a Participant and no Retained Distributions shall be paid before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Code.

 

5. Termination of Employment .

 

  a) Notwithstanding any provision of an employment agreement between the Participant and the Company or an Affiliate or any severance plan that provides for different treatment, (i) if, prior to the Vesting Commencement Date, the Participant’s Employment with the Company and its Affiliates terminates for any reason other than those described in Sections 5(b) or Section 6 (including as a result of termination of the Participant’s Employment without Cause or due to Retirement), then all portions of the Award and all Retained Distributions relating thereto shall be completely forfeited on the date of any such termination, and (ii) if, on or following the Vesting Commencement Date but prior to the Vesting Date with respect to any portion of the Award, the Participant’s Employment with the Company and its Affiliates terminates for any reason other than those described in Section 5(b), (c) or (d) or in Section 6, then the RSUs covered by such portion of the Award and all Retained Distributions relating thereto shall be completely forfeited on the date of any such termination.

 

  b) If, on any date while RSUs are outstanding hereunder, the Participant’s Employment terminates as a result of his or her death or Disability, then, to the extent the RSUs were not extinguished or forfeited prior to such termination of Employment, the RSUs and all Retained Distributions relating thereto shall fully vest on the date of any such termination, and Shares subject to the RSUs shall be issued or transferred to the Participant (along with the Retained Distributions relating thereto) as soon as practicable, but no later than 60 days, following such termination of Employment.

 

  c)

If, on or after the Vesting Commencement Date and prior to a Change of Control, the Participant’s Employment (i) terminates as a result of his or her Retirement (taking into account the provision in the definition thereof relating to the status of the transactions contemplated by the Merger Agreement) or (ii) is terminated by the Company and its Affiliates for any

 

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reason other than for Cause (x) on a date when the Participant satisfies the requirements for Retirement or (y) on a date when the Participant does not satisfy the requirements for Retirement, but the Participant would satisfy the requirements for Retirement during a Severance Period (for purposes of this clause (ii), based solely on whether the Participant has attained the relevant age and service requirements in the definition of Retirement and without regard to the status of the transactions contemplated by the Merger Agreement (the “ Age and Service Requirements ”)), then the RSUs and all Retained Distributions relating thereto shall fully vest on the date of such termination of Employment; and Shares subject to the RSUs shall be issued or transferred to the Participant (along with the Retained Distributions relating thereto) as soon as practicable, but no later than 60 days, following such termination of Employment.

 

  d) If, on or after the Vesting Commencement Date and prior to a Change of Control, the Participant’s Employment is terminated by the Company and its Affiliates for any reason other than for Cause (unless such termination is due to death or Disability) on a date when the Participant does not satisfy the Age and Service Requirements and the Participant would not satisfy such requirements by the end of a Severance Period, then the RSUs that were scheduled to vest on any Vesting Dates that occur before the end of a Severance Period, and any Retained Distributions relating thereto, shall become vested, and Shares subject to such RSUs shall be issued or transferred to the Participant (along with the Retained Distributions relating thereto) as soon as practicable, but no later than 60 days, following such termination of Employment. The portion of the RSUs that have a Vesting Date after the end of a Severance Period and any Retained Distributions related thereto shall be completely forfeited on the date of any such termination.

For purposes of this Section 5, a temporary leave of absence shall not constitute a termination of Employment or a failure to be continuously employed by the Company or any Affiliate regardless of the Participant’s payroll status during such leave of absence if such leave of absence is approved in writing by the Company or any Affiliate; provided , that such leave of absence constitutes a bona fide leave of absence and not a Separation From Service under Treas. Reg. 1.409A-1(h)(1)(i). Notice of any such approved leave of absence should be sent to the Company at One Time Warner Center, New York, New York 10019, attention: Director, Global Stock Plans Administration, but such notice shall not be required for the leave of absence to be considered approved.

Furthermore, if you are subject to an employment agreement that provides you the right to terminate your employment if the Company or one of its Subsidiaries is in material breach of its obligations thereunder, then if you terminate your employment as a result of a material breach, it will be deemed a termination without Cause for purposes of this Section 5, regardless of whether it occurs prior to, upon or after the closing of the transactions contemplated by, or following the termination of, the Merger Agreement.

 

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In the event the Participant’s Employment with the Company or any of its Affiliates is terminated, the Participant shall have no claim against the Company with respect to the RSUs and related Retained Distributions, if any, other than as set forth in this Section 5 (and, if applicable, Section 6), the provisions of this Section 5 (and, if applicable, Section 6) being the sole remedy of the Participant with respect thereto.

 

6. Acceleration of Vesting Date . In the event a Change in Control, subject to Section 7, has occurred on any date while RSUs are outstanding hereunder, (A) the Award will vest in full upon the earliest of (i) the Vesting Date with respect to each portion of the Award, (ii) the Participant’s Retirement and (iii) the termination of the Participant’s Employment by the Company or any of its Affiliates (I) by the Company other than for Cause (unless such termination is due to death or Disability) or (II) by the Participant for Good Reason and (B) Shares subject to the RSUs shall be issued or transferred to the Participant, as soon as practicable, but in no event later than 60 days following such Vesting Date, along with the Retained Distributions related thereto.

 

7. Limitation on Acceleration .

 

  a)

Notwithstanding any provision to the contrary in the Plan or this Agreement, in the event it is determined by an independent nationally recognized public accounting firm, which is engaged and paid for by the Company prior to the consummation of any transaction constituting a Change in Control (which for purposes of this Section 7 shall mean a change in ownership or control as determined in accordance with the regulations promulgated under Section 280G of the Code), which accounting firm shall in no event be the accounting firm for the entity seeking to effectuate the Change in Control (the “ Accountant ”), which determination shall be certified by the Accountant and set forth in a certificate delivered to the Participant not less than ten (10) business days prior to the Change in Control setting forth in reasonable detail the basis of the Accountant’s calculations (including any assumptions that the Accountant made in performing the calculations), that part or all of the consideration, compensation or benefits to be paid to such Participant under this Agreement constitute “parachute payments” under Section 280G(b)(2) of the Code, then, if the aggregate present value of such parachute payments, singularly or together with the aggregate present value of any consideration, compensation or benefits to be paid to such Participant under any other plan, arrangement or agreement which constitute “parachute payments” (collectively, the “ Parachute Amount ”) exceeds the maximum amount that would not give rise to any liability under Section 4999 of the Code, the amounts constituting “parachute payments” which would otherwise be payable to such Participant or for

 

7


 

such Participant’s benefit shall be reduced to the maximum amount that would not give rise to any liability under Section 4999 of the Code (the “ Reduced Amount ”); provided that such amounts shall not be so reduced if the Accountant determines that without such reduction such Participant would be entitled to receive and retain, on a net after-tax basis (including, without limitation, any excise taxes payable under Section 4999 of the Code), an amount which is greater than the amount, on a net after-tax basis, that such Participant would be entitled to retain upon receipt of the Reduced Amount. In connection with making determinations under this Section 7, the Accountant shall take into account any positions to mitigate any excise taxes payable under Section 4999 of the Code, such as the value of any reasonable compensation for services to be rendered by the Participant before or after the Change in Control, including any amounts payable to such Participant following such Participant’s termination of employment hereunder with respect to any non-competition provisions that may apply to such Participant, and the Company shall cooperate in the valuation of any such services, including any non-competition provisions.

 

  b) If the determination made pursuant to this Section 7 results in a reduction of the payments that would otherwise be paid to the Participant except for the application of this Section 7, the Company shall promptly give such Participant notice of such determination. Such reduction in payments shall be first applied to reduce any cash payments that such Participant would otherwise be entitled to receive under this Agreement or otherwise and shall thereafter be applied to reduce other payments and benefits, in each case, in reverse order beginning with the payments or benefits that are to be paid the furthest in time from the date of such determination, unless, to the extent permitted by Section 409A of the Code, such Participant elects to have the reduction in payments applied in a different order; provided that, in no event may such payments be reduced in a manner that would result in subjecting such Participant to additional taxation under Section 409A of the Code.

 

  c)

As a result of the uncertainty in the application of Sections 280G and 4999 of the Code at the time of a determination hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement which should not have been so paid or distributed (each, an “ Overpayment ”) or that additional amounts which will have not been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement could have been so paid or distributed (each, an “ Underpayment ”), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accountant, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Participant which the Accountant believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for such Participant’s benefit

 

8


 

shall be repaid by such Participant to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided , however , that no such repayment shall be required if and to the extent such deemed repayment would not either reduce the amount on which such Participant is subject to tax under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accountant, based on controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for such Participant’s benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.

 

  d) In the event of any dispute with the Internal Revenue Service (or other taxing authority) with respect to the application of this Section 7, the Participant shall control the issues involved in such dispute and make all final determinations with regard to such issues. The Company shall promptly pay, upon demand by such Participant, all legal fees, court costs, fees of experts and other costs and expenses which such Participant incurs in any actual, threatened or contemplated contest of such Participant’s interpretation of, or determination under, the provisions of this Section 7.

 

8. Withholding Taxes .

 

  a) Obligation to Pay Withholding Taxes . The Participant acknowledges and agrees that, regardless of any action the Company or the Participant’s employer takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding (the “ Tax-Related Items ”), the ultimate liability for all Tax-Related Items legally due by the Participant (i) is and remains the Participant’s responsibility and (ii) may exceed the amount actually withheld by the Company or the Participant’s employer. The Participant further agrees and acknowledges that the Company and the Participant’s employer (x) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant of the Award, the vesting of the RSUs or the subsequent sale of any Shares acquired from vesting of the RSUs, and the receipt of any Dividend Equivalents or Retained Distributions; and (y) do not commit to and are under no obligation to structure the terms of the Award to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any particular tax result. Further, the Participant understands and acknowledges that if the Participant has become subject to tax in more than one jurisdiction between the Date of Grant (as set forth in the Notice) and the date of any relevant taxable event, the Company and/or the Participant’s employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction. The Company’s obligation to deliver the Shares subject to the RSUs or to pay any Dividend Equivalents or Retained Distributions shall be subject to payment of all Tax-Related Items by the Participant.

 

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  b) Satisfaction of Company’s Withholding Obligations . At the time any portion of an Award of RSUs, Dividend Equivalent or Retained Distribution relating thereto, becomes taxable to the Participant, he or she will be required to pay to the Company or the Participant’s employer, as applicable, any Tax-Related Items due as a result of such taxable event. The Company or the Participant’s employer shall have the right to withhold from any payment in respect of RSUs, transfer of Shares acquired at vesting, or payment made to the Participant or to any person hereunder, whether such payment is to be made in cash or in Shares, all Tax-Related Items as shall be required, in the determination of the Company, pursuant to any statute or governmental regulation or ruling. The Participant acknowledges and agrees that the Company or the Participant’s employer, in their sole discretion, may satisfy such withholding obligation by any one or a combination of the following methods:

 

  (i) by requiring the Participant to deliver a properly executed notice together with irrevocable instructions to a broker approved by the Company to sell a sufficient number of Shares to generate net proceeds (after commission and fees) equal to the amount required to be withheld and promptly deliver such amount to the Company;

 

  (ii) by requiring or allowing the Participant to pay the amount required to be withheld in cash or by check;

 

  (iii) by deducting the amount required to be withheld from the Participant’s current compensation or other amounts payable to the Participant;

 

  (iv) by allowing the Participant to surrender other Shares that (A) in the case of Shares initially acquired from the Company (upon exercise of a stock option or otherwise), have been owned by the Participant for such period (if any) as may be required to avoid a charge to the Company’s earnings, and (B) have a fair market value on the date of surrender equal to the amount required to be withheld;

 

  (v) by withholding a number of Shares to be issued upon delivery of Shares that have a fair market value equal to the minimum statutory amount required to be withheld;

 

  (vi) by selling any Shares to the extent required to pay the amount required to be withheld; or

 

  (vii) by such other means or method as the Committee in its sole discretion and without notice to the Participant deems appropriate.

 

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       The Company may satisfy its obligation to withhold the Tax-Related Items on Dividend Equivalents and Retained Distributions payable in cash by withholding a sufficient amount from the payment or by such other means as the Committee in its sole discretion and without notice to the Participant deems appropriate, including withholding from salary or other amounts payable to the Participant, Shares or cash having a value sufficient to satisfy the withholding obligation for Tax-Related Items.

 

       The Company will not issue any Shares to the Participant until the Participant satisfies the withholding obligation for Tax-Related Items. If the withholding obligation for Tax-Related Items is satisfied by withholding in Shares, for tax purposes, the Participant shall be deemed to have been issued the full number of Shares subject to the vested RSUs, notwithstanding that a number of Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Participant’s participation in the Plan.

 

  c) Compliance with Applicable Laws . The Committee may also require the Participant to acknowledge that he or she shall not sell or transfer Shares except in compliance with all applicable laws, and may apply such other restrictions on the sale or transfer of the Shares as it deems appropriate.

 

9. Changes in Capitalization and Government and Other Regulations .

 

  a) The Award shall be subject to all of the terms and provisions as provided in this Agreement and in the Plan, which are incorporated by reference herein and made a part hereof, including, without limitation, the provisions of Section 10 of the Plan (generally relating to adjustments to the number of Shares subject to the Award, upon certain changes in capitalization and certain reorganizations and other transactions).

 

  b) In the event that the transactions contemplated by the Merger Agreement are consummated, upon the Effective Time (as defined in the Merger Agreement), the RSUs shall be converted into the right to receive the Merger Consideration (as defined in the Merger Agreement) if and when such RSU vests in accordance with its terms, in accordance with Section 4.5(c) of the Merger Agreement.

 

10. Forfeiture . A breach of any restrictions, terms and conditions of the Plan or this Agreement, with respect to any of the RSUs or any Dividend Equivalents and Retained Distributions relating thereto, except as waived by the Board or the Committee, will cause a forfeiture of such RSUs and any Dividend Equivalents or Retained Distributions relating thereto.

 

11


11. Amendment of Prior Agreements .

 

  a) Restricted Stock Units . In the case of any agreement between the Participant and the Company or an Affiliate relating to the grant of restricted stock units (“ Prior RSUs ”) that is outstanding on the date hereof (each, a “ Prior RSU Agreement ”), the definition of “Good Reason” in such agreement, if any, shall be deemed deleted and replaced in its entirety with the definition contained herein.

 

  b) Options . In the case of any agreement between the Participant and the Company or an Affiliate relating to the grant of Options (“ Prior Options ”) that is outstanding immediately prior to the date hereof (each, a “ Prior Option Agreement ”), in the event of a Change in Control, any section of such agreement requiring the Participant to retain a number of Shares for a specified period following the date of exercise of such Option shall be deemed deleted in its entirety and such requirement shall be deemed waived.

 

  c) The Participant acknowledges and agrees that Sections 11(a) and 11(b) of this Agreement constitute an amendment of any Prior RSU Agreements and Prior Option Agreements.

 

12. Treatment of Grant Under Employment Agreement and Merger Agreement . If the Participant is subject to an employment agreement between the Participant and the Company or an Affiliate that provides for annual long-term incentive compensation, the Participant agrees that the RSUs covered by the Award shall be considered as if they had been granted on the Vesting Commencement Date. Furthermore, for purposes of Section 6.9(a)(ii) of the Merger Agreement, the RSUs shall be considered as if they had been granted on the Vesting Commencement Date for purposes of determining the value of the Participant’s target long-term incentive opportunity immediately prior to the Effective Time (as defined in the Merger Agreement) and, if the Effective Time occurs during 2017, the RSUs shall count toward determining whether target annual cash bonus opportunities and target long-term incentive compensation opportunities for 2017 are no less favorable in the aggregate than immediately prior to the Effective Time.

 

13. Right of Company to Terminate Employment . Nothing contained in the Plan or this Agreement shall confer on any Participant any right to continue in the employ of the Company or any of its Affiliates and the Company and any such Affiliate shall have the right to terminate the Employment of the Participant at any such time, with or without cause, notwithstanding the fact that some or all of the RSUs and related Retained Distributions covered by this Agreement may be forfeited as a result of such termination. The granting of the RSUs under this Agreement shall not confer on the Participant any right to any future Awards under the Plan.

 

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14. Notices . Any notice which either party hereto may be required or permitted to give the other shall be in writing and may be delivered personally or by mail, postage prepaid, addressed to Time Warner Inc., at One Time Warner Center, New York, NY 10019, attention Director, Global Stock Plans Administration, and to the Participant at his or her address, as it is shown on the records of the Company or its Affiliate, or in either case to such other address as the Company or the Participant, as the case may be, by notice to the other may designate in writing from time to time.

 

15. Interpretation and Amendments . The Board and the Committee (to the extent delegated by the Board) have plenary authority to interpret this Agreement and the Plan, to prescribe, amend and rescind rules relating thereto and to make all other determinations in connection with the administration of the Plan. The Board or the Committee may from time to time modify or amend this Agreement in accordance with the provisions of the Plan, provided that no such amendment shall adversely affect the rights of the Participant under this Agreement without his or her consent.

 

16. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon and inure to the benefit of the Participant and his or her legatees, distributees and personal representatives.

 

17. Copy of the Plan and Documents . By entering into the Agreement, the Participant agrees and acknowledges that he or she has received and read a copy of the Plan. The Participant acknowledges and agrees that the Participant may be entitled from time to time to receive certain other documents related to the Company, including the Company’s annual report to stockholders and proxy statement related to its annual meeting of stockholders (which become available each year approximately three months after the end of the calendar year), and the Participant consents to receive such documents electronically through the Internet or as the Company otherwise directs.

 

18. Governing Law . The Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to any choice of law rules thereof which might apply the laws of any other jurisdiction.

 

19. Waiver of Jury Trial . To the extent not prohibited by applicable law which cannot be waived, each party hereto hereby waives, and covenants that it will not assert (whether as plaintiff, defendant or otherwise), any right to trial by jury in any forum in respect of any suit, action, or other proceeding arising out of or based upon this Agreement.

 

20.

Submission to Jurisdiction; Service of Process . Each of the parties hereto hereby irrevocably submits to the jurisdiction of the state courts of the State of New York located in the County of New York and the jurisdiction of the United States District Court for the Southern District of New York for the purposes of

 

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any suit, action or other proceeding arising out of or based upon this Agreement. Each of the parties hereto to the extent permitted by applicable law hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding brought in such courts, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that such suit, action or proceeding in the above-referenced courts is brought in an inconvenient forum, that the venue of such suit, action or proceedings, is improper or that this Agreement may not be enforced in or by such court. Each of the parties hereto hereby consents to service of process by mail at its address to which notices are to be given pursuant to Section 14 hereof.

 

21.

Personal Data . The Company, the Participant’s local employer and the local employer’s parent company or companies may hold, collect, use, process and transfer, in electronic or other form, certain personal information about the Participant for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. The Participant understands that the following personal information is required for the above named purposes: his/her name, home address and telephone number, office address (including department and employing entity) and telephone number, e-mail address, date of birth, citizenship, country of residence at the time of grant, work location country, system employee ID, employee local ID, employment status (including international status code), supervisor (if applicable), job code, title, salary, bonus target and bonuses paid (if applicable), termination date and reason, tax payer’s identification number, tax equalization code, US Green Card holder status, contract type (single/dual/multi), any shares of stock or directorships held in the Company, details of all grants of RSUs (including number of grants, grant dates, vesting type, vesting dates, and any other information regarding RSUs that have been granted, canceled, vested, or forfeited) with respect to the Participant, estimated tax withholding rate, brokerage account number (if applicable), and brokerage fees (the “ Data ”). The Participant understands that Data may be collected from the Participant directly or, on Company’s request, from the Participant’s local employer. The Participant understands that Data may be transferred to third parties assisting the Company in the implementation, administration and management of the Plan, including the brokers approved by the Company, the broker selected by the Participant from among such Company-approved brokers (if applicable), tax consultants and the Company’s software providers (the “ Data Recipients ”). The Participant understands that some of these Data Recipients may be located outside the Participant’s country of residence, and that the Data Recipient’s country may have different data privacy laws and protections than the Participant’s country of residence. The Participant understands that the Data Recipients will receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of Shares on the Participant’s behalf by a broker or other third party with whom the Participant may elect to deposit any

 

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Shares acquired pursuant to the Plan. The Participant understands that Data will be held only as long as necessary to implement, administer and manage the Participant’s participation in the Plan. The Participant understands that Data may also be made available to public authorities as required by law, e.g., to the U.S. government. The Participant understands that the Participant may, at any time, review Data and may provide updated Data or corrections to the Data by written notice to the Company. Except to the extent the collection, use, processing or transfer of Data is required by law, the Participant may object to the collection, use, processing or transfer of Data by contacting the Company in writing. The Participant understands that such objection may affect his/her ability to participate in the Plan. The Participant understands that he/she may contact the Company’s Stock Plan Administration to obtain more information on the consequences of such objection.

 

15

Exhibit 10.2

Time Warner Inc. 2013 Stock Incentive Plan

Special Retention RSU Agreement – 2018 (13RUM18)

For Use from October 22, 2016

Special Retention Restricted Stock Units Agreement — 2018

General Terms and Conditions

WHEREAS, the Company has adopted the Plan (as defined below), the terms of which are hereby incorporated by reference and made a part of this Agreement; and

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to make a special retention grant of the restricted stock units (the “ RSUs ”) provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

 

1. Definitions . Whenever the following terms are used in this Agreement, they shall have the meanings set forth below. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.

 

  a) Cause means “Cause” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there is no such agreement, “Cause” means (i) the Participant’s continued failure substantially to perform such Participant’s duties (other than as a result of total or partial incapacity due to physical or mental illness) for a period of ten (10) days following written notice by the Company or any of its Affiliates to the Participant of such failure, (ii) dishonesty in the performance of the Participant’s duties, (iii) the Participant’s conviction of, or plea of nolo contendere to, a crime constituting (A) a felony under the laws of the United States or any state thereof or (B) a misdemeanor involving moral turpitude, (iv) the Participant’s insubordination, willful malfeasance or willful misconduct in connection with the Participant’s duties or any act or omission which is injurious to the financial condition or business reputation of the Company or any of its Affiliates, or (v) the Participant’s breach of any non-competition, non-solicitation or confidentiality provisions to which the Participant is subject. Unless otherwise provided in an employment agreement between the Company or any of its Affiliates and the Participant, the determination of the Committee as to the existence of “Cause” will be conclusive on the Participant and the Company.

 

  b) Disability means “Disability” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there shall be no such agreement, “disability” of the Participant shall have the meaning ascribed to such term in the Company’s long-term disability plan or policy, as in effect from time to time, to the extent that such definition also constitutes such Participant being considered “disabled” under Section 409A(a)(2)(C) of the Code.


  c) Good Reason means “Good Reason” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there is no such agreement, “Good Reason” means (i) the failure of the Company to pay or cause to be paid the Participant’s base salary or annual bonus when due, (ii) any substantial and sustained diminution in the Participant’s authority or responsibilities materially inconsistent with the Participant’s position, (iii) a reduction in such Participant’s annual base salary or target annual bonus in effect as of the date of this Award without the Participant’s written consent or (iv) without the Participant’s written consent, any requirement that the Participant’s principal place of employment be relocated to a location that increases such Participant’s commute from his or her primary residence by more than thirty-five (35) miles; provided that any of the events described in clauses (i), (ii), (iii) and (iv) will constitute Good Reason only if the Company fails to cure such event within 30 days after receipt from the Participant of written notice of the event which constitutes Good Reason; provided , further , that, unless otherwise provided in an employment agreement between the Company or any of its Affiliates and the Participant, “Good Reason” will cease to exist for an event on the sixtieth (60 th ) day following the later of its occurrence or the Participant’s knowledge thereof, unless the Participant has given the Company written notice of his or her termination of employment for Good Reason prior to such date.

 

  d) Merger Agreement means the Agreement and Plan of Merger among Time Warner Inc., AT&T Inc. and West Merger Sub, Inc., dated as of October 22, 2016, as may be amended, modified or supplemented from time to time.

 

  e) Notice means (i) the Notice of Grant of Restricted Stock Units that accompanies this Agreement, if this Agreement is delivered to the Participant in “hard copy,” and (ii) the screen of the website for the stock plan administration with the heading “Vesting Schedule and Details,” which contains the details of the grant governed by this Agreement, if this Agreement is delivered electronically to the Participant.

 

  f) Participant means an individual to whom RSUs have been awarded pursuant to the Plan and shall have the same meaning as may be assigned to the terms “Holder” or “Participant” in the Plan.

 

  g) Plan means the equity plan maintained by the Company that is specified in the Notice, which equity plan has been provided to the Participant separately and forms a part of this Agreement, as such plan may be amended, supplemented or modified from time to time.

 

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  h) Prior Option Agreement has the meaning set forth in Section 11(b) below.

 

  i) Prior Options has the meaning set forth in Section 11(b) below.

 

  j) Prior RSU Agreement has the meaning set forth in Section 11(a) below.

 

  k) Prior RSUs has the meaning set forth in Section 11(a) below.

 

  l) Retirement means a voluntary termination of employment by the Participant following the attainment of age 55 with ten (10) or more years of service as an employee or a director with the Company or any Affiliate, provided that such voluntary termination occurs on or after the closing of the transactions contemplated by the Merger Agreement (or, if the Merger Agreement is terminated and such closing does not occur, on or after termination of the Merger Agreement).

 

  m) Severance Period means the period of time following a termination of Employment during which a Participant is entitled to receive both salary continuation payments and continued participation under the health benefit plans of the Company or any of its Affiliates, whether pursuant to an employment contract with, or a severance plan or other arrangement maintained by, the Company or any Affiliate.

 

  n) Shares means shares of Common Stock of the Company.

 

  o) Vesting Date means each vesting date set forth below:

 

Vesting Date   % of 2018 RSUs Vested
February 15, 2019   25%
February 15, 2020   50%
February 15, 2021   75%
February 15, 2022   100%

 

  p) Vesting Commencement Date means February 15, 2018.

 

2. Grant of Restricted Stock Units . The Company hereby grants to the Participant (the “ Award ”), on the terms and conditions hereinafter set forth, the number of RSUs set forth on the Notice. Each RSU represents the unfunded, unsecured right of the Participant to receive a Share on the applicable Vesting Date, subject to the terms and conditions set forth herein. RSUs do not constitute issued and outstanding shares of Common Stock for any corporate purposes and do not confer on the Participant any right to vote on matters that are submitted to a vote of holders of Shares.

 

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3. Dividend Equivalents and Retained Distributions . If on any date while RSUs are outstanding hereunder the Company shall pay any regular cash dividend on the Shares, then, for each RSU held by the Participant on the record date, the Participant shall be paid an amount of cash equal to the dividend paid on a Share (the “ Dividend Equivalents ”), with such payment made at the time that such dividends are paid to holders of Shares. If on any date while RSUs are outstanding hereunder the Company shall pay any dividend other than a regular cash dividend or make any other distribution on the Shares, the Participant shall be credited with a bookkeeping entry equivalent to such dividend or distribution for each RSU held by the Participant on the record date for such dividend or distribution, but the Company shall retain custody of all such dividends and distributions unless the Board has in its sole discretion determined that an amount equivalent to such dividend or distribution shall be paid currently to the Participant (the “ Retained Distributions ”); provided , however , that if the Retained Distribution relates to a dividend paid in Shares, the Participant shall receive an additional amount of RSUs equal to the product of (I) the aggregate number of RSUs held by the Participant pursuant to this Agreement through the related dividend record date, multiplied by (II) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Retained Distributions will not bear interest and will be subject to the same restrictions as the RSUs to which they relate. Notwithstanding anything else contained in this Section 3, no payment of Dividend Equivalents or Retained Distributions shall occur before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”).

 

4. Vesting and Delivery of Vested Securities .

 

  a) Except as otherwise provided in Sections 5, 6 and 7, the vesting of the RSUs and any Retained Distributions relating thereto shall occur only if the Participant has continued in Employment of the Company or any of its Affiliates on the Vesting Date and has continuously been so employed since the Date of Grant (as set forth in the Notice). Subject to the requirements and limitations in the immediately preceding sentence and the other terms and provisions of this Agreement and the Plan, no later than 60 days after each Vesting Date with respect to the Award, the Company shall issue or transfer to the Participant the number of Shares corresponding to such Vesting Date and the Retained Distributions, if any, covered by that portion of the Award.

 

  b) RSUs Extinguished . Upon each issuance or transfer of Shares in accordance with this Agreement, a number of RSUs equal to the number of Shares issued or transferred to the Participant shall be extinguished and such number of RSUs will not be considered to be held by the Participant for any purpose.

 

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  c) Final Issuance . Upon the final issuance or transfer of Shares and Retained Distributions, if any, to the Participant pursuant to this Agreement, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share.

 

  d) Section 409A . Notwithstanding anything else contained in this Agreement, no Shares shall be issued or transferred to a Participant and no Retained Distributions shall be paid before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Code.

 

5. Termination of Employment .

 

  a) Notwithstanding any provision of an employment agreement between the Participant and the Company or an Affiliate or any severance plan that provides for different treatment, (i) if, prior to the Vesting Commencement Date, the Participant’s Employment with the Company and its Affiliates terminates for any reason other than those described in Sections 5(b) or Section 6 (including as a result of termination of the Participant’s Employment without Cause or due to Retirement), then all portions of the Award and all Retained Distributions relating thereto shall be completely forfeited on the date of any such termination, and (ii) if, on or following the Vesting Commencement Date but prior to the Vesting Date with respect to any portion of the Award, the Participant’s Employment with the Company and its Affiliates terminates for any reason other than those described in Section 5(b), (c) or (d) or in Section 6, then the RSUs covered by such portion of the Award and all Retained Distributions relating thereto shall be completely forfeited on the date of any such termination.

 

  b) If, on any date while RSUs are outstanding hereunder, the Participant’s Employment terminates as a result of his or her death or Disability, then, to the extent the RSUs were not extinguished or forfeited prior to such termination of Employment, the RSUs and all Retained Distributions relating thereto shall fully vest on the date of any such termination, and Shares subject to the RSUs shall be issued or transferred to the Participant (along with the Retained Distributions relating thereto) as soon as practicable, but no later than 60 days, following such termination of Employment.

 

  c)

If, on or after the Vesting Commencement Date and prior to a Change of Control, the Participant’s Employment (i) terminates as a result of his or her Retirement (taking into account the provision in the definition thereof relating to the status of the transactions contemplated by the Merger Agreement) or (ii) is terminated by the Company and its Affiliates for any reason other than for Cause (x) on a date when the Participant satisfies the requirements for Retirement or (y) on a date when the Participant does not satisfy the requirements for Retirement, but the Participant would satisfy

 

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the requirements for Retirement during a Severance Period (for purposes of this clause (ii), based solely on whether the Participant has attained the relevant age and service requirements in the definition of Retirement and without regard to the status of the transactions contemplated by the Merger Agreement (the “ Age and Service Requirements ”)), then the RSUs and all Retained Distributions relating thereto shall fully vest on the date of such termination of Employment; and Shares subject to the RSUs shall be issued or transferred to the Participant (along with the Retained Distributions relating thereto) as soon as practicable, but no later than 60 days, following such termination of Employment.

 

  d) If, on or after the Vesting Commencement Date and prior to a Change of Control, the Participant’s Employment is terminated by the Company and its Affiliates for any reason other than for Cause (unless such termination is due to death or Disability) on a date when the Participant does not satisfy the Age and Service Requirements and the Participant would not satisfy such requirements by the end of a Severance Period, then the RSUs that were scheduled to vest on any Vesting Dates that occur before the end of a Severance Period, and any Retained Distributions relating thereto, shall become vested, and Shares subject to such RSUs shall be issued or transferred to the Participant (along with the Retained Distributions relating thereto) as soon as practicable, but no later than 60 days, following such termination of Employment. The portion of the RSUs that have a Vesting Date after the end of a Severance Period and any Retained Distributions related thereto shall be completely forfeited on the date of any such termination.

For purposes of this Section 5, a temporary leave of absence shall not constitute a termination of Employment or a failure to be continuously employed by the Company or any Affiliate regardless of the Participant’s payroll status during such leave of absence if such leave of absence is approved in writing by the Company or any Affiliate; provided , that such leave of absence constitutes a bona fide leave of absence and not a Separation From Service under Treas. Reg. 1.409A-1(h)(1)(i). Notice of any such approved leave of absence should be sent to the Company at One Time Warner Center, New York, New York 10019, attention: Director, Global Stock Plans Administration, but such notice shall not be required for the leave of absence to be considered approved.

Furthermore, if you are subject to an employment agreement that provides you the right to terminate your employment if the Company or one of its Subsidiaries is in material breach of its obligations thereunder, then if you terminate your employment as a result of a material breach, it will be deemed a termination without Cause for purposes of this Section 5, regardless of whether it occurs prior to, upon or after the closing of the transactions contemplated by, or following the termination of, the Merger Agreement.

 

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In the event the Participant’s Employment with the Company or any of its Affiliates is terminated, the Participant shall have no claim against the Company with respect to the RSUs and related Retained Distributions, if any, other than as set forth in this Section 5 (and, if applicable, Section 6), the provisions of this Section 5 (and, if applicable, Section 6) being the sole remedy of the Participant with respect thereto.

 

6. Acceleration of Vesting Date . In the event a Change in Control, subject to Section 7, has occurred on any date while RSUs are outstanding hereunder, (A) the Award will vest in full upon the earliest of (i) the Vesting Date with respect to each portion of the Award, (ii) the Participant’s Retirement and (iii) the termination of the Participant’s Employment by the Company or any of its Affiliates (I) by the Company other than for Cause (unless such termination is due to death or Disability) or (II) by the Participant for Good Reason and (B) Shares subject to the RSUs shall be issued or transferred to the Participant, as soon as practicable, but in no event later than 60 days following such Vesting Date, along with the Retained Distributions related thereto.

 

7. Limitation on Acceleration .

 

  a)

Notwithstanding any provision to the contrary in the Plan or this Agreement, in the event it is determined by an independent nationally recognized public accounting firm, which is engaged and paid for by the Company prior to the consummation of any transaction constituting a Change in Control (which for purposes of this Section 7 shall mean a change in ownership or control as determined in accordance with the regulations promulgated under Section 280G of the Code), which accounting firm shall in no event be the accounting firm for the entity seeking to effectuate the Change in Control (the “ Accountant ”), which determination shall be certified by the Accountant and set forth in a certificate delivered to the Participant not less than ten (10) business days prior to the Change in Control setting forth in reasonable detail the basis of the Accountant’s calculations (including any assumptions that the Accountant made in performing the calculations), that part or all of the consideration, compensation or benefits to be paid to such Participant under this Agreement constitute “parachute payments” under Section 280G(b)(2) of the Code, then, if the aggregate present value of such parachute payments, singularly or together with the aggregate present value of any consideration, compensation or benefits to be paid to such Participant under any other plan, arrangement or agreement which constitute “parachute payments” (collectively, the “ Parachute Amount ”) exceeds the maximum amount that would not give rise to any liability under Section 4999 of the Code, the amounts constituting “parachute payments” which would otherwise be payable to such Participant or for such Participant’s benefit shall be reduced to the maximum amount that would not give rise to any liability under Section 4999 of the Code (the “ Reduced Amount ”); provided that such amounts shall not be so reduced

 

7


 

if the Accountant determines that without such reduction such Participant would be entitled to receive and retain, on a net after-tax basis (including, without limitation, any excise taxes payable under Section 4999 of the Code), an amount which is greater than the amount, on a net after-tax basis, that such Participant would be entitled to retain upon receipt of the Reduced Amount. In connection with making determinations under this Section 7, the Accountant shall take into account any positions to mitigate any excise taxes payable under Section 4999 of the Code, such as the value of any reasonable compensation for services to be rendered by the Participant before or after the Change in Control, including any amounts payable to such Participant following such Participant’s termination of employment hereunder with respect to any non-competition provisions that may apply to such Participant, and the Company shall cooperate in the valuation of any such services, including any non-competition provisions.

 

  b) If the determination made pursuant to this Section 7 results in a reduction of the payments that would otherwise be paid to the Participant except for the application of this Section 7, the Company shall promptly give such Participant notice of such determination. Such reduction in payments shall be first applied to reduce any cash payments that such Participant would otherwise be entitled to receive under this Agreement or otherwise and shall thereafter be applied to reduce other payments and benefits, in each case, in reverse order beginning with the payments or benefits that are to be paid the furthest in time from the date of such determination, unless, to the extent permitted by Section 409A of the Code, such Participant elects to have the reduction in payments applied in a different order; provided that, in no event may such payments be reduced in a manner that would result in subjecting such Participant to additional taxation under Section 409A of the Code.

 

  c)

As a result of the uncertainty in the application of Sections 280G and 4999 of the Code at the time of a determination hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement which should not have been so paid or distributed (each, an “ Overpayment ”) or that additional amounts which will have not been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement could have been so paid or distributed (each, an “ Underpayment ”), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accountant, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Participant which the Accountant believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for such Participant’s benefit shall be repaid by such Participant to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided , however , that no such repayment shall be required if and

 

8


 

to the extent such deemed repayment would not either reduce the amount on which such Participant is subject to tax under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accountant, based on controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for such Participant’s benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.

 

  d) In the event of any dispute with the Internal Revenue Service (or other taxing authority) with respect to the application of this Section 7, the Participant shall control the issues involved in such dispute and make all final determinations with regard to such issues. The Company shall promptly pay, upon demand by such Participant, all legal fees, court costs, fees of experts and other costs and expenses which such Participant incurs in any actual, threatened or contemplated contest of such Participant’s interpretation of, or determination under, the provisions of this Section 7.

 

8. Withholding Taxes .

 

  a) Obligation to Pay Withholding Taxes . The Participant acknowledges and agrees that, regardless of any action the Company or the Participant’s employer takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding (the “ Tax-Related Items ”), the ultimate liability for all Tax-Related Items legally due by the Participant (i) is and remains the Participant’s responsibility and (ii) may exceed the amount actually withheld by the Company or the Participant’s employer. The Participant further agrees and acknowledges that the Company and the Participant’s employer (x) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant of the Award, the vesting of the RSUs or the subsequent sale of any Shares acquired from vesting of the RSUs, and the receipt of any Dividend Equivalents or Retained Distributions; and (y) do not commit to and are under no obligation to structure the terms of the Award to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any particular tax result. Further, the Participant understands and acknowledges that if the Participant has become subject to tax in more than one jurisdiction between the Date of Grant (as set forth in the Notice) and the date of any relevant taxable event, the Company and/or the Participant’s employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction. The Company’s obligation to deliver the Shares subject to the RSUs or to pay any Dividend Equivalents or Retained Distributions shall be subject to payment of all Tax-Related Items by the Participant.

 

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  b) Satisfaction of Company’s Withholding Obligations . At the time any portion of an Award of RSUs, Dividend Equivalent or Retained Distribution relating thereto, becomes taxable to the Participant, he or she will be required to pay to the Company or the Participant’s employer, as applicable, any Tax-Related Items due as a result of such taxable event. The Company or the Participant’s employer shall have the right to withhold from any payment in respect of RSUs, transfer of Shares acquired at vesting, or payment made to the Participant or to any person hereunder, whether such payment is to be made in cash or in Shares, all Tax-Related Items as shall be required, in the determination of the Company, pursuant to any statute or governmental regulation or ruling. The Participant acknowledges and agrees that the Company or the Participant’s employer, in their sole discretion, may satisfy such withholding obligation by any one or a combination of the following methods:

 

  (i) by requiring the Participant to deliver a properly executed notice together with irrevocable instructions to a broker approved by the Company to sell a sufficient number of Shares to generate net proceeds (after commission and fees) equal to the amount required to be withheld and promptly deliver such amount to the Company;

 

  (ii) by requiring or allowing the Participant to pay the amount required to be withheld in cash or by check;

 

  (iii) by deducting the amount required to be withheld from the Participant’s current compensation or other amounts payable to the Participant;

 

  (iv) by allowing the Participant to surrender other Shares that (A) in the case of Shares initially acquired from the Company (upon exercise of a stock option or otherwise), have been owned by the Participant for such period (if any) as may be required to avoid a charge to the Company’s earnings, and (B) have a fair market value on the date of surrender equal to the amount required to be withheld;

 

  (v) by withholding a number of Shares to be issued upon delivery of Shares that have a fair market value equal to the minimum statutory amount required to be withheld;

 

  (vi) by selling any Shares to the extent required to pay the amount required to be withheld; or

 

  (vii) by such other means or method as the Committee in its sole discretion and without notice to the Participant deems appropriate.

 

      

The Company may satisfy its obligation to withhold the Tax-Related Items on Dividend Equivalents and Retained Distributions payable in cash by

 

10


 

withholding a sufficient amount from the payment or by such other means as the Committee in its sole discretion and without notice to the Participant deems appropriate, including withholding from salary or other amounts payable to the Participant, Shares or cash having a value sufficient to satisfy the withholding obligation for Tax-Related Items.

 

       The Company will not issue any Shares to the Participant until the Participant satisfies the withholding obligation for Tax-Related Items. If the withholding obligation for Tax-Related Items is satisfied by withholding in Shares, for tax purposes, the Participant shall be deemed to have been issued the full number of Shares subject to the vested RSUs, notwithstanding that a number of Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Participant’s participation in the Plan.

 

  c) Compliance with Applicable Laws . The Committee may also require the Participant to acknowledge that he or she shall not sell or transfer Shares except in compliance with all applicable laws, and may apply such other restrictions on the sale or transfer of the Shares as it deems appropriate.

 

9. Changes in Capitalization and Government and Other Regulations .

 

  a) The Award shall be subject to all of the terms and provisions as provided in this Agreement and in the Plan, which are incorporated by reference herein and made a part hereof, including, without limitation, the provisions of Section 10 of the Plan (generally relating to adjustments to the number of Shares subject to the Award, upon certain changes in capitalization and certain reorganizations and other transactions).

 

  b) In the event that the transactions contemplated by the Merger Agreement are consummated, upon the Effective Time (as defined in the Merger Agreement), the RSUs shall be converted into the right to receive the Merger Consideration (as defined in the Merger Agreement) if and when such RSU vests in accordance with its terms, in accordance with Section 4.5(c) of the Merger Agreement.

 

10. Forfeiture . A breach of any restrictions, terms and conditions of the Plan or this Agreement, with respect to any of the RSUs or any Dividend Equivalents and Retained Distributions relating thereto, except as waived by the Board or the Committee, will cause a forfeiture of such RSUs and any Dividend Equivalents or Retained Distributions relating thereto.

 

11. Amendment of Prior Agreements .

 

  a) Restricted Stock Units . In the case of any agreement between the Participant and the Company or an Affiliate relating to the grant of restricted stock units (“ Prior RSUs ”) that is outstanding on the date hereof (each, a “ Prior RSU Agreement ”), the definition of “Good Reason” in such agreement, if any, shall be deemed deleted and replaced in its entirety with the definition contained herein.

 

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  b) Options . In the case of any agreement between the Participant and the Company or an Affiliate relating to the grant of Options (“ Prior Options ”) that is outstanding immediately prior to the date hereof (each, a “ Prior Option Agreement ”), in the event of a Change in Control, any section of such agreement requiring the Participant to retain a number of Shares for a specified period following the date of exercise of such Option shall be deemed deleted in its entirety and such requirement shall be deemed waived.

 

  c) The Participant acknowledges and agrees that Sections 11(a) and 11(b) of this Agreement constitute an amendment of any Prior RSU Agreements and Prior Option Agreements.

 

12. Treatment of Grant Under Employment Agreement and Merger Agreement . If the Participant is subject to an employment agreement between the Participant and the Company or an Affiliate that provides for annual long-term incentive compensation, the Participant agrees that the RSUs covered by the Award shall be considered as if they had been granted on the Vesting Commencement Date. Furthermore, for purposes of Section 6.9(a)(ii) of the Merger Agreement, the RSUs shall be considered as if they had been granted on the Vesting Commencement Date for purposes of determining the value of the Participant’s target long-term incentive opportunity immediately prior to the Effective Time (as defined in the Merger Agreement) and, the RSUs shall count toward determining whether target annual cash bonus opportunities and target long-term incentive compensation opportunities for 2018 are no less favorable in the aggregate than immediately prior to the Effective Time.

 

13. Right of Company to Terminate Employment . Nothing contained in the Plan or this Agreement shall confer on any Participant any right to continue in the employ of the Company or any of its Affiliates and the Company and any such Affiliate shall have the right to terminate the Employment of the Participant at any such time, with or without cause, notwithstanding the fact that some or all of the RSUs and related Retained Distributions covered by this Agreement may be forfeited as a result of such termination. The granting of the RSUs under this Agreement shall not confer on the Participant any right to any future Awards under the Plan.

 

14. Notices . Any notice which either party hereto may be required or permitted to give the other shall be in writing and may be delivered personally or by mail, postage prepaid, addressed to Time Warner Inc., at One Time Warner Center, New York, NY 10019, attention Director, Global Stock Plans Administration, and to the Participant at his or her address, as it is shown on the records of the Company or its Affiliate, or in either case to such other address as the Company or the Participant, as the case may be, by notice to the other may designate in writing from time to time.

 

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15. Interpretation and Amendments . The Board and the Committee (to the extent delegated by the Board) have plenary authority to interpret this Agreement and the Plan, to prescribe, amend and rescind rules relating thereto and to make all other determinations in connection with the administration of the Plan. The Board or the Committee may from time to time modify or amend this Agreement in accordance with the provisions of the Plan, provided that no such amendment shall adversely affect the rights of the Participant under this Agreement without his or her consent.

 

16. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon and inure to the benefit of the Participant and his or her legatees, distributees and personal representatives.

 

17. Copy of the Plan and Documents . By entering into the Agreement, the Participant agrees and acknowledges that he or she has received and read a copy of the Plan. The Participant acknowledges and agrees that the Participant may be entitled from time to time to receive certain other documents related to the Company, including the Company’s annual report to stockholders and proxy statement related to its annual meeting of stockholders (which become available each year approximately three months after the end of the calendar year), and the Participant consents to receive such documents electronically through the Internet or as the Company otherwise directs.

 

18. Governing Law . The Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to any choice of law rules thereof which might apply the laws of any other jurisdiction.

 

19. Waiver of Jury Trial . To the extent not prohibited by applicable law which cannot be waived, each party hereto hereby waives, and covenants that it will not assert (whether as plaintiff, defendant or otherwise), any right to trial by jury in any forum in respect of any suit, action, or other proceeding arising out of or based upon this Agreement.

 

20.

Submission to Jurisdiction; Service of Process . Each of the parties hereto hereby irrevocably submits to the jurisdiction of the state courts of the State of New York located in the County of New York and the jurisdiction of the United States District Court for the Southern District of New York for the purposes of any suit, action or other proceeding arising out of or based upon this Agreement. Each of the parties hereto to the extent permitted by applicable law hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding brought in such courts, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that such suit, action or

 

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proceeding in the above-referenced courts is brought in an inconvenient forum, that the venue of such suit, action or proceedings, is improper or that this Agreement may not be enforced in or by such court. Each of the parties hereto hereby consents to service of process by mail at its address to which notices are to be given pursuant to Section 14 hereof.

 

21.

Personal Data . The Company, the Participant’s local employer and the local employer’s parent company or companies may hold, collect, use, process and transfer, in electronic or other form, certain personal information about the Participant for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. The Participant understands that the following personal information is required for the above named purposes: his/her name, home address and telephone number, office address (including department and employing entity) and telephone number, e-mail address, date of birth, citizenship, country of residence at the time of grant, work location country, system employee ID, employee local ID, employment status (including international status code), supervisor (if applicable), job code, title, salary, bonus target and bonuses paid (if applicable), termination date and reason, tax payer’s identification number, tax equalization code, US Green Card holder status, contract type (single/dual/multi), any shares of stock or directorships held in the Company, details of all grants of RSUs (including number of grants, grant dates, vesting type, vesting dates, and any other information regarding RSUs that have been granted, canceled, vested, or forfeited) with respect to the Participant, estimated tax withholding rate, brokerage account number (if applicable), and brokerage fees (the “ Data ”). The Participant understands that Data may be collected from the Participant directly or, on Company’s request, from the Participant’s local employer. The Participant understands that Data may be transferred to third parties assisting the Company in the implementation, administration and management of the Plan, including the brokers approved by the Company, the broker selected by the Participant from among such Company-approved brokers (if applicable), tax consultants and the Company’s software providers (the “ Data Recipients ”). The Participant understands that some of these Data Recipients may be located outside the Participant’s country of residence, and that the Data Recipient’s country may have different data privacy laws and protections than the Participant’s country of residence. The Participant understands that the Data Recipients will receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of Shares on the Participant’s behalf by a broker or other third party with whom the Participant may elect to deposit any Shares acquired pursuant to the Plan. The Participant understands that Data will be held only as long as necessary to implement, administer and manage the Participant’s participation in the Plan. The Participant understands that Data may also be made available to public authorities as required by law, e.g., to the U.S. government. The Participant understands that the Participant may, at any time, review Data and may provide updated Data or corrections to the Data by written

 

14


 

notice to the Company. Except to the extent the collection, use, processing or transfer of Data is required by law, the Participant may object to the collection, use, processing or transfer of Data by contacting the Company in writing. The Participant understands that such objection may affect his/her ability to participate in the Plan. The Participant understands that he/she may contact the Company’s Stock Plan Administration to obtain more information on the consequences of such objection.

 

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Exhibit 10.3

October 22, 2016

Via Hand Delivery

Howard Averill

c/o Time Warner Inc.

One Time Warner Center

New York, New York 10019

Dear Howard:

Reference is made to your Employment Agreement, made as of February 24, 2015 and effective as of January 1, 2015 (the “Employment Agreement”) with Time Warner Inc. (the “Company”). We have agreed to amend the Employment Agreement, effective as of the date of this letter agreement (the “Letter Agreement”), in order to extend the term date of the Employment Agreement to December 31, 2019, without any other modification to its terms other than those explicitly set forth below. Accordingly, you and the Company, intending to reflect our mutual understanding regarding such modifications, hereby agree as follows:

1.         Term of Employment . Section 1 of the Employment Agreement is hereby deleted in its entirety and replaced with the following:

Term of Employment . Your “term of employment” as this phrase is used throughout this Agreement shall be for the period beginning on the Effective Date and ending on December 31, 2019 (the “Term Date”).

2.         Definition of Average Annual Bonus . Section 4.2.1 of the Employment Agreement is hereby amended by inserting the following at the end of the penultimate sentence of such section:

only if it would result in a greater Average Annual Bonus.

3.         Benefits After a Termination or Disability . Section 7.2 of the Employment Agreement is hereby amended by deleting clause (iii) in its entirety and replacing it with the following:

(iii) the Company shall not be permitted to determine that your employment was terminated for “unsatisfactory performance” or “cause” within the meaning of any stock option agreement between you and the Company.


 

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4.         Miscellaneous .

A.        Except as expressly set forth herein, this Letter Agreement shall not by implication or otherwise, limit, impair, constitute a waiver of or otherwise affect the rights and remedies of you or the Company pursuant to the Employment Agreement, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Employment Agreement, all of which shall continue in full force and effect. From and after the date of this Letter Agreement, all references to the Employment Agreement shall be deemed to refer to the Employment Agreement as amended hereby.

B.        This Letter Agreement may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, will constitute one and the same instrument. Delivery of an executed counterpart of a signature page of this Letter Agreement by facsimile transmission or portable document format (PDF) shall be effective as delivery of a manually executed counterpart of this Letter Agreement.

If the foregoing accurately reflects our agreement, please so indicate by signing where indicated below.

 

Very truly yours,  
TIME WARNER INC.  
By:  

/s/ James Cummings

  Name:   James Cummings  
  Title:  

Senior Vice President of Global

Compensation and Benefits

 

Agreed and Accepted:
/s/ Howard M. Averill
Howard Averill

Exhibit 10.4

October 22, 2016

Via Hand Delivery

Paul T. Cappuccio

c/o Time Warner Inc.

One Time Warner Center

New York, New York 10019

Dear Paul:

Reference is made to your Employment Agreement, made as of November 3, 2014 and effective as of January 1, 2014 (the “Employment Agreement”) with Time Warner Inc. (the “Company”). We have agreed to amend the Employment Agreement, effective as of the date of this letter agreement (the “Letter Agreement”), in order to extend the term date of the Employment Agreement to December 31, 2019, without any other modification to its terms other than those explicitly set forth below. Accordingly, you and the Company, intending to reflect our mutual understanding regarding such modifications, hereby agree as follows:

1.         Term of Employment . Section 1 of the Employment Agreement is hereby deleted in its entirety and replaced with the following:

Term of Employment . Your “term of employment” as this phrase is used throughout this Agreement shall be for the period beginning on the Effective Date and ending on December 31, 2019 (the “Term Date”).

2.         Definition of Average Annual Bonus . Section 4.2.1 of the Employment Agreement is hereby amended by inserting the following at the end of the penultimate sentence of such section:

only if it would result in a greater Average Annual Bonus.

3.         Life Insurance Premiums . Clause (c) of Section 4.2.2, of the Employment Agreement is hereby deleted in its entirety and replaced with the following:

(c) payment of the Life Insurance Premium for each full or partial calendar year during the Severance Period (with respect to the calendar year in which the Effective Termination Date occurs, to the extent not otherwise paid under Section 4.2.1 or Section 7, and with respect to the calendar year in which the Severance Term Date occurs, with the amount of such payment prorated to reflect the number of days during such calendar year that will elapse prior to the Severance Term Date).

4.         Benefits After a Termination or Disability . Section 8.2 of the Employment Agreement is hereby amended as follows:

A.        By inserting the following after the first sentence of such section:


 

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After the Effective Termination Date or a termination of employment pursuant to Section 4.2 and prior to the Severance Term Date, you will continue to receive all other benefits maintained in effect by the Company for its senior executives, such as financial services reimbursement.

B.        By deleting clause (iii) in its entirety and replacing it with the following:

(iii) the Company shall not be permitted to determine that your employment was terminated for “unsatisfactory performance” or “cause” within the meaning of any stock option agreement between you and the Company.

5.         Miscellaneous .

A.        Except as expressly set forth herein, this Letter Agreement shall not by implication or otherwise, limit, impair, constitute a waiver of or otherwise affect the rights and remedies of you or the Company pursuant to the Employment Agreement, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Employment Agreement, all of which shall continue in full force and effect. From and after the date of this Letter Agreement, all references to the Employment Agreement shall be deemed to refer to the Employment Agreement as amended hereby.

B.        This Letter Agreement may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, will constitute one and the same instrument. Delivery of an executed counterpart of a signature page of this Letter Agreement by facsimile transmission or portable document format (PDF) shall be effective as delivery of a manually executed counterpart of this Letter Agreement.

If the foregoing accurately reflects our agreement, please so indicate by signing where indicated below.

 

Very truly yours,
TIME WARNER INC.
By:  

/s/ James Cummings

  Name:   James Cummings
  Title:  

Senior Vice President of Global

Compensation and Benefits

 

Agreed and Accepted:
/s/ Paul T. Cappuccio
Paul T. Cappuccio

Exhibit 10.5

October 22, 2016

Via Hand Delivery

Olaf Olafsson

c/o Time Warner Inc.

One Time Warner Center

New York, New York 10019

Dear Olaf:

Reference is made to your Employment Agreement, made as of October 31, 2014 and effective as of August 1, 2014 (the “Employment Agreement”) with Time Warner Inc. (the “Company”). We have agreed to amend the Employment Agreement, effective as of the date of this letter agreement (the “Letter Agreement”), in order to extend the term date of the Employment Agreement to December 31, 2019, without any other modification to its terms other than those explicitly set forth below. Accordingly, you and the Company, intending to reflect our mutual understanding regarding such modifications, hereby agree as follows:

1.         Term of Employment . Section 1 of the Employment Agreement is hereby deleted in its entirety and replaced with the following:

Term of Employment .    Your “term of employment” as this phrase is used throughout this Agreement shall be for the period beginning on the Effective Date and ending on December 31, 2019 (the “Term Date”).

2.         Life Insurance Premiums . Clause (c) of Section 4.2.2, of the Employment Agreement is hereby deleted in its entirety and replaced with the following:

(c) payment of the Life Insurance Premium for each full or partial calendar year during the Severance Period (with respect to the calendar year in which the Effective Termination Date occurs, to the extent not otherwise paid under Section 4.2.1 or Section 7, and with respect to the calendar year in which the Severance Term Date occurs, with the amount of such payment prorated to reflect the number of days during such calendar year that will elapse prior to the Severance Term Date).

3.         Limitations on Certain Payments .


A. Section 4.7.2 of the Employment Agreement is hereby deleted in its entirety and replaced with the following:

If the determination made pursuant to Section 4.7.1 results in a reduction of the payments that would otherwise be paid to you except for the application of Section 4.7.1, the Company shall promptly give you notice of such determination. Such reduction in payments shall be first applied to reduce any cash payments that you would otherwise be entitled to receive (whether pursuant to this Agreement or otherwise) and shall thereafter be applied to reduce other payments and benefits, in each case, in reverse order beginning with the payments or benefits that are to be paid the furthest in time from the date of such determination, unless, to the extent permitted by Section 409A of the Code, you elect to have the reduction in payments applied in a different order; provided that, in no event may such payments be reduced in a manner that would result in subjecting you to additional taxation under Section 409A of the Code. Within ten business days following such determination, the Company shall pay or distribute to you or for your benefit such amounts as are then due to you under this Agreement and shall promptly pay or distribute to you or for your benefit in the future such amounts as become due to you under this Agreement.

B. The last sentence of Section 4.7.4 of the Employment Agreement is hereby deleted in its entirety and replaced with the following:

Notwithstanding any provision of Section 12.8 to the contrary, the Company shall promptly pay, upon demand by you, all legal fees, court costs, fees of experts and other costs and expenses which you incur no later than 10 years following your death in any actual, threatened or contemplated contest of your interpretation of, or determination under, the provisions of this Section 4.7.

4.         Benefits After a Termination or Disability . Section 8.2 of the Employment Agreement is hereby amended by deleting clause (iii) in its entirety and replacing it with the following:

(iii) the Company shall not be permitted to determine that your employment was terminated for “unsatisfactory performance” or “cause” within the meaning of any stock option agreement between you and the Company.

5.         Miscellaneous .

A.        Except as expressly set forth herein, this Letter Agreement shall not by implication or otherwise, limit, impair, constitute a waiver of or otherwise affect the rights and remedies of you or the Company pursuant to the Employment Agreement, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Employment Agreement, all of which shall continue in full force and effect. From and after the date of this Letter Agreement, all references to the Employment Agreement shall be deemed to refer to the Employment Agreement as amended hereby.


B.        This Letter Agreement may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, will constitute one and the same instrument. Delivery of an executed counterpart of a signature page of this Letter Agreement by facsimile transmission or portable document format (PDF) shall be effective as delivery of a manually executed counterpart of this Letter Agreement.

If the foregoing accurately reflects our agreement, please so indicate by signing where indicated below.

 

Very truly yours,    
TIME WARNER INC.    
By:  

/s/ James Cummings

   
  Name:   James Cummings    
  Title:  

Senior Vice President of Global

Compensation and Benefits

   

 

Agreed and Accepted:
/s/ Olaf Olafsson
Olaf Olafsson

Exhibit 10.6

AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the “Agreement”) made October 22, 2016 and effective as of January 1, 2017 (the “Effective Date”) between TIME WARNER INC., a Delaware corporation (the “Company”), and GARY GINSBERG (“You”).

You are currently employed by the Company pursuant to an Employment Agreement made April 14, 2014 and effective as of January 1, 2014, which superseded an agreement between the parties made and effective February 17, 2010 (the “Prior Agreement”). The Company wishes to amend and restate the terms of your employment with the Company and to secure your services on a full-time basis for the period from the Effective Date to and including December 31, 2019 on and subject to the terms and conditions set forth in this Agreement, and you are willing to provide such services on and subject to the terms and conditions set forth in this Agreement. You and the Company therefore agree as follows:

1.   Term of Employment .  Your “term of employment” as this phrase is used throughout this Agreement shall be for the period beginning on the Effective Date and ending on December 31, 2019 (the “Term Date”), subject, however, to earlier termination as set forth in this Agreement. Until the Effective Date, the Employment Agreement made April 14, 2014 and effective as of January 1, 2014 shall remain in full force and effect to the extent set forth therein.

2.   Employment .  During the term of employment, you shall serve as Executive Vice President, Corporate Marketing & Communications of the Company and you shall have the authority, functions, duties, powers and responsibilities normally associated with such position and such additional authority, functions, duties, powers and responsibilities as may be assigned to you from time to time by the Company consistent with your senior position with the Company. During the term of employment, (i) your services shall be rendered on a substantially full-business time, exclusive basis and you will apply on a full-business time basis all of your skill and experience to the performance of your duties, (ii) you shall have no other employment and, without the prior written consent of your manager or other more senior officer of the Company in your reporting line, no outside business activities which require the devotion of substantial amounts of your time, and (iii) the place for the performance of your services shall be the principal executive offices of the Company in the New York City metropolitan area, subject to such reasonable travel as may be required in the performance of your duties. The foregoing shall be subject to the Company’s written policies, as in effect from time to time, regarding vacations, holidays, illness and the like.


3.   Compensation .

3.1   Base Salary .  The Company shall pay you a base salary at the rate of not less than $900,000 per annum beginning on the Effective Date and continuing during the term of employment (“Base Salary”). The Company may increase, but not decrease, your Base Salary during the term of employment. Base Salary shall be paid in accordance with the Company’s customary payroll practices.

3.2   Bonus .  In addition to Base Salary, the Company typically pays its executives an annual cash bonus (“Bonus”). Although the amount of your Bonus is fully discretionary, your target annual Bonus as a percentage of Base Salary is 200%. The Company may increase, but not decrease, your target annual Bonus during the term of employment. Each year, your personal performance will be considered in the context of your executive duties and any individual goals set for you, and your actual Bonus will be determined based on your personal performance and the Company’s performance. Your Bonus amount, if any, will be paid to you between January 1 and March 15 of the calendar year immediately following the performance year in respect of which such Bonus is earned.

3.3   Long Term Incentive Compensation .  So long as the term of employment has not terminated, you shall be eligible to receive annually from the Company long term incentive compensation with a target value beginning in 2017 of $1,250,000 (based on the valuation method used by the Company for its senior executives) through a combination of stock option grants, restricted stock units, performance shares or other equity-based awards, cash-based long-term plans or other components as may be determined by the Compensation and Human Development Committee of the Company’s Board of Directors from time to time in its sole discretion. The Company may increase, but not decrease, the target value of your annual long term incentive compensation during the term of employment.

 

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3.4   Indemnification .  You shall be entitled throughout the term of employment (and after the end of the term of employment, to the extent relating to service during the term of employment) to the benefit of the indemnification provisions contained on the Effective Date in the Restated Certificate of Incorporation and By-laws of the Company (not including any amendments or additions after the Effective Date that limit or narrow, but including any that add to or broaden, the protection afforded to you by those provisions).

4.   Termination .

4.1   Termination for Cause .  The Company may terminate the term of employment and all of the Company’s obligations under this Agreement, other than its obligations set forth below in this Sections 4.1 and in Section 3.4, for “cause”. Termination by the Company for “cause” shall mean termination because of your (a) conviction (treating a nolo contendere plea as a conviction) of a felony (whether or not any right to appeal has been or may be exercised) other than as a result of a moving violation or a Limited Vicarious Liability, (b) willful failure or refusal without proper cause to perform your material duties with the Company, including your material obligations under this Agreement (other than any such failure resulting from your incapacity due to physical or mental impairment), (c) willful misappropriation, embezzlement or reckless or willful destruction of Company property having a significant adverse financial effect on the Company or a significant adverse effect on the Company’s reputation, (d) willful and material breach of any statutory or common law duty of loyalty to the Company having a significant adverse financial effect on the Company or a significant adverse effect on the Company’s reputation, or (e) material and willful breach of any of the covenants provided for in Sections 8 and 9. Such termination shall be effected by written notice thereof delivered by the Company to you and shall be effective as of the date of such notice; provided, however, that if (i) such termination is because of your willful failure or refusal without proper cause to perform your material duties with the Company including any one or more of your material obligations under this Agreement or for intentional and improper conduct, and (ii) within 30 days following the date of such notice you shall cease your refusal and shall use your best efforts to perform such obligations or cease such intentional and improper conduct, the termination shall not be effective. For purposes of this definition of Cause, no act, or failure to act, on your part shall be considered “willful” or “intentional” unless done, or omitted to be done, by you not in good faith and without reasonable belief that such action or omission was opposed to

 

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the best interest of the Company. The term “Limited Vicarious Liability” shall mean any liability which is based on acts of the Company for which you are responsible solely as a result of your office(s) with the Company; provided that (x) you are not directly involved in such acts and either had no prior knowledge of such intended actions or, upon obtaining such knowledge, promptly acted reasonably and in good faith to attempt to prevent the acts causing such liability or (y) after consulting with the Company’s counsel, you reasonably believed that no law was being violated by such acts.

In the event of termination by the Company for cause, without prejudice to any other rights or remedies that the Company may have at law or in equity, the Company shall have no further obligation to you other than (i) to pay Base Salary through the effective date of the termination of employment (the “Effective Termination Date”), (ii) to pay any Bonus for any year prior to the year in which such termination occurs that has been determined but not yet paid as of the Effective Termination Date, (iii) to pay any unpaid Life Insurance Premium (as defined in Section 7.1) for any year prior to the year in which such termination occurs, and (iv) with respect to any rights you have pursuant to any insurance or other benefit plans or arrangements of the Company (including under Section 7.2 hereof) (the items described in clauses (i), (ii), (iii) and (iv), collectively, the “Accrued Obligations”). You hereby disclaim any right to receive a pro rata portion of any Bonus with respect to the year in which such termination occurs.

4.2   Termination by You for Material Breach by the Company and Termination by the Company Without Cause .  Unless previously terminated pursuant to any other provision of this Agreement and unless a Disability Period shall be in effect, you shall have the right, exercisable by written notice to the Company, to terminate the term of employment under this Agreement with an Effective Termination Date 30 days after the giving of such notice, if, at the time of the giving of such notice, the Company is in material breach of its obligations under this Agreement; provided, however, that, with the exception of clause (i) below, this Agreement shall not so terminate if such notice is the first such notice of termination delivered by you pursuant to this Section 4.2 and within such 30-day period the Company shall have cured all such material breaches; and provided further, that such notice is provided to the Company within 90 days after the occurrence of such material breach. A material breach by the Company shall include, but not be limited to (i) the Company violating Section 2 with respect to authority, duties, or place of employment and (ii) the Company failing to cause any successor to all or substantially all of the business and assets of the Company expressly to assume the obligations of the Company under this Agreement.

 

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The Company shall have the right, exercisable by written notice to you delivered at least 60 days prior to the Effective Termination Date, to terminate your employment under this Agreement without cause, which notice shall specify the Effective Termination Date. If such notice is delivered on or after the date which is 60 days prior to the Term Date, the provisions of Section 4.3 shall apply.

4.2.1  In the event of a termination of employment pursuant to this Section 4.2 (a “termination without cause”), you shall receive Base Salary and a pro rata portion of your Average Annual Bonus (as defined below) through the Effective Termination Date. Your Average Annual Bonus shall be equal to the average of the regular annual bonus amounts (including any such amounts that have been deferred under any plan or arrangement of the Company, but excluding the amount of any special or spot bonuses)(the “Regular Bonus”) in respect of the two calendar years during the most recent three calendar years for which the Regular Bonus received by you from the Company was the greatest. In addition, if the Effective Termination Date occurs on December 31 of any performance year or following the end of a performance year but prior to the date that the Bonus amount in respect of such year has been paid to you pursuant to Section 3.2, then for purposes of calculating your Average Annual Bonus, the unpaid Bonus in respect of such year will be taken into account only if it would result in a greater Average Annual Bonus. Your pro rata Average Annual Bonus pursuant to this Section 4.2.1 shall be paid to you at the times set forth in Section 4.7.

4.2.2  In the event of a termination covered by Section 4.2 or 4.3 after the Effective Termination Date, you shall continue to be treated like an employee of the Company for a period ending on the date which is twenty-four months after the Effective Termination Date if the Effective Termination Date occurs prior to the Term Date or twelve months after the Effective Termination Date if the Effective Termination Date occurs on or after the Term Date (such date, the “Severance Term Date”). During such period you shall be entitled to receive, whether or not you become disabled during such period but subject to Section 6, (a) Base Salary (on the Company’s normal payroll payment dates as in effect immediately prior to the Effective Termination Date) at an annual rate equal to your Base Salary in effect immediately prior to the notice of termination, (b) an annual Bonus in respect of each calendar year or portion thereof (in

 

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which case a pro rata portion of such Bonus will be payable) during such period equal to your Average Annual Bonus and (c) payment of the Life Insurance Premium for each full or partial calendar year during the Severance Period (with respect to the calendar year in which the Effective Termination Date occurs, to the extent not otherwise paid under Section 4.2.1 or Section 7, and with respect to the calendar year in which the Severance Term Date occurs, with the amount of such payment prorated to reflect the number of days during such calendar year that will elapse prior to the Severance Term Date). Except as provided in the next sentence, if you accept other full-time employment during such period or notify the Company in writing of your intention to terminate your status of being treated like an employee during such period, you shall cease to be treated like an employee of the Company for purposes of your rights to receive certain post-termination benefits under Section 8.2 effective upon the commencement of such other employment or the effective date specified by you in such notice, whichever is applicable (the “Equity Cessation Date”), and you shall receive the remaining payments of Base Salary, Bonus and Life Insurance Premium pursuant to this Section 4.2.2 for the balance of the period when payments are due to you between the Effective Termination Date and the Severance Term Date at the times specified in Section 4.7 of the Agreement. Notwithstanding the foregoing, if you accept employment with any not-for-profit entity or governmental entity, then you may continue to be treated like an employee of the Company for purposes of your rights to receive certain post-termination benefits pursuant to Section 8.2 and you will continue to receive the payments as provided in the first sentence of this Section 4.2.2; and if you accept full-time employment with any affiliate of the Company, then the payments provided for in this Section 4.2.2 shall immediately cease and you shall not be entitled to any further payments. For purposes of this Agreement, the term “affiliate” shall mean any entity which, directly or indirectly, controls, is controlled by, or is under common control with, the Company.

4.3   After the Term Date .  If, at the Term Date, the term of employment shall not have been previously terminated pursuant to the provisions of this Agreement, no Disability Period is then in effect and the parties shall not have agreed to an extension or renewal of this Agreement or on the terms of a new employment agreement, then the term of employment shall continue on a month-to-month basis and you shall continue to be employed by the Company pursuant to the terms of this Agreement, subject to termination by either party hereto on 60 days written notice delivered to the other party (which notice may be delivered by either party at any time on or after the date which is 60 days prior to the Term Date). If the Company shall terminate the term of employment on

 

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or after the Term Date for any reason (other than for cause as defined in Section 4.1, in which case Section 4.1 shall apply), which the Company shall have the right to do so long as no Disability Date (as defined in Section 5) has occurred prior to the delivery by the Company of written notice of termination, then such termination shall be deemed for all purposes of this Agreement to be a “termination without cause” under Section 4.2 and the provisions of Sections 4.2.1 and 4.2.2 shall apply.

4.4   Release .  A condition precedent to the Company’s obligation to make or continue the payments associated with a termination without cause shall be your execution and delivery of a release in the form attached hereto as Annex A, as such form may be revised as required by law, within 60 days following your Effective Termination Date. If you shall fail to timely execute and deliver such release, or if you revoke such release as provided therein, then in lieu of continuing to receive the payments provided for herein, you shall receive a severance payment determined in accordance with the Company’s policies relating to notice and severance reduced by the aggregate amount of severance payments paid pursuant to this Agreement, if any, prior to the date of your refusal to deliver, or revocation of, such release. In this event, any such severance payments shall be paid in the form of Base Salary continuation payments at the annual rate equal to your Base Salary in effect immediately prior to your notice of termination, with such amounts paid until your severance benefit has been exhausted.

4.5   Retirement .  Notwithstanding the provisions of this Agreement relating to a termination without cause and Disability, on the date you first become eligible for normal retirement as defined in any applicable retirement plan (i.e., age 65) of the Company or any subsidiary of the Company (the “Retirement Date”), then this Agreement shall terminate automatically on such date and your employment with the Company shall thereafter be governed by the policies generally applicable to employees of the Company, and you shall not thereafter be entitled to the payments provided in this Agreement to the extent not received by you on or prior to the Retirement Date. In addition, no benefits or payments provided in this Agreement relating to termination without cause and Disability shall include any period after the Retirement Date and if the provision of benefits or calculation of payments provided in this Agreement with respect thereto would include any period subsequent to the Retirement Date, such provision of benefits shall end on the Retirement Date and the calculation of payments shall cover only the period ending on the Retirement Date.

 

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4.6   Mitigation .  In the event of a termination without cause under this Agreement, you shall not be required to take actions in order to mitigate your damages hereunder, unless Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), would apply to any payments to you by the Company and your failure to mitigate would result in the Company losing tax deductions to which it would otherwise have been entitled. In such an event, Section 4.8 shall govern. With respect to the preceding sentences, any payments or rights to which you are entitled by reason of the termination of employment without cause shall be considered as damages hereunder. Any obligation to mitigate your damages pursuant to this Section 4.6 shall not be a defense or offset to the Company’s obligation to pay you in full the amounts provided in this Agreement upon the occurrence of a termination without cause, at the time provided herein, or the timely and full performance of any of the Company’s other obligations under this Agreement.

4.7   Payments .  Payments of Base Salary, Bonus and Life Insurance Premium required to be made to you after any termination shall be made at the same times as such payments otherwise would have been paid to you pursuant to Sections 3.1, 3.2 and 7 if you had not been terminated, subject to Section 12.17.

4.8   Limitation on Certain Payments .  Notwithstanding any other provision of this Agreement:

4.8.1.  In the event it is determined by an independent nationally recognized public accounting firm that is reasonably acceptable to you, which is engaged and paid for by the Company prior to the consummation of any transaction constituting a Change in Control (which for purposes of this Section 4.8 shall mean a change in ownership or control as determined in accordance with the regulations promulgated under Section 280G of the Code), which accounting firm shall in no event be the accounting firm for the entity seeking to effectuate the Change in Control (the “Accountant”), which determination shall be certified by the Accountant and set forth in a certificate delivered to you not less than ten business days prior to the Change in Control setting forth in reasonable detail the basis of the Accountant’s calculations (including any assumptions that the Accountant made in performing the calculations), that part or all of the consideration, compensation or benefits to be paid to you under this Agreement constitute “parachute payments” under Section 280G(b)(2) of the Code, then, if the aggregate present value of such parachute payments, singularly or together with the aggregate present value of any consideration, compensation or benefits to be paid to you

 

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under any other plan, arrangement or agreement which constitute “parachute payments” (collectively, the “Parachute Amount”) exceeds the maximum amount that would not give rise to any liability under Section 4999 of the Code, the amounts constituting “parachute payments” which would otherwise be payable to you or for your benefit shall be reduced to the maximum amount that would not give rise to any liability under Section 4999 of the Code (the “Reduced Amount”); provided that such amounts shall not be so reduced if the Accountant determines that without such reduction you would be entitled to receive and retain, on a net after-tax basis (including, without limitation, any excise taxes payable under Section 4999 of the Code), an amount which is greater than the amount, on a net after-tax basis, that you would be entitled to retain upon receipt of the Reduced Amount. In connection with making determinations under this Section 4.8, the Accountant shall take into account any positions to mitigate any excise taxes payable under Section 4999 of the Code, such as the value of any reasonable compensation for services to be rendered by you before or after the Change in Control, including any amounts payable to you following your termination of employment hereunder with respect to any non-competition provisions that may apply to you, and the Company shall cooperate in the valuation of any such services, including any non-competition provisions.

4.8.2.  If the determination made pursuant to Section 4.8.1 results in a reduction of the payments that would otherwise be paid to you except for the application of Section 4.8.1, the Company shall promptly give you notice of such determination. Such reduction in payments shall be first applied to reduce any cash payments that you would otherwise be entitled to receive (whether pursuant to this Agreement or otherwise) and shall thereafter be applied to reduce other payments and benefits, in each case, in reverse order beginning with the payments or benefits that are to be paid the furthest in time from the date of such determination, unless, to the extent permitted by Section 409A of the Code, you elect to have the reduction in payments applied in a different order; provided that, in no event may such payments be reduced in a manner that would result in subjecting you to additional taxation under Section 409A of the Code. Within ten business days following such determination, the Company shall pay or distribute to you or for your benefit such amounts as are then due to you under this Agreement and shall promptly pay or distribute to you or for your benefit in the future such amounts as become due to you under this Agreement.

4.8.3.  As a result of the uncertainty in the application of Sections 280G and 4999 of the Code at the time of a determination hereunder, it is possible

 

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that amounts will have been paid or distributed by the Company to or for your benefit pursuant to this Agreement which should not have been so paid or distributed (each, an “Overpayment”) or that additional amounts which will have not been paid or distributed by the Company to or for your benefit pursuant to this Agreement could have been so paid or distributed (each, an “Underpayment”), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accountant, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or you which the Accountant believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for your benefit shall be repaid by you to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that no such repayment shall be required if and to the extent such deemed repayment would not either reduce the amount on which you are subject to tax under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accountant, based on controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for your benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.

4.8.4.  In the event of any dispute with the Internal Revenue Service (or other taxing authority) with respect to the application of this Section 4.8, you shall control the issues involved in such dispute and make all final determinations with regard to such issues. Notwithstanding any provision of Section 12.8 to the contrary, the Company shall promptly pay, upon demand by you, all legal fees, court costs, fees of experts and other costs and expenses which you incur no later than 10 years following your death in any actual, threatened or contemplated contest of your interpretation of, or determination under, the provisions of this Section 4.8.

5.   Disability .

5.1   Disability Payments .  If during the term of employment and prior to the delivery of any notice of termination without cause, you become physically or mentally disabled, whether totally or partially, so that you are prevented from performing your usual duties for a period of six consecutive months, or for shorter periods aggregating six months in any twelve-month period, the Company shall, nevertheless, continue to pay your full compensation through the last day of the sixth consecutive month of disability or

 

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the date on which the shorter periods of disability shall have equaled a total of six months in any twelve-month period (such last day or date being referred to herein as the “Disability Date”), subject to Section 12.17. If you have not resumed your usual duties on or prior to the Disability Date, the Company shall pay you a pro rata Bonus (based on your Average Annual Bonus) for the year in which the Disability Date occurs and thereafter shall pay you disability benefits for the period ending on the later of (i) the Term Date or (ii) the date which is twelve months after the Disability Date (in the case of either (i) or (ii), the “Disability Period”), in an annual amount equal to 75% of (a) your Base Salary at the time you become disabled and (b) the Average Annual Bonus, in each case, subject to Section 12.17.

5.2   Recovery from Disability .  If during the Disability Period you shall fully recover from your disability, the Company shall have the right (exercisable within 60 days after notice from you of such recovery), but not the obligation, to restore you to full-time service at full compensation. If the Company elects to restore you to full-time service, then this Agreement shall continue in full force and effect in all respects and the Term Date shall not be extended by virtue of the occurrence of the Disability Period. If the Company elects not to restore you to full-time service, you shall be entitled to obtain other employment, subject, however, to the following: (i) you shall perform advisory services during any balance of the Disability Period; and (ii) you shall comply with the provisions of Sections 9 and 10 during the Disability Period. The advisory services referred to in clause (i) of the immediately preceding sentence shall consist of rendering advice concerning the business, affairs and management of the Company as requested by the Chief Executive Officer or other more senior officer of the Company but you shall not be required to devote more than five days (up to eight hours per day) each month to such services, which shall be performed at a time and place mutually convenient to both parties. Any income from such other employment shall not be applied to reduce the Company’s obligations under this Agreement.

5.3   Other Disability Provisions .  The Company shall be entitled to deduct from all payments to be made to you during the Disability Period pursuant to this Section 5 an amount equal to all disability payments received by you during the Disability Period from Worker’s Compensation, Social Security and disability insurance policies maintained by the Company; provided, however, that for so long as, and to the extent that, proceeds paid to you from such disability insurance policies are not includible in your income for federal income tax purposes, the Company’s deduction with respect to such

 

11


payments shall be equal to the product of (i) such payments and (ii) a fraction, the numerator of which is one and the denominator of which is one less the maximum marginal rate of federal income taxes applicable to individuals at the time of receipt of such payments. All payments made under this Section 5 after the Disability Date are intended to be disability payments, regardless of the manner in which they are computed. Except as otherwise provided in this Section 5, the term of employment shall continue during the Disability Period and you shall be entitled to all of the rights and benefits provided for in this Agreement, except that Sections 4.2 and 4.3 shall not apply during the Disability Period, and unless the Company has restored you to full-time service at full compensation prior to the end of the Disability Period, the term of employment shall end and you shall cease to be an employee of the Company at the end of the Disability Period and shall not be entitled to notice and severance or to receive or be paid for any accrued vacation time or unused sabbatical.

6.   Death .  If you die during the term of employment, this Agreement and all obligations of the Company to make any payments hereunder shall terminate except that your estate (or a designated beneficiary) shall be entitled to receive Base Salary to the last day of the month in which your death occurs and Bonus compensation (at the time bonuses are normally paid) based on the Average Annual Bonus, but prorated according to the number of whole or partial months you were employed by the Company in such calendar year.

7.   Life Insurance .  During your employment with the Company, the Company shall (i) provide you with $50,000 of group life insurance and (ii) pay you annually an amount equal to two times the premium you would have to pay to obtain life insurance under a standard group universal life insurance program in an amount equal to $3,000,000 (“Life Insurance Premium”) . The Company shall pay you such amount no earlier than January 1 and no later than December 31 of the calendar year in which you are entitled to this amount. You shall be under no obligation to use the payments made by the Company pursuant to the preceding sentence to purchase any additional life insurance. The payments made to you hereunder shall not be considered as “salary” or “compensation” or “bonus” in determining the amount of any payment under any retirement, profit-sharing or other benefit plan of the Company or any subsidiary of the Company.

8.   Other Benefits .

 

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8.1   General Availability .  To the extent that (a) you are eligible under the general provisions thereof (including without limitation, any plan provision providing for participation to be limited to persons who were employees of the Company or certain of its subsidiaries prior to a specific point in time) and (b) the Company maintains such plan or program for the benefit of its executives, during the term of your employment with the Company, you shall be eligible to participate in any savings plan, or similar plan or program and in any group life insurance, hospitalization, medical, dental, accident, disability or similar plan or program of the Company now existing or established hereafter on a basis no less favorable to you than is provided to any other executive vice president of the Company.

8.2   Benefits After a Termination or Disability .  After the Effective Termination Date of a termination of employment pursuant to Section 4.2 and prior to the Severance Term Date or during the Disability Period, you shall continue to be treated like an employee of the Company for purposes of eligibility to participate in the Company’s health and welfare benefit plans other than disability programs and to receive the health and welfare benefits (other than disability programs) required to be provided to you under this Agreement to the extent such health and welfare benefits are maintained in effect by the Company for its executives. After the Effective Termination Date or a termination of employment pursuant to Section 4.2 and prior to the Severance Term Date, you will continue to receive all other benefits maintained in effect by the Company for its senior executives, such as financial services reimbursement. After the Effective Termination Date of a termination of employment pursuant to Section 4 or during a Disability Period, you shall not be entitled to any additional awards or grants under any stock option, restricted stock or other stock-based incentive plan and you shall not be entitled to continue elective deferrals in or accrue additional benefits under any qualified or nonqualified retirement programs maintained by the Company. At the Severance Term Date, your rights to benefits and payments under any health and welfare benefit plans or any insurance or other death benefit plans or arrangements of the Company shall be determined in accordance with the terms and provisions of such plans. At the Severance Term Date or, if earlier, the Equity Cessation Date, your rights to benefits and payments under any stock option, restricted stock, stock appreciation right, bonus unit, management incentive or other long-term incentive plan of the Company shall be determined in accordance with the terms and provisions of such plans and any agreements under which such stock options, restricted stock or other awards were granted. However, consistent

 

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with the terms of the Prior Agreement, notwithstanding the foregoing or any more restrictive provisions of any such plan or agreement, if your employment with the Company is terminated as a result of a termination pursuant to Section 4.2, then, subject to the application of any more favorable terms of the applicable stock option agreement, (i) all stock options to purchase shares of Time Warner Common Stock shall continue to vest, through the earlier of the Severance Term Date or the Equity Cessation Date; (ii) except if you shall then qualify for retirement under the terms of the applicable stock option agreement and would receive more favorable treatment under the terms of the stock option agreement, (x) all stock options to purchase shares of Time Warner Common Stock granted to you on or after February 17, 2010 (the “Term Options”) that would have vested on or before the later of the Term Date and the Severance Term Date (or the date that is comparable to the Severance Term Date under any employment agreement that amends, replaces or supersedes this Agreement) shall vest and become immediately exercisable upon the earlier of the Severance Term Date or the Equity Cessation Date, and (y) all your vested Term Options shall remain exercisable for a period of three years after the earlier of the Severance Term Date or the Equity Cessation Date (but not beyond the term of such stock options); and (iii) the Company shall not be permitted to determine that your employment was terminated for “unsatisfactory performance” or “cause”, in either case within the meaning of any stock option agreement between you and the Company.

With respect to awards of restricted stock units (“RSUs”) held at the Effective Termination Date of a termination of employment pursuant to Section 4.2, subject to potential further delay in payment pursuant to Section 12.17, the treatment of the RSUs will be determined in accordance with the terms of the applicable award agreement(s).

8.3   Payments in Lieu of Other Benefits .  In the event the term of employment and your employment with the Company is terminated pursuant to any section of this Agreement, you shall not be entitled to notice and severance under the Company’s general employee policies or to be paid for any accrued vacation time or unused sabbatical, the payments provided for in such sections being in lieu thereof.

9.   Protection of Confidential Information; Non-Compete .

9.1   Confidentiality Covenant .  You acknowledge that your employment by the Company (which, for purposes of this Section 9 shall mean Time Warner Inc. and its affiliates) will, throughout your employment, bring you into close

 

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contact with many confidential affairs of the Company, including information about costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, technical processes, trade secrets, plans for future development, strategic plans of the most valuable nature and other business affairs and methods and other information not readily available to the public. You further acknowledge that the services to be performed under this Agreement are of a special, unique, unusual, extraordinary and intellectual character. You further acknowledge that the business of the Company is global in scope, that its products and services are marketed throughout the world, that the Company competes in nearly all of its business activities with other entities that are or could be located in nearly any part of the world and that the nature of your services, position and expertise are such that you are capable of competing with the Company from nearly any location in the world. In recognition of the foregoing, you covenant and agree:

9.1.1  You shall keep secret all confidential matters of the Company and shall not disclose such matters to anyone outside of the Company, or to anyone inside the Company who does not have a need to know or use such information, and shall not use such information for personal benefit or the benefit of a third party, either during or after the term of employment, except with the Company’s written consent, provided that (i) you shall have no such obligation to the extent such matters are or become publicly known other than as a result of your breach of your obligations hereunder and (ii) you may, after giving prior notice to the Company to the extent practicable under the circumstances, disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process;

9.1.2  You shall deliver promptly to the Company on termination of your employment, or at any other time the Company may so request, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to the Company’s business, which you obtained while employed by, or otherwise serving or acting on behalf of, the Company and which you may then possess or have under your control; and

9.1.3  For a period of one year after the effective date of your retirement or other termination by you of your employment with the Company or for one year after the Effective Termination Date of a termination of employment pursuant to Section 4, without the prior written consent of the Company, you shall not employ, and shall not cause any entity of which you are an affiliate to employ, any person who was a

 

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full-time employee of the Company at the date of such termination of employment or within six months prior thereto, but such prohibition shall not apply to your secretary or executive assistant or to any other employee eligible to receive overtime pay.

9.2.   Non-Compete Covenant .

9.2.1  During the term of employment and for the twelve-month period after (i) the effective date of your retirement or other termination by you of your employment or (ii) the Effective Termination Date of a termination of employment pursuant to Section 4, you shall not, directly or indirectly, without the prior written consent of the Chief Executive Officer of the Company: (x) render any services to, manage, operate, control, or act in any capacity (whether as a principal, partner, director, officer, member, agent, employee, consultant, owner, independent contractor or otherwise and whether or not for compensation) for, any person or entity that is a Competitive Entity, or (y) acquire any interest of any type in any Competitive Entity, including without limitation as an owner, holder or beneficiary of any stock, stock options or other equity interest (except as permitted by the next sentence). Nothing herein shall prohibit you from acquiring solely as an investment and through market purchases (i) securities of any Competitive Entity that are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) and that are publicly traded, so long as you or any entity under your control are not part of any control group of such Competitive Entity and such securities, including converted or convertible securities, do not constitute more than one percent (1%) of the outstanding voting power of that entity and (ii) securities of any Competitive Entity that are not registered under Section 12(b) or 12(g) of the Exchange Act and are not publicly traded, so long as you or any entity under your control is not part of any control group of such Competitive Entity and such securities, including converted securities, do not constitute more than three percent (3%) of the outstanding voting power of that entity, provided that in each case you have no active participation in the business of such entity.

9.2.2  “Competitive Entity” shall be defined as a business (whether conducted through an entity (including its parent, subsidiary, affiliate, joint venture, partnership or otherwise) or by individuals including employee in self-employment) that is engaged in any business activities that directly compete with (x) any of the business activities carried on by the Company in any geographic location where the Company conducts business (including without limitation a Competitive Activity as

 

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defined below), (y) any business activities being planned by the Company or in the process of development at the time of your termination of employment (as evidenced by written proposals, market research, RFPs and similar materials) or (z) any business activity that the Company has covenanted, in writing, not to compete with in connection with the disposition of such a business.

9.2.3  “Competitive Activity” refers to business activities within the lines of business of the Company, including without limitation, the following:

 

  (a) The operation of domestic and international networks and premium pay television services (including the production, provision and/or delivery of programming to cable system operators, satellite distribution services, telephone companies, Internet Protocol Television systems, mobile operators, broadband and other distribution platforms and outlets) and websites and digital applications associated with such networks and pay television services;

 

  (b) The sale, licensing and/or distribution of content on DVD and Blu-ray discs, video on demand, electronic sell-through, applications for mobile devices, the Internet or other digital services; and

 

  (c) The production, distribution and licensing of motion pictures and other entertainment assets, television programming, animation, interactive games (whether distributed in physical form or digitally) and other video products and the operation of websites and digital applications associated with the foregoing.

9.3.   Injunctive Relief .  You acknowledge that your services are of a special, unique and extraordinary value to the Company and that you develop goodwill on behalf of Time Warner. Because your services are unique and because you have access to confidential information and strategic plans of the Company of the most valuable nature and will help the Company develop goodwill, the parties agree that the covenants contained in this Section 9 are necessary to protect the value of the business of the Company and that a breach of any such non-competition covenant would result in irreparable and continuing damage for which there would be no adequate remedy at law.

 

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The parties agree therefore that in the event of a breach or threatened breach of this Section 8, the Company may, in addition to other rights and remedies existing in its favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof. The parties further agree that in the event the Company is granted any such injunctive or other relief, the Company shall not be required to post any bond or security that may otherwise normally be associated with such relief.

10.   Ownership of Work Product .  You acknowledge that during the term of employment, you may conceive of, discover, invent or create inventions, improvements, new contributions, literary property, material, ideas and discoveries, whether patentable or copyrightable or not (all of the foregoing being collectively referred to herein as “Work Product”), and that various business opportunities shall be presented to you by reason of your employment by the Company. You acknowledge that all of the foregoing shall be owned by and belong exclusively to the Company and that you shall have no personal interest therein, provided that they are either related in any manner to the business (commercial or experimental) of the Company, or are, in the case of Work Product, conceived or made on the Company’s time or with the use of the Company’s facilities or materials, or, in the case of business opportunities, are presented to you for the possible interest or participation of the Company. You shall (i) promptly disclose any such Work Product and business opportunities to the Company; (ii) assign to the Company, upon request and without additional compensation, the entire rights to such Work Product and business opportunities; (iii) sign all papers necessary to carry out the foregoing; and (iv) give testimony in support of your inventorship or creation in any appropriate case. You agree that you will not assert any rights to any Work Product or business opportunity as having been made or acquired by you prior to the date of this Agreement except for Work Product or business opportunities, if any, disclosed to and acknowledged by the Company in writing prior to the date hereof.

11.   Notices .  All notices, requests, consents and other communications required or permitted to be given under this Agreement shall be effective only if given in writing and shall be deemed to have been duly given if delivered personally or sent by a nationally recognized overnight delivery service, or mailed first-class, postage prepaid, by registered or certified mail, as follows (or to such other or additional address as either party shall designate by notice in writing to the other in accordance herewith):

 

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11.1  If to the Company:

Time Warner Inc.

One Time Warner Center

New York, New York 10019

Attention: Senior Vice President—Global

Compensation and Benefits

(with a copy, similarly addressed

but Attention: General Counsel)

11.2  If to you, to your residence address set forth on the records of the Company.

12.   General .

12.1   Governing Law .  This Agreement shall be governed by and construed and enforced in accordance with the substantive laws of the State of New York applicable to agreements made and to be performed entirely in New York.

12.2   Captions .  The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

12.3   Entire Agreement .  This Agreement, including Annexes A and B, set forth the entire agreement and understanding of the parties relating to the subject matter of this Agreement and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties.

12.4   No Other Representations .  No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or be liable for any alleged representation, promise or inducement not so set forth.

12.5   Assignability .  This Agreement and your rights and obligations hereunder may not be assigned by you and except as specifically contemplated in this Agreement, neither you, your legal representative nor any beneficiary designated by you shall have any right, without the prior written consent of the Company, to assign,

 

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transfer, pledge, hypothecate, anticipate or commute to any person or entity any payment due in the future pursuant to any provision of this Agreement, and any attempt to do so shall be void and shall not be recognized by the Company. The Company may not assign this Agreement or its rights or obligations hereunder except that the Company shall assign its rights together with its obligations hereunder in connection with any sale, transfer or other disposition of all or substantially all of the Company’s business and assets, whether by merger, purchase of stock or assets or otherwise, as the case may be. Upon any such assignment, the Company shall cause any such successor expressly to assume such obligations, and such rights and obligations shall inure to and be binding upon any such successor.

12.6   Amendments; Waivers .  This Agreement may be amended, modified, superseded, cancelled, renewed or extended and the terms or covenants hereof may be waived only by written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect such party’s right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement.

12.7   Specific Remedy .  In addition to such other rights and remedies as the Company may have at equity or in law with respect to any breach of this Agreement, if you commit a material breach of any of the provisions of Sections 9.1, 9.2, or 10, the Company shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company.

12.8   Resolution of Disputes .  Except as provided in the preceding Section 12.7, any dispute or controversy arising with respect to this Agreement and your employment hereunder (whether based on contract or tort or upon any federal, state or local statute, including but not limited to claims asserted under the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, as amended, any state Fair Employment Practices Act and/or the Americans with Disability Act) shall, at the election of either you or the Company, be submitted to JAMS for resolution in arbitration in accordance with the rules and procedures of JAMS. Either party shall make such election

 

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by delivering written notice thereof to the other party at any time (but not later than 45 days after such party receives notice of the commencement of any administrative or regulatory proceeding or the filing of any lawsuit relating to any such dispute or controversy) and thereupon any such dispute or controversy shall be resolved only in accordance with the provisions of this Section 12.8. Any such proceedings shall take place in New York City before a single arbitrator (rather than a panel of arbitrators), pursuant to any streamlined or expedited (rather than a comprehensive) arbitration process, before a non-judicial (rather than a judicial) arbitrator, and in accordance with an arbitration process which, in the judgment of such arbitrator, shall have the effect of reasonably limiting or reducing the cost of such arbitration. The resolution of any such dispute or controversy by the arbitrator appointed in accordance with the procedures of JAMS shall be final and binding. Judgment upon the award rendered by such arbitrator may be entered in any court having jurisdiction thereof, and the parties consent to the jurisdiction of the New York courts for this purpose. The prevailing party shall be entitled to recover the costs of arbitration (including reasonable attorneys fees and the fees of experts) from the losing party. If at the time any dispute or controversy arises with respect to this Agreement, JAMS is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for JAMS for the purposes of the foregoing provisions of this Section 12.8. If you shall be the prevailing party in such arbitration, the Company shall promptly pay, upon your demand, all legal fees, court costs and other costs and expenses incurred by you in any legal action seeking to enforce the award in any court.

12.9   Beneficiaries .  Whenever this Agreement provides for any payment to your estate, such payment may be made instead to such beneficiary or beneficiaries as you may designate by written notice to the Company. You shall have the right to revoke any such designation and to redesignate a beneficiary or beneficiaries by written notice to the Company (and to any applicable insurance company) to such effect.

12.10   No Conflict .  You represent and warrant to the Company that this Agreement is legal, valid and binding upon you and the execution of this Agreement and the performance of your obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which you are a party (including, without limitation, any other employment agreement). The Company represents and warrants to you that this Agreement is legal, valid and binding upon the Company and the execution of this Agreement and the performance of the Company’s obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Company is a party.

 

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12.11   Conflict of Interest .  Attached as Annex B and made part of this Agreement is the Time Warner Corporate Standards of Business Conduct. You confirm that you have read, understand and will comply with the terms thereof and any reasonable amendments thereto. In addition, as a condition of your employment under this Agreement, you understand that you may be required periodically to confirm that you have read, understand and will comply with the Standards of Business Conduct as the same may be revised from time to time.

12.12   Withholding Taxes .  Payments made to you pursuant to this Agreement shall be subject to withholding and social security taxes and other ordinary and customary payroll deductions.

12.13   No Offset .  Neither you nor the Company shall have any right to offset any amounts owed by one party hereunder against amounts owed or claimed to be owed to such party, whether pursuant to this Agreement or otherwise, and you and the Company shall make all the payments provided for in this Agreement in a timely manner.

12.14   Severability .  If any provision of this Agreement shall be held invalid, the remainder of this Agreement shall not be affected thereby; provided, however, that the parties shall negotiate in good faith with respect to equitable modification of the provision or application thereof held to be invalid. To the extent that it may effectively do so under applicable law, each party hereby waives any provision of law which renders any provision of this Agreement invalid, illegal or unenforceable in any respect.

12.15   Survival .  Sections 3.4, 8.3 and 9 through 12 shall survive any termination of the term of employment by the Company for cause pursuant to Section 4.1. Sections 3.4, 4.4, 4.5, 4.6, 4.8 and 8 through 12 shall survive any termination of the term of employment pursuant to Sections 4.2, 4.3, 5 or 6. Sections 3.4, 4.6 and Sections 9 through 12 shall survive any termination of employment due to resignation.

 

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12.16   Definitions .  The following terms are defined in this Agreement in the places indicated:

Accrued Obligations – Section 4.1

affiliate – Section 4.2.2

Average Annual Bonus – Section 4.2.1

Base Amount – Section 4.8.1

Base Salary – Section 3.1

Bonus – Section 3.2

cause – Section 4.1

Code – Section 4.6

Company – the first paragraph on page 1 and Section 8.1

Competitive Entity – Section 8.2

Disability Date – Section 5

Disability Period – Section 5

Effective Date – the first paragraph on page 1

Effective Termination Date – Section 4.1

Equity Cessation Date – Section 4.2.2

Life Insurance Premium – Section 7

Overpayment – Section 4.8.3

Parachute Amount – Section 4.8.1

Reduced Amount – Section 4.8.1

Regular Bonus – Section 4.2.1

Retirement Date – Section 4.5

Severance Term Date – Section 4.2.2

Term Date – Section 1

term of employment – Section 1

termination without cause – Section 4.2.1

Work Product – Section 10

12.17   Compliance with IRC Section 409A .  This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and will be interpreted in a manner intended to comply with Section 409A of the Code. Notwithstanding anything herein to the contrary, (i) if at the time of your termination of employment with the Company you are a “specified employee” as defined in Section 409A of the Code (and any related regulations or other pronouncements thereunder) and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then the Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided

 

23


to you) until the date that is six months following your termination of employment with the Company (or the earliest date as is permitted under Section 409A of the Code) and (ii) if any other payments of money or other benefits due to you hereunder could cause the application of an accelerated or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payment or other benefits shall be restructured, to the extent possible, in a manner, determined by the Company, that does not cause such an accelerated or additional tax and does not reduce the value of such payments to you. To the extent any reimbursements or in-kind benefits due to you under this Agreement constitutes “deferred compensation” under Section 409A of the Code, any such reimbursements or in-kind benefits shall be paid to you in a manner consistent with Treas. Reg. Section 1.409A-3(i)(1)(iv). Each payment made under this Agreement shall be designated as a “separate payment” within the meaning of Section 409A of the Code. References in this Agreement to your termination of active employment or your Effective Termination Date shall be deemed to refer to the date upon which you have a “separation from service” with the Company and its affiliates within the meaning of Section 409A of the Code. The Company shall consult with you in good faith regarding the implementation of the provisions of this Section 12.17; provided that neither the Company nor any of its employees or representatives shall have any liability to you with respect to thereto.

 

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IN WITNESS WHEREOF, the parties have duly executed this Agreement the date first above written.

 

 

TIME WARNER INC.
By   /s/ James Cummings
Name:   James Cummings
Title:   Senior Vice President of Global
  Compensation and Benefits

 

 

  /s/ Gary Ginsberg
  GARY GINSBERG

 

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ANNEX A

RELEASE

This Release is made by and among                                  (“You” or “Your”) and TIME WARNER INC. (the “Company”), One Time Warner Center, New York, New York 10019, as of the date set forth below in connection with the Employment Agreement dated                                  , and effective as of                                  , and the letter agreement (the “Letter Agreement” between You and the Company dated as of                                  (as so amended, the “Employment Agreement”), and in association with the termination of Your employment with the Company.

In consideration of payments made to You and other benefits to be received by You by the Company and other benefits to be received by You pursuant to the Employment Agreement, as further reflected in the Letter Agreement, You, being of lawful age, do hereby release and forever discharge the Company, its successors, related companies, Affiliates, officers, directors, shareholders, subsidiaries, agents, employees, heirs, executors, administrators, assigns, benefit plans (including but not limited to the Time Warner Inc. Severance Pay Plan For Regular Employees and the Time Warner Inc. Change in Control Severance Plan), benefit plan sponsors and benefit plan administrators of and from any and all actions, causes of action, claims, or demands for general, special or punitive damages, attorney’s fees, expenses, or other compensation or damages (collectively, “Claims”), whether known or unknown, which in any way relate to or arise out of Your employment with the Company or the termination of Your employment, which You may now have under any federal, state or local law, regulation or order, including without limitation, Claims related to any equity awards held by You or granted to You by the Company that are scheduled to vest subsequent to the Severance Term Date that applies to Your termination of employment, all Claims of discrimination, or harassment in employment on the basis of age, religion, gender, sexual orientation, race, national origin, disability or any other protected characteristic, and of retaliation or violation of any employment or fair employment practices law, including, without limitation, all Claims under the Age Discrimination in Employment Act (with the exception of Claims that may arise after the date You sign this Release), Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act of 1990, as amended, the Worker Adjustment and Retraining Notification Act, the Family and Medical Leave Act, the Equal Pay Act, the New York State Human Rights Law, the New York Labor Law, the New York Worker Adjustment and Retraining Notification Act, the New York City Administrative Code, all Claims for severance benefits or notice pay under any plan or policy of the Company (other than for enforcement of the Release and the Employment Agreement), all Claims under any whistleblower protection law, including but not limited to any Claims under the Sarbanes-Oxley Act or the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the Employee Retirement Income Security Act of 1974 (for each of the foregoing statutes, as amended) through and including the date of this Release.

Notwithstanding the above, You are not waiving or releasing: (i) any Claims arising after You sign this Release; (ii) any Claims related to the enforcement of the Employment Agreement and this Release; (iii) any rights or Claims You may have to workers’


compensation or unemployment benefits; (iv) Claims for accrued, vested retirement benefits under any employee retirement plan of the Company in accordance with the terms of such plans and applicable law; and/or (v) Claims that cannot be waived by law. Further, notwithstanding anything to the contrary, nothing contained in the Employment Agreement or this Release is intended to prohibit or restrict You in any way from: (i) making any disclosure of any information about the Company, Your employment or the Employment Agreement and this Release as required by law, or to a government agency in connection with any charge or investigation; (ii) providing information to, filing a charge with, or testifying or otherwise assisting in any investigation or proceeding brought by, any federal, state or local regulatory or law enforcement agency (including without limitation the U.S. Equal Employment Opportunity Commission) or legislative body, any self-regulatory organization, or the Company’s legal, compliance or human resources officers; or (iii) filing, testifying or participating in or otherwise assisting in a proceeding relating to, or reporting, an alleged violation of any federal, state or municipal law relating to fraud or any rule or regulation of the Securities and Exchange Commission (“SEC”) or any self-regulatory organization, or making other disclosures that are protected under the whistleblower provisions of federal or state law or regulation. Prior authorization of the Company shall not be required to make any reports or disclosures permitted by this Release and You are not required to notify the Company that You have made such reports or disclosures. However, You acknowledge and agree that You cannot recover any monetary damages or equitable relief in connection with a charge or proceeding brought by You or through any action brought by a third party with respect to the Claims released and waived in this Release. This Release does not, however, waive or release Your right to receive a monetary award from the SEC.

You further state that You have reviewed this Release, that You know and understand its contents, and that You have executed it voluntarily.

You acknowledge that You have been given                  days to review this Release and to sign it. You also acknowledge that by signing this Release You may be giving up valuable legal rights and that You have been advised to consult with an attorney. You understand that You have the right to revoke Your consent to the Release for seven days following Your signing of the Release. You further understand that You will cease to receive any payments or benefits under this Agreement (except as set forth in Section 4.4 of the Agreement) if You do not sign this Release or if You revoke Your consent to the Release within seven days after signing the Release. The Release shall not become effective or enforceable with respect to Claims under the Age Discrimination Act until the expiration of the seven-day period following Your signing of this Release. To revoke, You send a written statement of revocation by certified mail, return receipt requested, or by hand delivery. If You do not revoke, the Release shall become effective on the eighth day after You sign it.


Accepted and Agreed to:

 

 

 

 

Dated:    
 


ANNEX B

TIME WARNER CORPORATE

STANDARDS OF BUSINESS CONDUCT

Exhibit 31.1

CERTIFICATIONS

I, Jeffrey L. Bewkes, certify that:

 

  1.

I have reviewed this quarterly report on Form 10-Q of Time Warner Inc.;

 

  2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)         Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)         Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)         Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)         Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

     
Date: November 2, 2016     By:  

/s/ Jeffrey L. Bewkes

 
      Name:   Jeffrey L. Bewkes  
      Title:   Chief Executive Officer  
        Time Warner Inc.  

Exhibit 31.2

CERTIFICATIONS

I, Howard M. Averill, certify that:

 

  1.

I have reviewed this quarterly report on Form 10-Q of Time Warner Inc.;

 

  2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)         Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)         Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)         Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)         Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

     
Date: November 2, 2016     By:  

/s/ Howard M. Averill

 
      Name:   Howard M. Averill  
      Title:   Chief Financial Officer  
        Time Warner Inc.  

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Time Warner Inc., a Delaware corporation (the “Company”), for the quarter ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his respective knowledge:

1.      the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.      the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

   
Date: November 2, 2016    

/s/ Jeffrey L. Bewkes

 
    Jeffrey L. Bewkes  
    Chief Executive Officer  
    Time Warner Inc.  
   
Date: November 2, 2016  

/s/ Howard M. Averill

 
    Howard M. Averill  
    Chief Financial Officer  
    Time Warner Inc.