Soap Operas On and Off the Screen at Time-Warner (TWX, CBS)

Includes: CBS, TWX
by: 10Q Detective

The giant media conglomerate, Time-Warner, Inc. (NYSE:TWX) and CBS Corp. (NYSE:CBS) recently told advertisers that their new joint venture, the CW network, which will replace the WB and UPN networks, is planning to offer serialized commercials starting in the fall 2006 television season.

In a recent New York Times article, Dawn Ostroff, president for entertainment at CW, said [that] “the goal in embracing the genre is to increase the appeal of programs to advertisers by forging stronger, more emotional bonds with viewers — particularly the younger ones who are willing to follow a series from the TV set onto the Internet, iPods and cellphones.”

As for the serialized commercials on CW, plans include content wraps. These are commercials [mini ‘infomercials’], produced to resemble programs, that will tell a story with a beginning, middle and end. The content wraps can be bought by advertisers to run as a series of two-minute spots during a night of CW programming.

Proposed for the CW Tuesday lineup of two female-focused series, "Gilmore Girls" and "Veronica Mars." is a serialized commercial, “Date Night.” In the first two-minute commercial, a couple gets made over for a date. In the second segment, the couple goes out on the date. In the third and final spot, the couple recaps the date in a post-mortem.

Advertisers that sponsor the segments would get their products embedded in the content wraps; they also could run regular 15-second spots before and after each segment. The advertisers suggested for "Date Night” included makers of cosmetics, fragrances and clothing.


Unfortunately for Time Warner, the Company and its CFO are currently involved in their own soap opera.

On June 17, 2006, the New York Daily News and The New York Post reported that an accused prostitution ringleader, Andreia Schwartz, said Wayne Pace, Chief Financial Officer of Time Warner, Inc., was her "sugar daddy" in a relationship where he had showered her with gifts.

Pace's lawyer Mark Pomerantz has responded by saying that his client "had no inappropriate relationship with her." Pace still has yet to persuasively explain (to his wife and to the media giant that he works for) what “relationship” he did have with Ms. Schwartz? To date, all that is known is that Pace identified Schwartz as a real-estate agent.

The 10Q Detective admits to a natural prurient curiosity in this story, but respects Pace’s right to privacy in this matter. Nonetheless, Time Warner is the world’s largest media conglomerate, and stakeholders in the Company have the right to know (a) if Pace misused any corporate assets and (b) whether or not Pace disclosed any insider information.

Yesterday, Time Warner did say that it was looking into whether company funds were used by its chief financial officer for gifts he allegedly gave an accused prostitution ringleader.

The 10Q Detective is willing to go on record and say that Wayne Pace will probably resign [before the year is out] for “personal reasons” or to “pursue other business opportunities.”

According to the Company's Schedule 14A (Proxy Statement) filed with the SEC on April 4, 2006, Wayne Pace’s 2005 annual compensation totaled $6.8 million, consisting of $3.7 million in salary and bonus, $373,276 in “Other Annual” compensation, $1.6 million in long term compensation (Restricted Stock Awards & Securities Underlying Options), and, $1.4 million in awarded Option Grants.

“Other Annual” is defined as personal benefits, which included: financial services of $10,000; commercial car services of $ 338,796 to Pace. [ed. note. Do limo drivers talk?]; and, $24,480 to cover the cost of Group Life Insurance.

The employment agreement with Pace includes a narrow definition of the “cause” for which the executive’s employment may be terminated. According to the Form 8-K, filed on April 29, 2005, termination by the Company for `cause' usually means one of the following:

(a) conviction of a felony (whether or not any right to appeal has been or may be exercised).

(b) willful failure or refusal without proper cause to perform duties with the Company (other than any such failure resulting from incapacity due to physical or mental impairment).

(c) fraud, misappropriation, embezzlement or reckless or willful destruction of Company property.

(d) a material and willful breach of any statutory or common law duty of loyalty to the Company.

(e) intentional and improper conduct materially prejudicial and detrimental to the business of the Company or any of its affiliates.

A look at Mr. Pace’s 2005 employment agreement sheds some light on what he stands to gain by resigning –as opposed to being fired for ‘cause.’ The 10Q Detective believes that Time Warner will backdate [re-adjust] Mr. Pace’s current December 31, 2007, retirement date. Doing so allows the Company and Mr. Pace to both “save face.”

Such an accord preserves additional benefits guaranteed to Mr. Pace, too, including: Mr. Pace and his spouse will continue to have access to medical insurance coverage through the Company that is substantially similar to the coverage afforded to active employees of the Company at that time; 201,637 shares and unvested stock units valued at $3,515,283 will not have to be returned to the Company; and, a portion or all of the unvested stock options previously granted to Mr. Pace will vest and some or all of the vested stock options will remain exercisable for a period of time longer than would generally apply to stock options awarded by the Company.

Additionally, if Mr. Pace and Time Warner were to renegotiate the timing of his retirement, Pace would become a part-time employee of the Company, providing advisory services through December 31, 2009 at an annual salary equal to $1 million.

Pace owns 173,045 shares and 1,416,213 options (to buy shares) of Time-Warner worth an estimated $27.4 million. When he retires, he is also entitled to the maximum annual Pension Plan payout of $350,000—which does not include payouts from any other Executive Savings Plan.

In addition to lavishing her with gifts, Schwartz alleges that during the course of their ‘relationship’ that Pace sent her e-mails and wrote checks to her. If true, retirement smells like a sweet rose to Pace.

In his play, The Mourning Bride (1697), playwright, William Congreve (1670-1729, said, “Heaven has no rage like love to hatred turned, Nor hell a fury like a woman scorned.” Wayne Pace has more to fear than Time Warner, Inc.

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