Tax Receivable Agreement - DreamWorks Animation SKG Inc. and DW Investment II Inc.
TAX RECEIVABLE AGREEMENT (this "Agreement"), dated as of
, 2004, by and among DreamWorks Animation SKG,
Inc., a Delaware corporation ("DWA") and DW Investment
II, Inc., a Washington subchapter S corporation ("DWI
II").
WHEREAS, on , 2004, DW Investment I, Inc., a subchapter S
corporation ("DWI I"), distributed its entire interest in DreamWorks Animation
LLC, a Delaware limited liability company ("DWA LLC"), to Paul G. Allen
("Allen"), its sole shareholder, in a transaction taxable under Section 311 of
the Code (the "Vulcan Transaction").
WHEREAS, on , 2004, after the Vulcan Transaction, Allen
contributed his entire interest in DWA LLC to DWI II and DWA acquired such
interest in DWA LLC from DWI II by contribution (the "Contribution") in a
transaction described in Section 351 of the Internal Revenue Code of 1986, as
amended (the "Code").
WHEREAS, this Agreement was issued by DWA to DWI II as partial
consideration for the DWA LLC interest transferred to DWA by DWI II in the
Contribution and shall be treated as "other property" received by DWI II for
purposes of Section 351(b) of the Code.
WHEREAS, DWA LLC shall have in effect an election under Section 754
of the Code(2) for the Taxable Year in which the Vulcan Transaction occurs,
which will result in an adjustment to the tax basis of the assets owned by DWA
LLC as of the Closing Date (such assets and any asset whose tax basis is
determined, in whole or in part, by reference to the adjusted basis of any such
asset, the "Original Assets") by reason of the Vulcan Transaction and the
issuance of this Agreement to DWI II as partial consideration in the
Contribution.
WHEREAS, on , 2004, DWA acquired all the remaining interests
in DWA LLC from the holders of such interests, other than an interest in DWA LLC
held by DreamWorks, Inc., a Delaware corporation ("DW Inc.").
WHEREAS, on , 2004, after the Vulcan Transaction, DWA
acquired all the outstanding stock of DW Inc.
WHEREAS, DWA is the common parent of the DWA Affiliated Group and DW
Inc. is a member of the DWA Affiliated Group.
WHEREAS, 100% of the interests in DWA LLC are held by members of the
DWA Affiliated Group and, as a result, the income, gain, loss, expense and other
Tax items of DWA LLC will be reported by the DWA Affiliated Group on the DWA
Consolidated Returns.
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WHEREAS, the income, gain, loss, expense and other Tax items of DWA
LLC may be affected by the Basis Adjustment and the Imputed Interest.
WHEREAS, the parties to this Agreement desire to make certain
arrangements with respect to the effect of the Basis Adjustment and Imputed
Interest on the actual liability for Covered Taxes of the DWA Affiliated Group.
NOW, THEREFORE, in consideration of the foregoing and the respective
covenants and agreements set forth herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I
Definitions
Definitions. As used in this Agreement, the terms set forth in this
Article I shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined).
"Advisory Firm" means [ ] or a nationally recognized accounting
or law firm that is nationally recognized as being expert in Covered Tax matters
that is agreed to by DWA and DWI II as its replacement.
"Advisory Firm Letter" shall mean a letter from the Advisory Firm
stating that the relevant schedule, notice or other information to be provided
by DWA to DWI II and all supporting schedules and work papers were prepared in a
manner consistent with the terms of this Agreement and, to the extent not
expressly provided in this Agreement, on a reasonable basis in light of the
facts and law in existence on the date such schedule, notice or other
information is delivered to DWI II.
"Agreed Rate" means, LIBOR plus 200 basis points.
"Agreement" is defined in the preamble.
"Agreement Value" is defined in Section 2.01 of this Agreement.
"Amended Tax Benefit Schedule" is defined in Section 2.03(b) of this
Agreement.
"Applicable Treasury Rate" means a rate equal to (1) if an Early
Termination Notice is delivered prior to the third anniversary of the Closing
Date , [x.xx]% or (2) the yield to maturity as of the date an Early
Termination Notice is delivered of United States Treasury
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securities with a constant maturity (the "Applicable Maturity") (as compiled and
published in the most recent Federal Reserve Statistical Release H 15 (519))
equal to (a) if such Early Termination Notice is delivered on or after the third
anniversary of the Closing Date but prior to the fifth anniversary of the
Closing Date, 10 years, (b) if such Early Termination Notice is delivered on or
after the fifth anniversary of the Closing Date but prior to the fifteenth
anniversary of the Closing Date, the number of years from the date such Early
Termination Notice is delivered through the fifteenth anniversary of the Closing
Date, or (c) if such Early Termination Notice is delivered on or after the
fifteenth anniversary of the Closing Date, two years. If there are no United
States Treasury securities with a constant maturity equal to the Applicable
Maturity, the yield to maturity shall be interpolated from the United States
Treasury securities with constant maturities that are most nearly longer than
and shorter than the Applicable Maturity.
"Basis Adjustment" means the increase or decrease to the tax basis
of an Original Asset (i) under Sections 743(b) and 754 of the Code and
comparable sections of the California Revenue and Taxation Code as a result of
the Vulcan Transaction and (ii) under Section 362(a) of the Code and the
comparable section of the California Revenue and Taxation Code as a result of
the receipt by DWI II of this Agreement as partial consideration in the
Contribution, as shown on the Basis and Agreement Value Schedule. The Basis
Adjustment shall include only the increase or decrease to the tax basis of any
Original Asset made as of the Closing Date and for the reasons described in (i)
and (ii) above, provided however that if there is a relevant Determination that
all or part of the Basis Adjustment described in (ii) above occurred after the
Closing Date by reason of the accrual or payment of any amount due to DWI II
under this Agreement, then the increase or decrease in the basis of the Original
Assets described in (ii) above shall include all such adjustments as they occur
after the Closing Date in a manner consistent with such Determination.
"Basis and Agreement Value Schedule" is defined in Section 2.02(a)
of this Agreement.
"Business Day" means any calendar day that is not a Saturday, Sunday
or other calendar day on which banks are required or authorized to be closed in
the City of New York.
"California State Income Tax" means any income, franchise or similar
tax imposed by the state of California (including, without limitation, the
Corporation Tax Law under the California Revenue and Taxation Code Section 23001
et. seq.), and any interest, additions to tax or penalties applicable or related
to such tax.
"Change of Control Event" means the occurrence of any of the
following events, not including any events occurring prior to or in connection
with an initial public offering of Shares (as defined below), including the
occurrence of such initial public offering:
(i) during any period of 14 consecutive calendar months, individuals
who were directors of DWA on the first day of such period (the "Incumbent
Directors") cease for any reason to constitute a majority of the Board of
Directors of DWA (the "Board"); provided, however, that any individual
becoming a director subsequent to the first day of
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such period whose election, or nomination for election, by DWA's
stockholders was approved by a vote of at least a majority of the
Incumbent Directors shall be considered as though such individual were an
Incumbent Director, but excluding, for purposes of this proviso, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened proxy contest with respect to election or removal of
directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a "person" (as such term is used in Section
13(d) of the Exchange Act), in each case other than the management of DWA,
the Board or the holders of DWA's Class B common stock, $0.01 par value;
(ii) the consummation of (A) a merger, consolidation, statutory
share exchange or similar form of corporate transaction involving (x) DWA
or (y) any of its Subsidiaries, but in the case of this clause (y) only if
DWA Voting Securities (as defined below) are issued or issuable (each of
the events referred to in this clause (A) being hereinafter referred to as
a "Reorganization") or (B) the sale or other disposition of all or
substantially all the assets of DWA to an entity that is not an affiliate
of DWA (a "Sale") if such Reorganization or Sale requires the approval of
DWA's stockholders under the law of DWA's jurisdiction of organization
(whether such approval is required for such Reorganization or Sale or for
the issuance of securities of DWA in such Reorganization or Sale), unless,
immediately following such Reorganization or Sale, (1) all or
substantially all the individuals and entities who were the "beneficial
owners" (as such term is defined in Rule 13d-3 under the Exchange Act (or
a successor rule thereto)) of the shares of Class A Common Stock of DWA,
$0.01 par value, or such other securities of DWA into which such shares
shall be changed by reason of a recapitalization, merger, consolidation,
split-up, combination, exchange of shares or other similar transaction
(the "Shares") or other securities eligible to vote for the election of
the Board (together, "DWA Voting Securities") outstanding immediately
prior to the consummation of such Reorganization or Sale beneficially own,
directly or indirectly, more than 50% of the combined voting power of the
then outstanding voting securities of the corporation resulting from such
Reorganization or Sale (including, without limitation, a corporation that
as a result of such transaction owns DWA or all or substantially all DWA's
assets either directly or through one or more subsidiaries) (the
"Continuing Corporation") in substantially the same proportions as their
ownership, immediately prior to the consummation of such Reorganization or
Sale, of the outstanding DWA Voting Securities (excluding any outstanding
voting securities of the Continuing Corporation that such beneficial
owners hold immediately following the consummation of the Reorganization
or Sale as a result of their ownership prior to such consummation of
voting securities of any company or other entity involved in or forming
part of such Reorganization or Sale other than DWA), (2) no "person" (as
such term is used in Section 13(d) of the Exchange Act), excluding (x) any
employee benefit plan (or related trust) sponsored or maintained by the
Continuing Corporation or any corporation controlled by the Continuing
Corporation, (y) Jeffrey Katzenberg and (z) David Geffen, beneficially
owns, directly or indirectly, 20% or more of the combined voting power of
the then outstanding voting securities of the Continuing Corporation and
(3) at least a majority of the members of the board of directors of the
Continuing Corporation were Incumbent Directors at the time of the
execution of the definitive agreement providing for such
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Reorganization or Sale or, in the absence of such an agreement, at the
time at which approval of the Board was obtained for such Reorganization
or Sale;
(iii) the stockholders of DWA approve a plan of complete liquidation
or dissolution of DWA; or
(iv) any "person" (as such term is used in Section 13(d) of the
Exchange Act), corporation or other entity or "group" (as used in Section
14(d)(2) of the Exchange Act) (other than (A) DWA, (B) any trustee or
other fiduciary holding securities under an employee benefit plan of DWA
or an affiliate of DWA or (C) any company owned, directly or indirectly,
by the stockholders of DWA in substantially the same proportions as their
ownership of the voting power of the DWA Voting Securities) becomes the
beneficial owner, directly or indirectly, of securities of DWA
representing 20% or more of the combined voting power of the DWA Voting
Securities but only if the percentage so owned exceeds the aggregate
percentage of the combined voting power of the DWA Voting Securities then
owned, directly or indirectly, by Jeffrey Katzenberg and David Geffen;
provided, however, that for purposes of this subparagraph (iv), the
following acquisitions shall not constitute a Change of Control: (x) any
acquisition directly from DWA or (y) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by DWA or an
affiliate of DWA.
"Change of Control Termination Payment" is defined in Section
4.03(c) of this Agreement.
"Closing Date" means , 2004.
"Code" is defined in the recitals.
"Contribution" is defined in the recitals.
"Covered Taxable Year" means any Taxable Year of the DWA Affiliated
Group ending after the Closing Date and on or before the end of the Taxable Year
including the date which is the twentieth (20th) anniversary of the Closing
Date.
"Covered Taxes" means Federal Income Taxes and California State
Income Taxes.
"Determination" shall have the meaning ascribed to such term in
Section 1313(a) of the Code or similar provision of the California Revenue and
Taxation Code, as applicable.
"DWA" is defined in the preamble.
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"DWA Affiliated Group" means the affiliated group of domestic
corporations within the meaning of Section 1504(a) of the Code or the unitary
combined group of corporations within the meaning the California Revenue and
Taxation Code, as applicable, of which DWA is a member from time to time.
"DWA Consolidated Return" means the consolidated Federal income tax
return or California unitary combined tax return, as applicable, of the DWA
Affiliated Group filed with respect to any Taxable Year.
"DWA Group" means (i) the corporations that are members of the DWA
Affiliated Group and (ii) the corporations that would be members of the DWA
Affiliated Group but for the fact they are not includible corporations under
Section 1504(b) of the Code.
"DWA Payment" is defined in Section 5.01 of this Agreement.
"DWA LLC" is defined in the recitals.
"DWA Senior Obligations" means indebtedness of DWA (including and
together with all monetary obligations in respect of the five-year $200 million
revolving credit facility entered into among DWA, JP Morgan Chase Bank and
certain other lenders (the "Credit Agreement"), and interest, whether or not
allowable, accruing on indebtedness incurred pursuant to the Credit Agreement
after the filing of a petition initiating any proceeding under any bankruptcy,
insolvency or similar law or that would have accrued but for such filing)
arising under the Credit Agreement or that, by the terms of the instrument
creating or evidencing such indebtedness, is expressly designated "senior debt"
and made senior in right of payment to any other of the indebtedness of DWA;
provided, that in no event shall DWA Senior Obligations include (i) indebtedness
to any Subsidiary of DWA or any officer, director or employee of DWA or any of
its Subsidiaries (other than indebtedness that is required to be pledged to the
lenders under the Credit Agreement) or (ii) indebtedness to trade creditors.
"DWI I" is defined in the recitals.
"DWI II" is defined in the preamble.
"DW Inc." is defined in the recitals.
"DW LLC" means DreamWorks L.L.C., a Delaware limited liability
company.
"Early Termination Notice" is defined in Section 4.02 of this
Agreement.
"Early Termination Payment" is defined in Section 4.03(b) of this
Agreement.
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"Early Termination Rate" means the Applicable Treasury Rate plus 300
basis points.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute thereto.
"Federal Income Tax" means any tax imposed under Subtitle A of the
Code or any other provision of United States Federal income tax law (including,
without limitation, the taxes imposed by Sections 11, 55, 59A, and 1201(a) of
the Code), and any interest, additions to tax or penalties applicable or related
to such tax.
"Governmental Entity" means any Federal, state, local, provincial or
foreign government or any court of competent jurisdiction, administrative agency
or commission or other governmental authority or instrumentality, whether
domestic or foreign.
"Hypothetical Tax Basis" means, with respect to any asset at any
time, the tax basis that such asset would have at such time if no Basis
Adjustment had been made.
"Hypothetical Tax Liability" means, with respect to any Covered
Taxable Year, the liability for Covered Taxes of the DWA Affiliated Group using
the same methods, elections, conventions and similar practices used on the
relevant DWA Consolidated Return, but using the Hypothetical Tax Basis instead
of the actual tax basis of each relevant asset and excluding any deduction
attributable to the Imputed Interest.
"Imputed Interest" shall mean any interest imputed under Section
1272, 1274 or 483 or other provision of the Code and the similar section of the
California Revenue and Taxation Code with respect to DWA's payment obligations
under this Agreement.
"Initial Value" shall mean the weighted average trading price of DWA
Class A common stock on the date of its initial public offering, as reported on
the New York Stock Exchange consolidated tape.
"IRS" means the United States Internal Revenue Service.
"LIBOR" means, for each month (or portion thereof) during any
period, an interest rate per annum equal to the rate per annum reported, on the
date two days prior to the first day of such month, on the Telerate Page 3750
(or if such screen shall cease to be publicly available, as reported on Reuters
Screen page "LIBO" or by any other publicly available source of such market
rate) for London interbank offered rates for United States dollar deposits for
such month (or portion thereof).
"Original Assets" is defined in the recitals.
"Person" means and includes any individual, firm, corporation,
partnership (including, without limitation, any limited, general or limited
liability partnership), company, limited liability company, trust, joint
venture, association, joint stock company, unincorporated organization or
similar entity or Governmental Entity.
"Proceeding" is defined in Section 7.08 of this Agreement.
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"Realized Tax Benefit" means, for a Covered Taxable Year, the
excess, if any, of the Hypothetical Tax Liability over the actual liability for
Covered Taxes of the DWA Affiliated Group for such Covered Taxable Year. If all
or a portion of the actual tax liability for Covered Taxes for the Covered
Taxable Year arises as a result of an audit by a Taxing Authority of any Covered
Taxable Year, such liability shall not be included in determining the Realized
Tax Benefit or the Realized Tax Detriment unless and until there has been a
Determination.
"Realized Tax Detriment" means, for a Covered Taxable Year, the
excess, if any, of the actual liability for Covered Taxes of the DWA Affiliated
Group over the Hypothetical Tax Liability for such Covered Taxable Year. If all
or a portion of the actual tax liability for Covered Taxes for the Covered
Taxable Year arises as a result of an audit by a Taxing Authority of any Covered
Taxable Year, such liability shall not be included in determining the Realized
Tax Benefit or Realized Tax Detriment unless and until there has been a
Determination.
"Reconciliation Procedures" shall mean those procedures set forth in
Section 7.09 of this Agreement.
"Scheduled Termination Date" shall mean the date on which this
Agreement would terminate in the absence of an Early Termination Notice.
"Statutory Rate" means the October 2004 long-term applicable federal
rate.
"Subsidiary" means any entity in which DWA, directly or indirectly,
possesses fifty percent (50%) or more of the total combined voting power of all
classes of its stock.
"Tax Benefit Payment" is defined in Section 3.01 of this Agreement.
"Tax Benefit Schedule" is defined in Section 2.03(a) of this
Agreement.
"Taxable Year" means a taxable year as defined in Section 441(b) of
the Code or comparable section of the California Revenue and Taxation Code, as
applicable, (and, therefore, for the avoidance of doubt, may include a period of
less than 12 months for which a Tax Return is made).
"Taxes" means (i) all forms of taxation or duties imposed, or
required to be collected or withheld, including, without limitation, charges,
together with any related interest, penalties or other additional amounts, (ii)
liability for the payment of any amount of the type described in the preceding
clause (i) as a result of being a member of an affiliated, consolidated,
combined or unitary group, and (iii) liability for the payment of any amounts as
a result of being party to any tax sharing agreement (other than this Agreement)
or as a result of any express or implied obligation to indemnify any other
person with respect to the payment of any amount described in the immediately
preceding clauses (i) or (ii) (other than an obligation to indemnify under this
Agreement).
"Tax Return" means any return, filing, report, questionnaire,
information statement or other document required to be filed, including amended
returns that may be filed, for any taxable period with any Taxing Authority
(whether or not a payment is required to be made with respect to such filing).
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"Taxing Authority" means the IRS and any other state, local, foreign
or other Governmental Entity responsible for the administration of Taxes.
"Treasury Regulations" means the final, temporary and proposed
regulations under the Code promulgated from time to time (including
corresponding provisions of succeeding provisions) as in effect for the relevant
taxable period.
"Valuation Assumptions" shall mean, as of any Valuation Date, the
assumptions that (1) in each Covered Taxable Year ending after such Valuation
Date DWA will have taxable income sufficient to fully utilize the deductions
arising from the Basis Adjustment and the Imputed Interest during such Covered
Taxable Year and (2) the Federal Income Tax rates and California State Income
Tax rates that will be in effect for each such Covered Taxable Year will be
those specified for each such Covered Taxable Year by the Code and by the
California Revenue and Taxation Code as in effect on the Valuation Date.
"Valuation Date" means the Closing Date for purposes of determining
the Agreement Value or the date of an Early Termination Notice for purposes of
determining an Early Termination Payment or Change of Control Termination
Payment.
"Vulcan Transaction" is defined in the recitals.
ARTICLE II
Determination of Realized Tax Benefit or Realized Tax Detriment
SECTION 2.01. Closing Date Basis Adjustment. DWA and DWI II hereby
agree to treat the issuance of this Agreement as property received by DWI II as
partial consideration for the Contribution on the Closing Date for all Tax
purposes. DWA and DWI II further agree that as a result of the issuance of the
Agreement, DWI II shall recognize gain on the Closing Date in an amount not to
exceed the value of the Agreement on the Closing Date (the "Agreement Value")
under Section 351(b) of the Code and the comparable section of the California
Revenue and Taxation Code and the basis in the Original Assets shall be
increased by the amount of such gain recognized under Section 362(a)(2) of the
Code and the comparable section of the California Revenue and Taxation Code (in
addition to any basis increase occurring as a result of the Vulcan Transaction).
DWA and DWI II shall treat such gain and basis adjustment as occurring entirely
on the Closing Date unless there is a Determination to the contrary. For all Tax
purposes, DWA and DWI II hereby agree that the Agreement Value shall equal the
present value, discounted at the Statutory Rate, of all Tax Benefit Payments
that would be required to be paid by DWA to DWI II during the period from the
Closing Date through the Scheduled Termination Date based on the Valuation
Assumptions. The Valuation Assumptions are to be applied in a manner consistent
with the illustrative example attached as Appendix A hereto.
SECTION 2.02. (a) Basis and Agreement Value Schedule. Within 120
calendar days after the Closing Date, DWA shall deliver to DWI II a schedule
(the "Basis and Agreement Value Schedule") that shows, in reasonable detail, for
Covered Tax purposes (i) the actual tax basis as of the Closing Date of each
Original Asset, (ii) the Basis Adjustment with respect to each Original Asset
and (iii) a calculation of the Agreement Value consistent with the Basis
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Adjustment and the methodology set forth in Section 2.01. The aggregate tax
basis of the Original Assets as of the Closing Date shall equal the aggregate
Initial Value of the common stock of DWA received by DWI II in the Contribution
plus the Agreement Value. At the time DWA delivers the Basis and Agreement Value
Schedule to DWI II it shall (x) deliver to DWI II schedules and work papers
providing reasonable detail regarding the preparation of the Basis and Agreement
Value Schedule and an Advisory Firm Letter supporting such Basis and Agreement
Value Schedule and (y) allow DWI II reasonable access to the appropriate
representatives at DWA and the Advisory Firm in connection with its review of
such schedule. The Basis and Agreement Value Schedule shall become final and
binding on the parties unless DWI II, within 30 calendar days after receiving
such Basis and Agreement Value Schedule, provides DWA with notice of a material
objection to such Basis and Agreement Value Schedule made in good faith. If the
parties, using their best efforts, are unable to successfully resolve the issues
raised in such notice within 60 calendar days after such Basis and Agreement
Value Schedule was delivered to DWI II, DWA and DWI II shall employ the
Reconciliation Procedures.
(b) Amended Basis and Agreement Value Schedule. The Basis and Agreement
Value Schedule may be amended from time to time by DWA (i) in connection with a
Determination, (ii) to correct inaccuracies in the original Basis and Agreement
Value Schedule identified after the Closing Date as a result of the receipt of
additional information relating to facts or circumstances on or prior to the
Closing Date or (iii) to comply with the expert's determination under the
Reconciliation Procedures. At the time DWA delivers such amended Basis and
Agreement Value Schedule to DWI II it shall (x) deliver to DWI II schedules and
work papers providing reasonable detail regarding the preparation of the amended
Basis and Agreement Value Schedule and an Advisory Firm Letter supporting such
amended Basis and Agreement Value Schedule and (y) allow DWI II reasonable
access to the appropriate representatives at DWA and the Advisory Firm in
connection with its review of such schedule. The amended Basis and Agreement
Value Schedule shall become final and binding on the parties unless DWI II,
within 30 calendar days after receiving such amended Basis and Agreement Value
Schedule, provides DWA with notice of a material objection to such amended Basis
and Agreement Value Schedule made in good faith. If the parties, using their
best efforts, are unable to successfully resolve the issues raised in such
notice within 60 calendar days after such amended Basis and Agreement Value
Schedule was delivered to DWI II, DWA and DWI II shall employ the Reconciliation
Procedures.
SECTION 2.03 (a) Tax Benefit Schedule. Within 10 calendar days after
filing the Federal income tax return of DWA for the relevant Covered Taxable
Year, DWA shall provide to DWI II a schedule showing, in reasonable detail, the
calculation of the Realized Tax Benefit or the Realized Tax Detriment for such
Covered Taxable Year (the "Tax Benefit Schedule"). At the time DWA delivers the
Tax Benefit Schedule to DWI II it shall (i) deliver to DWI II schedules and work
papers providing reasonable detail regarding the preparation of the Tax Benefit
Schedule and an Advisory Firm Letter supporting such Tax Benefit Schedule and
(ii) allow DWI II reasonable access to the appropriate representatives at DWA
and the Advisory Firm in connection with its review of such schedule. The Tax
Benefit Schedule shall become final and binding on the parties unless DWI II,
within 30 calendar days after receiving such Tax Benefit Schedule, provides DWA
with notice of a material objection to such Tax Benefit Schedule made in good
faith. If the parties, using their best efforts, are unable to successfully
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resolve the issues raised in such notice within 60 calendar days after such Tax
Benefit Schedule was delivered to DWI II, DWA and DWI II shall employ the
Reconciliation Procedures.
(b) Amended Tax Benefit Schedule. The Tax Benefit Schedule for any
Covered Taxable Year may be amended from time to time by DWA (i) in connection
with a Determination affecting such Tax Benefit Schedule, (ii) to correct
inaccuracies in the original Tax Benefit Schedule identified as a result of the
receipt of additional factual information relating to a Covered Taxable Year
after the date the Tax Benefit Schedule was provided to DWI II, (iii) to reflect
a change in the Realized Tax Benefit or Realized Tax Detriment for such Covered
Taxable Year attributable to a carryback or carryforward of a loss or other tax
item to such Covered Taxable Year, (iv) to reflect a change in the Realized Tax
Benefit or Realized Tax Detriment for such Covered Taxable Year attributable to
an amended tax return filed for such Covered Taxable Year (provided, however,
that such a change attributable to an audit of a Tax Return by an applicable
Taxing Authority shall not be taken into account on an Amended Tax Benefit
Schedule unless and until there has been a Determination with respect to such
change) or (v) to comply with the expert's determination under the
Reconciliation Procedures. At the time DWA delivers such an amended Tax Benefit
Schedule pursuant to this Section 2.03(b) (an "Amended Tax Benefit Schedule") to
DWI II it shall (x) deliver to DWI II schedules and work papers providing
reasonable detail regarding the preparation of the Amended Tax Benefit Schedule
and an Advisory Firm Letter supporting such Amended Tax Benefit Schedule and (y)
allow DWI II reasonable access to the appropriate representatives at DWA and the
Advisory Firm in connection with its review of such schedule. Such Amended Tax
Benefit Schedule shall become final and binding on the parties unless DWI II,
within 30 calendar days after receiving such Amended Tax Benefit Schedule,
provides DWA with notice of a material objection to such Amended Tax Benefit
Schedule made in good faith. If the parties, using their best efforts, are
unable to successfully resolve the issues raised in such notice within 60
calendar days after such Amended Tax Benefit Schedule was delivered to DWI II,
DWA and DWI II shall employ the Reconciliation Procedures.
(c) Applicable Principles. The Realized Tax Benefit or Realized Tax
Detriment for each Covered Taxable Year is intended to measure the decrease or
increase in the actual Covered Tax liability of the DWA Affiliated Group for
such Covered Taxable Year attributable to the Basis Adjustment and Imputed
Interest, determined using a "with and without" methodology. Carryovers or
carrybacks of any tax item attributable to the Basis Adjustment and Imputed
Interest (determined using such "with and without" methodology) shall be
considered to be subject to the rules of the Code and the Treasury Regulations
or the California Revenue and Taxation Code, as applicable, governing the use,
limitation and expiration of carryovers or carrybacks of the relevant type. If a
carryover or carryback of any tax item includes a portion that is attributable
to the Basis Adjustment or Imputed Interest and another portion that is not,
such portions shall be considered to be used in the order determined using such
"with and without" methodology. Appendix [B] to this Agreement provides
illustrative examples of the applicable principles described in this Section
2.03(c) of this Agreement.
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ARTICLE III
Tax Benefit Payments
SECTION 3.01. Payments. (a) Within 3 calendar days of the delivery
of the Tax Benefit Schedule to DWI II for any Covered Taxable Year (a) DWA shall
pay to DWI II an amount equal to 85% of the Realized Tax Benefit (if any) for
such Covered Taxable Year and (b) DWI II shall pay to DWA an amount equal to 85%
of the Realized Tax Detriment (if any) for such Covered Taxable Year, in each
case with interest calculated at the Agreed Rate from the due date (without
extensions) for filing the Tax Return with respect to Covered Taxes for such
Covered Taxable Year. Each such payment (a "Tax Benefit Payment") shall be made
by wire transfer of immediately available funds to a bank account of the
recipient previously designated by it to the other party. For the avoidance of
doubt, no Tax Benefit Payment shall be made in respect of estimated tax
payments, including, without limitation, Federal Income Tax payments.
(b) Within 3 calendar days of the delivery of an Amended Tax Benefit
Schedule to DWI II for any Covered Taxable Year, DWA shall pay to DWI II, or DWI
II shall pay to DWA, as appropriate, an amount equal to the difference between
the Realized Tax Benefit or the Realized Tax Detriment reflected on such Amended
Tax Benefit Schedule and the Realized Tax Benefit or the Realized Tax Detriment
reflected on the Tax Benefit Schedule or prior amended Tax Benefit Schedule for
the relevant Covered Taxable Year.
SECTION 3.02. No Duplicative Payments. No duplicative payment of any
amount (including interest) will be required under this Agreement.
ARTICLE IV
Termination
SECTION 4.01. Early Termination of Agreement. DWA may terminate this
Agreement at any time by paying to DWI II the Early Termination Payment as of
the date of the Early Termination Notice. DWA may terminate this Agreement upon
the occurrence of a Change of Control Event by paying to DWI II the Change of
Control Termination Payment as of the date of the Early Termination Notice. Upon
payment of the Early Termination Payment or the Change of Control Termination
Payment by DWA, neither DWI II nor DWA shall have any further payment
obligations under this Agreement, other than for any (a) Tax Benefit Payment
agreed to by DWA and DWI II as due and payable but unpaid as of the Early
Termination Notice and (b) Tax Benefit Payment due for the Covered Taxable Year
ending with or including the date of the Early Termination Notice (except to the
extent that the amount described in clause (a) or (b) is included in the Early
Termination Payment or Change of Control Termination Payment).
SECTION 4.02. Early Termination Notice. If DWA chooses to exercise
its right of early termination under Section 4.01 above, DWA shall deliver to
DWI II a notice (the "Early Termination Notice") specifying DWA's intention to
exercise such right and showing in reasonable detail the calculation of the
Early Termination Payment or the Change of Control Termination Payment, as the
case may be. At the time DWA delivers the Early Termination Notice to DWI II it
shall (a) deliver to DWI II schedules and work papers providing reasonable
detail regarding the calculation of the Early Termination Payment or the Change
of Control Termination Payment, as the case may be, in a manner consistent with
the guidelines set forth in
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13
Section 4.03 of this Agreement and an Advisory Firm Letter supporting such Early
Termination Notice and (b) allow DWI II reasonable access to the appropriate
representatives at DWA and the Advisory Firm in connection with its review of
such Early Termination Notice. Such Early Termination Notice shall become final
and binding on the parties unless DWI II, within 30 calendar days after
receiving such Early Termination Notice, provides DWA with notice of a material
objection to such Early Termination Notice made in good faith. If the parties,
using their best efforts, are unable to successfully resolve the issues raised
in such notice within 60 calendar days after such Early Termination Notice was
delivered to DWI II, DWA and DWI II shall employ the Reconciliation Procedures.
SECTION 4.03. Payment upon Early Termination. (a) Within 3 calendar
days of the delivery to DWI II of the Early Termination Notice or any amendment
to the Early Termination Notice, DWA shall pay to DWI II an amount equal to the
Early Termination Payment or the Change of Control Termination Payment, as the
case may be. Such payment shall be made by wire transfer of immediately
available funds to a bank account designated by the relevant party.
(b) The Early Termination Payment as of the date of an Early
Termination Notice shall equal the present value, discounted at the Early
Termination Rate, of all Tax Benefit Payments that would be required to be paid
by DWA to DWI II during the period from the date of the Early Termination Notice
through the Scheduled Termination Date assuming (1) the Valuation Assumptions
are applied and (2) any loss carryovers generated by the Basis Adjustment or the
Imputed Interest and available as of the date of the Early Termination Notice
will be utilized by DWA on pro rata basis from the date of the Early Termination
Notice through the Scheduled Termination Date. For the avoidance of doubt, the
Early Termination Payment would be equal to the Agreement Value if the Early
Termination Notice were delivered as of the Closing Date and the Early
Termination Rate were equal to the Statutory Rate.
(c) The Change of Control Termination Payment as of the date of an
Early Termination Notice shall equal the Early Termination Payment as of such
date multiplied by 70%.
SECTION 4.04. No Other Right of Early Termination. For the avoidance
of doubt, DWI II shall not be entitled to cause an early termination of this
Agreement.
ARTICLE V
Subordination and Late Payments
SECTION 5.01. Subordination. Notwithstanding any other provision of
this Agreement to the contrary, any Tax Benefit Payment, Early Termination
Payment or Change of Control Termination Payment required to be made by DWA to
DWI II under this Agreement (a "DWA Payment") shall rank subordinate and junior
in right of payment to any principal, interest or other amounts due and payable
in respect of any DWA Senior Obligations and shall rank pari passu with all
current or future unsecured obligations of DWA that are not DWA Senior
Obligations.
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14
SECTION 5.02. Late Payments by DWA. The amount of all or any portion
of a DWA Payment not made to DWI II when due under the terms of this Agreement
shall be payable together with any interest thereon, computed at the Agreed Rate
and commencing from the date on which such DWA Payment was due and payable.
SECTION 5.03. Late Payments by DWI II. The amount of all or any
portion of a Tax Benefit Payment required to be made by DWI II to DWA under this
Agreement that is not made to DWA when due under the terms of this Agreement
shall be payable together with any interest thereon, computed at the Agreed Rate
and commencing from the date on which such Tax Benefit Payment was due and
payable.
ARTICLE VI
No Disputes; Consistency; Cooperation
SECTION 6.01. DWI II Participation In DWA Tax Matters. Except as
otherwise provided herein, DWA shall have full responsibility for, and sole
discretion over, all Tax matters concerning any member of the DWA Group,
including without limitation the preparation, filing or amending of any Tax
Return and defending, contesting or settling any issue pertaining to Taxes.
Notwithstanding the foregoing, DWA shall notify DWI II of, and keep DWI II
reasonably informed with respect to, and DWI II shall have the right to
participate in and monitor (but, for the avoidance of doubt, not to control) the
portion of any audit of the DWA Group by a Taxing Authority the outcome of which
is reasonably expected to affect DWI II's rights and obligations under this
Agreement, and shall provide to DWI II reasonable opportunity to provide
information and other input to DWA and its advisors concerning the conduct of
any such portion of such audits. No member of the DWA Group shall settle or
otherwise resolve any audit or other challenge by a Taxing Authority relating to
the basis of the Original Assets or the deduction of Imputed Interest without
the consent of DWI II, which DWI II shall not unreasonably withhold, condition
or delay. Nothing in this Agreement shall alter DWI I's full responsibility for,
and sole discretion over, any audit of DWI I or any of its affiliates relating
to the Vulcan Transaction.
SECTION 6.02. Consistency. Unless there is a Determination to the
contrary, DWA, on its own behalf and on behalf of each member of the DWA Group,
and DWI II, on its own behalf and on behalf of each of its affiliates, agree to
report and cause to be reported for all purposes, including Federal, state and
local Tax purposes and financial reporting purposes, all Tax-related items
(including without limitation the Basis Adjustment and each Tax Benefit Payment)
in a manner consistent with that specified by DWA in any schedule, letter or
certificate required to be provided by or on behalf of DWA under this Agreement.
In the event that an Advisory Firm is replaced with another firm acceptable to
DWA and DWI II, such replacement Advisory Firm shall be required to perform its
services under this Agreement using procedures and methodologies consistent with
the previous Advisory Firm, unless otherwise required by law or DWA and DWI II
agree to the use of other procedures and methodologies.
SECTION 6.03. Cooperation. DWI II shall (and shall cause its
affiliates to) (a) furnish to DWA in a timely manner such information, documents
and other materials as DWA may reasonably request for purposes of making any
determination or computation necessary or appropriate under this Agreement,
preparing any Tax Return or contesting or defending any
<PAGE>
15
audit, examination or controversy with any Taxing Authority, (b) make its
employees available to DWA and its representatives to provide explanations of
documents and materials and such other information as the DWA or its
representative may reasonably request in connection with any of the matters
described in clause (a) above, and (c) reasonably cooperate in connection with
any such matter.
ARTICLE VII
General Provisions
SECTION 7.01. Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be deemed duly
given and received (a) on the date of delivery if delivered personally, or by
facsimile upon confirmation of transmission by the sender's fax machine if sent
on a Business Day (or otherwise on the next Business Day) or (b) on the first
Business Day following the date of dispatch if delivered by a recognized
next-day courier service. All notices hereunder shall be delivered as set forth
below, or pursuant to such other instructions as may be designated in writing by
the party to receive such notice:
if to DWA, to:
DreamWorks Animation SKG, Inc.
Grandview Building
1000 Flower Street
Glendale, California 91201
Fax: (818) 659-6123
Attention: Katherine Kendrick, Esq.
General Counsel
with a copy to:
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
Fax: (212) 474-3700
Attention: Stephen L. Gordon, Esq.
if to DWI II, to:
DW Investment II, Inc.
505 Fifth Avenue South, Suite 900
Seattle, WA 98104
Fax: (206) 342-3000
Attention: W. Lance Conn
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16
Executive Vice President, Investment
Management; and Executive Vice President,
Legal
with a copy to:
Skadden Arps Meagher & Flom LLP
Four Times Square
New York, New York 10036
Fax: (212) 735-2000
Attention: Nicholas Saggese, Esq. and David Rievman,
Esq.
Any party may change its address or fax number by giving the other party written
notice of its new address or fax number in the manner set forth above.
SECTION 7.02. Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
SECTION 7.03. Entire Agreement; No Third Party Beneficiaries. This
Agreement constitutes the entire agreement and supersedes all prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter hereof. This Agreement shall be binding upon and inure solely to
the benefit of each party hereto and their respective successors and permitted
assigns, and nothing in this Agreement, express or implied, is intended to or
shall confer upon any other Person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.
SECTION 7.04. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflict of laws.
SECTION 7.05. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner in
order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
SECTION 7.06. Successors; Assignment; Amendments. DWI II may not
assign this Agreement to any person without the prior written consent of DWA,
which consent shall not be unreasonably withheld, conditioned or delayed;
provided, however, (i) DWI II may pledge some or all of its rights, interests or
entitlements under this Agreement to any U.S. money center bank in connection
with a bona fide loan or other indebtedness and (ii) DWI II may assign some or
all its rights, interests or entitlements under this Agreement to any related
entity within the
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17
meaning of Section 267(b) or 707(b) of the Code, in each case without the prior
written consent of DWA. DWA may not assign any of its rights, interests or
entitlements under this Agreement without the consent of DWI II, not to be
unreasonably withheld or delayed. Subject to each of the two immediately
preceding sentences, this Agreement will be binding upon, inure to the benefit
of and be enforceable by, the parties and their respective successors and
assigns including any acquiror of all or substantially all of the assets of DWA.
In the event that DWA ceases to be the common parent of the DWA Affiliated
Group, the successor common parent of such group shall assume all of DWA's
rights and obligations under this Agreement.
No amendment to this Agreement shall be effective unless it shall be
in writing and signed by DWA and DWI II.
SECTION 7.07. Titles and Subtitles. The titles of the sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
SECTION 7.08. Submission to Jurisdiction; Waivers. With respect to
any suit, action or proceeding relating to this Agreement (collectively, a
"Proceeding"), each party to this Agreement irrevocably (a) consents and submits
to the exclusive jurisdiction of the courts of the States of New York and
Delaware and any court of the United States located in the Borough of Manhattan
in New York City or the State of Delaware; (b) waives any objection which such
party may have at any time to the laying of venue of any Proceeding brought in
any such court, waives any claim that such Proceeding has been brought in an
inconvenient forum and further waives the right to object, with respect to such
Proceeding, that such court does not have jurisdiction over such party; (c)
consents to the service of process at the address set forth for notices in
Section 7.01 herein; provided, however, that such manner of service of process
shall not preclude the service of process in any other manner permitted under
applicable law; and (d) waives, to the fullest extent permitted by applicable
law, any and all rights to trial by jury in connection with any Proceeding.
SECTION 7.09. Reconciliation. In the event that DWA and DWI II are
unable to resolve a disagreement within the relevant period designated in this
Agreement, the matter shall be submitted for determination to a nationally
recognized expert in the particular area of disagreement mutually acceptable to
both parties. The expert shall be employed by a nationally recognized accounting
firm or a law firm (other than the Advisory Firm), and the expert shall not, and
the firm that employs the expert shall not, have any material relationship with
either DWA or DWI II or other actual or potential conflict of interest. If the
matter is not resolved before any payment that is the subject of a disagreement
is due or any Tax Return reflecting the subject of a disagreement is due, such
payment shall be made on the date prescribed by this Agreement and such Tax
Return may be filed as prepared by DWA or its affiliate, subject to adjustment
or amendment upon resolution. The costs and expenses relating to the engagement
of such expert or amending any return shall be borne by the party who did not
have the prevailing position, or if a compromise is reached by the DWA and DWI
II, the costs and expenses shall be borne equally by the parties. The expert
shall determine which party prevails. The determinations of the expert pursuant
to this Section 7.09 shall be binding on DWA and DWI II absent manifest error.
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IN WITNESS WHEREOF, DWA and DWI II have duly executed this Agreement as of the
date first written above.
DREAMWORKS ANIMATION SKG, INC.,
By
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Name:
Title:
Address:
DWI II,
By
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Name:
Title:
Address:
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