Review of tax and corporate counsel, respective board approvals, and execution and delivery of definitive binding agreements




Дата канвертавання26.04.2016
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Document for Negotiation

Non-Binding
4/8/08
1. Conditions: This is a non-binding discussion document. Any agreement is subject to conditions below, review of tax and corporate counsel, respective board approvals, and execution and delivery of definitive binding agreements.
2. Acquisition of Embassy Row (“ER”): Sony will buy 100% of the shares (or assets, subject to tax advice) of ER. Deal to be structured such that MD maximizes capital gains treatments. Company will continue to operate under the “ER” brand.
3. Diplomatic: Michael Davies (“MD”) will retain 100% of the shares and economic interest in Diplomatic. MD (through Diplomatic) may continue to render services on “Millionaire,” “Wife Swap,” any format thereof, and any derivative or spin-off program or project based on a pre-existing Diplomatic property. MD may also continue to render journalistic work for ESPN, other sports-related programmers, or on his own behalf, in any media, through Diplomatic. Current Sony – Diplomatic deal dated [as of 12/22/05] (“Old Deal”) will terminate on TBD "Effective Date," and financing and distribution terms of this new agreement will replace Old Deal. Unrecouped overhead under Old Deal ($1.8 million) will be extinguished and be non-recoupable under this new deal. In addition, the participations on “Power of 10,” “Chain Reaction,” “Grand Slam,” and any other program or series initially produced under the Old Deal will be recalculated and paid retroactively [We are clarifying if he means these don’t go into is earn-out calc but are paid directly to him? Or paid at close?] to the pilot or first episode in accordance with the provisions of 7 below. Sony will issue a current participation statement calculated in accordance with the terms hereof on such programs and series prior to the Effective Date and closing hereof.
4. Intentionally Omitted.
5. Consideration & Earn-Out:
5.1. $25 million non-returnable guaranteed advance on signature of definitive agreements.
5.2. Earn-Out of up to an additional $50 million, based on a multiple 7X average actual “Profits” for fiscal years 3 (2010), 4 (2011), and 5 (2012) (the “Average Measurement Profits”) less the advance, as “Profits” are defined below, and paid out starting after Year 5 in accordance with the provisions below. For purposes of computing the Earn-Out, the Average Measurement Profits will be deemed capped at $10,714,285 (i.e., 7 x $10.714m = $75 million), regardless of the actual potentially greater amount of the Average Measurement Profits. Average Measurement Profits will be calculated without reference to recoupment of the payment under 5.1 (i.e., not cumulative profits).
5.3 “Profits” defined under GAAP, prepared consistently with ER business plan of [date], and calculated, declared, and if applicable, paid quarterly in certified statements (i.e., “Profits” for any period means net income (or net losses) of ER determined exclusive of any extraordinary fees and expenses, plus (i) all interest expense in respect of ER's debt, (ii) the total expense of ER for depreciation and amortization relating specifically to this deal, and (iii) provisions for all taxes of ER for such period, in each case calculated in accordance with GAAP). MD will have customary audit rights with respect to accountings and statements due hereunder.
5.4 Year 1 Profits (2008) and Year 2 Profits (2009) included solely for purposes of the cumulative calculation in 5.8 below. There will be no carryover (or charge back) of Profits (or losses) from one FY to another FY. MD to retain and withdraw working capital left in ER from 2007. (This may become a normal working capital adjustment. We increase purchase price by working capital, which is net of any liabilities / debt) In this regard, balance of unpaid portion of GSN guarantee ($150,000) will be paid to ER prior to MD’s withdrawal and retention of such working capital.
5.5. 10% of Earn-Out paid at end of Year 5 (2012), and 10% of Earn-Out paid at end of Year 6 (2013) (Clarify if this is to Davies or a defined set of employees). Balance of Earn-Out (80%) paid out in equal installments (16% installments) at end of Years 6 – 10, subject to 5.6, 5.7, and 5.8 below.
5.6 MD will receive balance of Earn-Out if: (a) ER SPE elects not to exercise option for Second Employment Term after Davies expresses interest in staying(as defined in 8.1); (b) MD is terminated without cause (or “paid-or-played” during the Employment Term or Second Employment Term); (c) ER elects to exercise option for the Second Employment Term, and MD accepts such employment; or (d) as otherwise proved in 8.1.[Add back the concept of a 2 year non-compete if he unilaterally decides not to stay]
5.7 MD will receive each applicable installment of the balance of the Earn-Out as provided above if the Profits in each applicable payment year (Years 6 – 10) is at least 80% of the amount of the Average Measurement Profits. Any shortfall (i.e., less than 80% is achieved) will result in that year’s vesting payment be deducted from such applicable installmentbeing , and deferred, and the balance of such installment will may be paid to MD in future years. The deferred amount will be paid to MD to the extent (and in such amount) as Profits in the next applicable payment year(s) exceed the lesser of (a) 80% of the Average Measurement Profits or (b) $10.7MM x the number of year’s being measured [add back in our cumulative concept].
5.8 If the Earn-Out reaches the maximum amount of $50 million, then payment of the Earn-Out will be accelerated as follows: (a) MD will be paid 40% of each dollar over cumulative Profits in excess of $40 million in Years 1 – 5, paid at the end of Year 5; (b) For Years 6 – 10, MD will be paid at the end of each year 40% of the amount by which Profits in each year that Profits are at least exceed 125% of the Average Measurement Profits [make this a cume subjecting to netting over-payments in early years from the vesting payment in future years]. MD will still receive the balance of the Earn-Out as calculated under 5.2 and payable hereunder, to the extent such accelerated payout does not fully pay such calculated amount.
6. Operation of ER:
6.1 ER will be a primary vehicle for the development, production, and exploitation of game show, reality show, and “alternative” programming to be financed and produced by Sony for initial exhibition on television, internet, broadband, and wireless in the U.S. (or substantially contemporaneous exhibition in the U.S. and other territories) and abroad.
6.2 [Strike the first look concept. But OK to leave the notion that he doesn’t pay a rights fee for Sony materials] ER will have a 30 day "first look" at all Sony owned or controlled formats, properties, and materials proposed for such exploitation (“Sony Property”), including formats, properties, and materials based on: (a) Sony library material; (b) foreign programs; or (c) pitches from third party producers or rights holders. If ER elects to acquire such Sony Property, then the following will apply:
For library material [(a) above], the budget and deals therefore will include a mutually approved rights fee or royalty to Sony. No production fee, overhead charge, producing fee, participation, or other charge will be charged to ER for use of such material.
For formats [(b) above] or third party material [(c) above], to the extent Sony is permitted to bring such Sony Property to ER, then the underlying deal between Sony and the third party will be passed through to ER, without markup by Sony. No production fee, overhead charge, producing fee, participation, or other charge will be charged to ER by Sony for use of such material. If no deal is in place, then ER will negotiate in good faith with the third party. If ER rejects a proposed Sony Property, or no deal can be concluded by ER, Sony may license the Sony Property to another producer, provided ER will be offered a matching right regarding the same or less favorable (to Sony) terms.
6.3 Any “transfer pricing” deals to ER for use of Sony services, facilities, personnel, support, etc., will be on a “most favored nations” basis with the best deals Sony makes internally or with outside suppliers, whichever is most favorable.
6.4 Funding for operations and overhead of ER (including for key staff contracts under 9) to be agreed per mutually approved business plan. Development funding pool to be mutually agreed. MD to have full day-to-day operational control. Production funding to be advanced by Sony, subject to approval and greenlighting process to be negotiated in good faith.
6.5 Ownership of all programs produced by ER, or all formats acquired by ER, will stay in ER, subject to tax considerations.
6.6 ER may also develop and produce other types of programs (e.g., scripted network primetime and cable) from time-to-time, subject to business plan.
6.7 Sony to confirm the GSN first look and annual guarantee continues during Earn-Out period.
7. Distribution:
7.1 As between ER and Sony, with respect to programs and formats acquired, produced, or financed by ER, Sony will distribute same, and all format, ancillary and subsidiary rights therein, in all media (including, without limitation, internet, broadband, and wireless) and territories, in perpetuity, on the following basis. Sony will charge the applicable distribution fee (as set forth in paragraph 6 of the Old Deal) on gross receipts received in all media where it self-distributes (or a 5% override fee where it does not), except no fee will be charged on the initial network or licensee “sale” (or any renewals or extensions thereof) or any related “repurpose” sale that is part of the initial network sale transaction(clarify that this needs to be in the original network deal; but excludes any off-net rights). (No fee will be charged on gross receipts from digital businesses when digitally distributed. Although such formats translated into traditional TV shows will be subject to distribution fees.) Thereafter, Sony will recoup direct-out-of pocket distribution costs (capped at 5%, excluding residuals), mutually approved third party participations, direct production deficits (if any), and interest thereon at LIBOR. 50% (if non-deficit) or 75% (if deficit) of the balance from distribution of projects initially produced for linear television and any ancillary rights associated therewith will be paid to ER and 100% of the balance from projects initially produced for digital media when such projects are digitally distributed and any ancillary rights associated therewith will be paid to ER, and included on a cross-collateralized basis in determining Profits under 5.3.
7.2 To the extend ER sells a Each Sony license of a format to a third party will including any of e the following fees and charges, in amounts to be mutually agreed, between ER and the third party licensee: a format fee for ER, a consulting producer fee f/s/o MD (or his designee) is this , a per-episode royalty to ER, and a participation to ER. All of the foregoing consideration will be included in “gross receipts” of ER, provided only the format fee will be subject to a distribution fee to Sony. With respect to licenses of Sony library titles, ER will be attached to such license where ER is producing the current domestic version. [Clarifying he’s not deemed to receive this from SPE even if it doesn’t come from a third party]
7.3 Each TV production produced hereunder will include a production fee for ER in the amount of at least 10% of the per-program budget (or a mutually approved executive producer fee) and amounts for charge backs and/or overhead recoupment Only if paid by a third party (i.e., if he gets from a network, we’ll count it. But we won’t such deem such a fee as being paid from SPE to ER for purposes of earn-out calculations).
8. MD Employment Contract:
8.1. MD will be exclusive to ERSPE, except for the permitted services for Diplomatic set forth above. MD will enter into a employment contract with ER SPEfor an initial term of 5 years, at $400,000 per year, with 5% annual cumulative raises. Earn-Out subject to vesting, payment, and payout terms in 5. above, provided MD will be 100% vested if terminated “without cause,” constructively terminated, or ER acquired, merged, or sold. ER and MD will have mutual option to extend the term of employment for an additional period of 5 years after the initial term (the “Second Employment Term”), such option to be exercised in writing not earlier than 6 months before the end of the initial term nor later than 3 months before the end of the initial term. If such option is mutually exercised, MD will be engaged at [NOT $1MM.] $1 million per year, with 5% annual cumulative raises, plus 33.33% [NO ONGOING PARTICIPATION] of the Profits of ER during the Second Employment Term. Travel outside of the ordinary course of ER (e.g., attending Sony International/2Way meetings or other Sony business) will be reimbursed by Sony to ER.
8.2 Post-Term: MD to receive an annual “tail" payment of 20% NO ONGOING PARTICIPATION]of the Profits (as defined above) of ER, for 5 years, after the end of the initial term or Second Employment Term, as applicable.
9. Other Key Staff Contracts for ER Personnel: To be agreed, including bonus arrangements, with the understanding that the first two distributions of Earn-Out under 5.5 will be used in whole or in part for payment of a bonus pool for such key staff. Charged to the ER P&L in determining Profits.
10. NO BOARD. REPORTS TO MOSKO.Board of Directors: MD/Sony representatives to be equal on ER board, with Sony nominating the Chairman and having the casting vote. MD to be President and CEO, and to report solely to the ER Board. MD to be member of ER Board.
11. Other Customary Terms: To be negotiated in good faith. Disposition of Rock Shrimp/Bobby Flay deal to be mutually agreed.

4102.9 - - CGL/mm

April 26, 2016 435466.2


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