EXHIBIT 10.9 TAX RECEIVABLE AGREEMENT

EXECUTION COPY

 

EXHIBIT 10.9

 

TAX RECEIVABLE AGREEMENT (this “ Agreement ”), dated as of October 27, 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 October 27, 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 October 27, 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 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 October 27, 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 October 27, 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.

 

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:

 

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 the Person identified on Schedule 1.01 to this Agreement 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    , 4.001% or (2) the yield to maturity as of the date an Early Termination Notice is delivered of United States Treasury 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.

 

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“ 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 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

 

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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 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

 

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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 October 27, 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 (20 ^th ) 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.

 

“ 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

 

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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.

 

“ DWI II Certification Noncompliance ” is defined in Section 7.04.

 

“ 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.

 

“ 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.

 

“ Holdco ” means DWA Escrow LLLP, a Delaware limited liability limited partnership.

 

“ 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.

 

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“ 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.

 

“ Indemnity Agreement ” means the Indemnity Agreement, dated as of October 27, 2004, among M&J K B Limited Partnership, a Delaware limited partnership, M&J K Dream Limited Partnership, a Delaware limited partnership, DG-DW, L.P., a Delaware limited partnership, DW LIPS, L.P., a California limited partnership, and DWI II.

 

“ 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.

 

“ Liabilities ” means liabilities or obligations of any nature.

 

“ 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).

 

“ Net Asset Valuation Date ” means each March 31, June 30, September 30 and December 31.

 

“ Net Asset Valuation Statement ” is defined in Section 7.03 of this Agreement.

 

“ 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 8.08 of this Agreement.

 

“ 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

 

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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 Procedure s” 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.

 

“ Specified Assets ” means (i) cash and cash equivalents, (ii) debt securities with an initial maturity of ten years or less that are traded on a national securities exchange registered under Section 6 of the Exchange Act (an “Exchange”), (iii) equity securities that are traded on an Exchange, (iv) partnership interests in Holdco, and (v) investment funds, provided that any amounts invested in the fund may be withdrawn, without penalty, within a period of 12 months or less.

 

“ 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 month