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Confidential Draft

Embassy Row Acquisition Update November 2008. Confidential Draft. Executive Summary. Reality remains a critical growth area for SPE and requires further investment Sector offers attractive program economics and continues to grow

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Confidential Draft

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  1. Embassy Row Acquisition Update November 2008 Confidential Draft

  2. Executive Summary • Reality remains a critical growth area for SPE and requires further investment • Sector offers attractive program economics and continues to grow • GSN is increasingly dependent on original game shows to drive growth • 2waytraffic provides strong international distribution but needs additional U.S. product to fill distribution capacity • Through the acquisition of his production company (Embassy Row / “ER”), Michael Davies will serve as a cornerstone of our reality strategy • Strong track record, credible internationally and works well with 2way and GSN • ER earnings will be below CY08 budget, but we continue to believe in ER’s potential and do not anticipate a significant negative impact on overall economics • ER recently received orders for new shows (Newlywed Game, Make My Day, Empire, PopTub) and has key properties in development (American Bandstand, Dating Game) • We are seeking approval to close the Embassy Row acquisition • Long-form negotiated in-line with terms previously discussed ($25MM at close, up to an additional $50MM of earn-outs) • RAD to be signed week after Thanksgiving • Target closing December 12th

  3. Fit with 2waytraffic Fit with GSN Track Record Strategic Benefits • Michael Davies has a history of success with shows like “Who Wants to be a Millionaire?” and “Wife Swap” • Now focusing on reinvigorating Sony brands (“Dating Game” and “Newlywed Game”) and launching new shows with global potential (“The Comedy Exchange”) • Well regarded both domestically and internationally • Strong relationships with networks in multiple territories International Credibility • Creates new formats that leverages 2way's distribution capacity • Valuable sales asset for selling new ER formats, SPT library formats, and 2way formats in the U.S. • Driving force behind 2waytraffic’s format “All-Star Mr. and Mrs.” being developed for the U.S. (likely with CBS) • Successful, original programming is key to GSN’s growth strategy • Embassy Row is now a key source of GSN originals, including: • Shows in production: Newlywed Game • Shows in development: Hold on to Your Seat, It’s A Knockout: U.S. vs. France, Honey Please and Game Show Talk Show

  4. Key Terms: Deal Consideration • Current Deal Structure • $25MM cash at close • Up to $50MM of additional earn-outs tied to “Adjusted Company Profit” (ACP) • ACP mimics the portion of profits ER would retain under the existing overall deal, tying earn-outs to profits that are truly incremental to SPE • Value of earn-outs would be calculated in Year 6 as: 7x (Average of Years 5-6 ACP) minus $25MM advance • Earn-out payments would be made between Year 6 and Year 10 • Subject to the creation of an incentive plan to be approved by the SCA Comp Committee, 10% of earn-out would be paid to employees in Year 6; 10% in Year 7 • 80% of earn-out paid to Davies over Years 6-10 if Davies meets minimum Adjusted Company Profit (ACP) targets • Earn-out payments can be accelerated if Davies exceeds ACP goals Changes from April 2008 Deal Update • No change to overall consideration or mix between cash at close and earn-out • Changed earn-out measurement period from years 3-5 to years 5-6 to improve tax impact to Davies and accounting impact to SPE • Earn-out payments are no longer subject to Davies being employed by SPE

  5. FY09 FY10 Forward CY07 Financial Performance • Operating income was in-line with previous projections • $3.3MM actual vs. $3.4MM budget • 15 months ending March 2009 is expected to be below forecast • 15 month forecast was revised downward in October from $1.1MM to ($0.1MM) • November through March Forecast (period owned by Sony) was revised down from $2.0MM to $0.9MM Through 3/31/09 • FY09 EBIT impact will be better than budget, roughly in-line with Q2 forecast • Q1 forecast for FY09 EBIT was ($3MM) with higher amortization and excluding P10 • Q2 forecast for FY09 EBIT was $0.4MM with lower amortization and including P10 • Current forecast for FY09 EBIT is $0.3MM, offsetting near-term earnings miss with decreased incremental investment in overhead and development • We believe Michael Davies will continue to generate successful new shows and the deal will generate a positive NPV of $8.0MM • Although value of on-air shows (including Power of 10) has decreased, the ability to leverage 2waytraffic and ER’s currently increased staff has decreased our required incremental investment • Model assumes that ER creates 2 format successes in the next 3 years

  6. Embassy Row’s Pipeline Remains Strong

  7. Prior Base Case (4/08) Current Base Case Financial Impact – Base Case NPV (10-year) Incremental EBITDA: $21.0 Value of Exit (2): $16.1 Total Consideration: ($25.0) Net Present Value (3): $12.2 Nominal (10-Year) Incremental EBITDA: $52.8 Terminal Value: $74.2 Total Consideration: ($25.0) Consideration / EBITDA: 47% NPV (10-year) Incremental EBITDA: $18.3 Value of Exit (2): $14.7 Total Consideration: ($25.0) Net Present Value (3): $8.0 Nominal (10-Year) Incremental EBITDA: $47.0 Terminal Value: $67.8 Total Consideration: ($25.0) Consideration / EBITDA: 53% Notes: Difference between total EBITDA and Incremental EBITDA is the portion of shows we own under Davies’ current deal Old Cases assume ER is owned for all of FY09 while New Cases assume ER is owned as of December 1, 2008 Assumes a risk adjusted discount rate of 16.5% for all NPV calculations (1) If ER secures 5% chargebacks, EBIT in FY10 - FY13 would be ($0.1), $1.9, $3.6 and $6.1, NPV would be $18.1MM (2) Includes exit at 11x multiple (3) Includes $25MM up-front, incremental EBITDA less earn-outs, plus exit at 11x

  8. Cumulative Incremental EBITDA/NPV: Current Base Case vs. Prior Base Case • Value associated with properties currently on-air has decreased • Partially offset by decrease in required investment in overhead and development as a result of the ability to leverage 2waytraffic and ER’s currently increased staff • Value of properties in development is higher because ER network contracts include chargebacks (1) Note: (1) Includes chargebacks of 5% of budget on new shows. (2) Includes only portion of P10 acquired from Davies.

  9. Economic Impact of Acquiring Embassy Row Cumulative 10 Yr. EBITDA (1) Cumulative 10 Yr. EBIT(2) NPV • Footnotes: • Based on incremental EBITDA (e.g., only includes portion of Power of 10 SPE did not already own). In all cases, assumes incremental EBITDA is flat in years 6-10 for purposes of calculating any earn-out acceleration. • EBIT after Earn-out.

  10. Embassy Row Deal Timing

  11. Appendix

  12. Current Year Update • Since we began negotiations, Davies’ forecast for his standalone business has declined from $3.5MM to breakeven • $1MM of the decline has occurred since submitting the MRP and would impact SPE’s FY09 dollar-for-dollar unless we further decrease our incremental investment in ER operations • Footnotes: • 12 months ending 3/31/09. • 5 months ending 3/31/09. • 15 month net operating profit from Davies estimated at ($694K). Excludes $530K from Davies salary ($264K) and salary re-adjustment ($266K). • 4 months ending 3/31/09. Assumes zero additional revenue during the month of November.

  13. Managing Current Year Earnings • Footnotes: • Includes $61K in expenses that weren’t accrued and $25K in December bonuses which weren’t accrued. • Gross up on employee salaries for Nov-Mar 2009. SPT also should have accrued for an additional $342K of expenses ($106K associated with Davies' salary in Nov and Dec.; $173K of accruals for aspire bonuses; $63K in fringe in Nov. and Dec.).

  14. Key Terms: Calculation and Payment of Earn-out • The portion of the “Earn-out Value” not paid to employees will be paid as follows: • “Year 6 Acceleration” • If the Earn-out Value is $50MM; • All or a portion of the earn-out will be eligible for payment in year 6 • For every $1 by which cumulative Year 1-6 ACP exceeds $56MM; $0.40 of the earn-out will be paid in year 6 • “Vesting Payments” • Any portion of the earn-out not paid in year 6 or set aside for the employee pool, will be payable equally per year in years 6, 7, 8, 9, 10 if: • ACP in any given year meets or exceeds a threshold • Threshold ACP will equal the lesser of 80% of the year 5-6 average or $8.6MM • Earnings are “crossed” for purposes of vesting (i.e., earnings shortfall in early years can be made-up in future years) • “Acceleration of Vesting Payments” • In Years 6-10, any payments normally payable under the Vesting Payments will be subject to acceleration • For every $1 a given year’s ACP exceeds 125% of the Year 5-6 average; Davies will accelerate $0.40 of the total vesting payments • Any acceleration will decrease future year payments ratably

  15. Key Terms: Davies Employment and Non-compete • Current Deal Structure • Davies will be subject to a 4 year employment agreement • Exclusive to SPE with the exception of • Executive Producer services on Who Wants to be a Millionaire? and Wife Swap • Journalistic work for ESPN (e.g., Davies’ World Cup Blog) • Liquidated damages if employment contract is breached • After a 4 year employment contract: • If Davies chooses not to stay; he is subject to a 2 year non-compete • If Davies wants to stay; SPT may retain him for 2 years • If Davies wants to stay and SPT doesn’t retain him; he is not subject to a 2 year non-compete • Changes from April 2008 Deal Update • Previously discussed a 5 year contract • Shortened to 4 years to address tax and accounting issues • Introduced liquidated damages into deal to ensure Davies is present long enough to drive value

  16. Key changes in Model: “Base Case” Current Approach Changes from Prior Slate • Davies’ “New” slate, but with 5% chargebacks on new shows • New shows including 2 modest format successes in the next 3-5 years • P10 on GSN, declining format profits, no syndication and no local language production • Begins w/ Davies’ updated slate • Smaller shows (WSOPC, Chain Reaction, Grand Slam) no longer on-air • New shows added (Newlywed, Pyramid) • Format profits on new/library shows more modest compared with format profits on network shows in prior model • P10 moved to GSN from CBS, formats/ syndication fees and local language production reduced • Incremental Investment • Reduced to $0.5MM - $1.9MM of investment in HC and development • Reduced investment from prior estimate of $3MM - $6MM due to: • Ability to leverage 2way for acquisition and distribution • Davies now has more HC in place • Interactive • $1.9MM (CY07 actuals) growing at 5% • Increased from $1.5MM growing @ 5% based on actual performance • Ancillary • Excluded • No Change Sports and Film • Excluded • No Change

  17. Incremental Investment (Prior) Incremental Investment (New) Incremental SPT Investment New Case vs. Prior • Incremental investment was modeled prior to 2waytraffic acquisition • $300K-$2.4M of headcount costs • 2-3 Acquisition headcount • 1-3 Development headcount • 1-3 Administration headcount • An additional 5 Embassy Row headcount converted to full-time employees • $2.0-$2.5M of self-funded pilot costs • $0.0-$2.0M for development and acquisitions • New incremental investment assumes ability to leverage 2waytraffic • Current ER and 2way working relationship is already bearing fruit with the development of “Celebrity Mr. and Mrs. “ • Reduced headcount costs to $500K-$1.4M • 2 Acquisition headcount • 1 Development headcount • 1-2 Administration headcount • 1 Finance headcount • 1 Director of Digital Development • $0 in self-funded pilot costs • $0-$500K for development and acquisitions

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