PROFIT SHARING BONUS POLICY

THIS PROFIT SHARING BONUS POLICY (this “Policy”) is made and entered into as of this 21st day of December, 2010, by Undead Labs, LLC, a Washington limited liability company (the “Company”).

In entering into this Policy, the Company desires to provide each Participant (defined below) with substantial incentives to serve the Company, without distraction or concern over minimum compensation, benefits or tenure and to assist in the management of the Company’s future growth and development and the maximization of the returns to the Company’s Members (defined below).

Section 1.        Certain Defined Terms.

As used in this Policy, the following terms have the following meanings:

 “Code” means the Internal Revenue Code of 1986.

Company” has the meaning set forth in the Preamble to this Policy.

Compensation Plan” means any compensation arrangement, plan, policy, practice or program the Company establishes, maintains or sponsors, or to which the Company contributes, on behalf of one (1) or more employees (including, for this purpose, any member of the family of any employee), (i) including (A) any “employee pension benefit plan” (as defined in ERISA Section 3(2)) or other “employee benefit plan” (as defined in ERISA Section 3(3)), (B) any other retirement or savings plan, including any supplemental benefit arrangement relating to any plan intended to be qualified under Code Section 401(a) or whose benefits the Code or ERISA limits, (C) any “employee welfare plan” (as defined in ERISA Section 3(1)), (D) any arrangement, plan, policy, practice or program providing for severance pay, deferred compensation or insurance benefit, and (E) any plan, policy, practice or program which provides for incentive, bonus or other performance-based awards of cash, securities or the phantom equivalent of securities, including any stock option, stock appreciation right and restricted stock plan, but excluding any plan intended to qualify as a plan under any one or more of Code Sections 401(a), 401(k) or 423, but (ii) excluding any compensation arrangement, plan, policy, practice or program to the extent it provides for annual base salary.

Cumulative Profit” means for any given Current Profit Calculation Period, the aggregate Net Profits for all Profit Calculation Periods (defined below) through and including the end of such Current Profit Calculation Period.

Current Profit Calculation Period” has the meaning set forth in Section 4(a).

Eligible Participant” has the meaning set forth in Section 3.

Employed” or “Employment” means the salaried employment by the Company.  

Employment Date” means the first day of Employment of a Participant.

Eligible Salary” means the total salary paid to an Eligible Participant for a given Profit Calculation Period multiplied by that Eligible Participant’s Employment Percentage for such Profit Calculation Period.

Employment Percentage” means, for each Eligible Participant: (i) ten percent (10%) following six (6) consecutive months of Employment; (ii) five percent (5%) per each consecutive month of Employment after six (6) consecutive months in addition to the percentage set forth in subpart (i) hereof through the twenty-third consecutive month of Employment; and (iii) one hundred percent (100%) upon the twenty-fourth (24th) consecutive month of Employment.  

ERISA” means the Employee Retirement Income Security Act of 1974.

Excess Profit” means for any given Profit Calculation Period, the Qualifying Profit in excess of the Profit Threshold plus the interest actually earned thereon, less any bank fees, account fees, fees charged by the trustee of the Profit Escrow or other related fees.

Executive Officer” means any of the Manager, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer or any equivalent of any of the foregoing, or any executive or other director of a significant function of the Company, or any executive or senior vice president of the Company.

Members” means the owners of equity interests in the Company.

Net Profits” with respect to any Profit Calculation Period means the amount of revenues actually received from the sale, licensing, distribution or other exploitation of Video Games and the exploitation of the underlying rights of such Video Games, including, without limitation, in film, broadcast television, merchandizing (other than promotional merchandizing), novels, comics, toys, board games and collectible card games less all of the costs incurred and/or paid by the Company during such Profit Calculation Period, including, without limitation, employee salaries, contractor costs, outsourcing fees, legal fees, accounting fees and other professional fees, equipment costs, utilities, overhead costs, software licenses, commercial leases, office leases, rents, insurance, capital expenditures, any taxes of any kind and any employee benefits, including, without limitation, Compensation Plans.  For purposes of clarification the following shall not be deemed “revenues” for the purpose of calculating Net Profits: (i) any amounts paid by publishers or third parties to Company prior to the commercial release of a particular Video Game, including, without limitation, advances against royalties or minimum guarantees; (ii) equity investments; (iii) lines of credit; and (iv) other debt facilities.

Profit Escrow” means an account under the control of a trustee appointed by the Company in which Excess Profit is deposited.

Profit Calculation Period” means the twelve month period from October 1 of a given calendar year through September 30 of the following calendar year.

Profit Pool” means for a given Profit Calculation Period in which the Qualifying Profit is above 0, fifteen percent (15%) of such Qualifying Profit provided that such amount shall in no event exceed the Profit Threshold.

Profit Threshold” means two hundred percent (200%) of Total Studio Salaries for a given Profit Calculation Period.

Participant” means an Employed natural person.

 “Person” means any natural person, sole proprietorship, corporation, partnership of any kind having a separate legal status, limited liability company, business trust, unincorporated organization or association, mutual company, joint stock company, joint venture, estate, trust, union or employee organization or governmental authority.

Participant Percentage” means, for each Eligible Participant, the percentage calculated from dividing the Eligible Salary of such Eligible Participant by the Total Studio Salaries for a given Profit Calculation Period.

Pro Rata Profit Sharing Amount” means for each Eligible Participant, the product of the following formula: A x B whereby:

A = the Profit Pool for a given Profit Calculation Period; and

B = the Participant Percentage.

 “Qualifying Profit” means the lesser of (i) Net Profit for the Profit Calculation Period; or (ii) Cumulative Profit.

Termination Date” means the effective date of the termination of the Participant’s Employment with the Company, under any Employment agreement between the Company and the Participant or otherwise.

Total Studio Salaries” means for a given Profit Calculation Period, the sum of all Eligible Salaries for such Profit Calculation Period.  

Video Game” means a video game developed by the Company.

Section 2.        Appointment of Trustee; Creation of Profit Escrow.  Upon the Company’s determination, the Company will create the Profit Escrow and appoint the trustee thereof.  The Company may change the trustee of the Profit Escrow from time to time, but only upon a majority vote of the voting Members.  The Company cannot liquidate or otherwise dispose of the Profit Escrow except as otherwise set forth in this Policy without the unanimous consent of the Company’s voting Members.

Section 3.        Eligibility. A Participant will be eligible (an “Eligible Participant”) to receive a Pro Rata Profit Sharing Amount following the 6th consecutive month from such Participant’s Employment Date; provided, however, that a Participant must be Employed on the last day of the applicable Profit Calculation Period to be deemed an Eligible Participant for such Profit Calculation Period.

Section 4.        Determination and Payment of Distributable Profits.  

(a)        Within thirty (30) days after the end of each Profit Calculation Period (the “Current Profit Calculation Period”) the Company and/or the Company’s accountants will determine for such Profit Calculation Period, the amount of Net Profit, Excess Profit, Qualifying Profit, and the Profit Pool.  The Company shall promptly deposit any Excess Profit for such Profit Calculation Period into the Profit Escrow.

(b)        Should the Profit Pool for the Current Profit Calculation Period be less than the Profit Threshold (the “Below Threshold Pool”) and to the extent that the Profit Escrow contains Excess Profit, the Company shall instruct the trustee to distribute to the Company for the Current Profit Calculation Period an amount of Excess Profit equal to the difference between the Below Threshold Pool and the Profit Threshold (the “Profit Gross Up”).  The Company shall add the Profit Gross Up to the Below Threshold Pool and distribute such amount as the Profit Pool for the Current Profit Calculation Period.

(c)        As soon as reasonably practicable, but not later than November 1 of each Current Profit Calculation Period in which a distribution of the Profit Pool is to occur, the Company shall announce to all Participants the resulting calculation of the Profit Pool in terms of a total number of weeks of Total Studio Salaries.  By way of example, if Total Studio Salaries for the Current Profit Calculation Period is $1,000,000 and the Profit Pool is $100,000, then the Company shall announce that the Profit Pool is 5.2 weeks of Total Studio Salaries ($100,000/($1,000,000/52)).

(d)        As soon as reasonably practical, but no later than the second regularly scheduled payroll date in November of the Current Profit Calculation Period in which a distribution of the Profit Pool is to occur, the Company will pay to each Participant the Pro Rata Profit Sharing Amount payable to such Participant as bonus compensation, less all applicable withholdings.  All calculations of the Pro Rata Profit Sharing Amount shall be final and binding on all parties to this Policy in the absence of manifest error.

Section 5.        Section 409A Matters.

(a)        It is the intention of Company that this Agreement shall comply with the requirements of Section 409A of the Code (“Section 409A”). All payments under this Agreement are intended to be excluded from the requirements of Section 409A or be payable on a fixed date or schedule under Section 409A. All payments made under this Agreement shall be strictly paid in accordance with the terms of this Agreement. To the extent that this Agreement is subject to Section 409A, notwithstanding the other provisions hereof, all provisions herein, or incorporated by reference, shall be construed and interpreted to comply with Section 409A. Each payment of compensation under this Agreement shall be treated as a separate payment of compensation for purposes of Section 409A.

(b)        Any payments hereunder shall be paid no later than the fifteenth day of the third month following the year the Profit Calculation Period ends with respect to which the payment has been determined. 

(c)        Notwithstanding anything to the contrary herein, (i) if at the time of Participant’s “separation from service” with Company, Participant is a “specified employee” (as such terms are defined in Section 409A and any regulations or other pronouncements thereunder) and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional tax under Section 409A, then Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to Participant) until the date that is six months and one day following Participant’s separation from service with Company (or the earliest date that is permitted under Section 409A).

(d)        Notwithstanding anything to the contrary in this Agreement, Company shall not make any deductions for money or property that Participant owes to Company, or offset or otherwise reduce any sums that may be due or become payable to or for the account of Participant, from amounts that constitute “deferred compensation” for purposes of Section 409A.

(e)        Participant’s right to any “deferred compensation,” as defined under Section 409A, shall not be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, garnishment by creditors, or borrowing, to the extent necessary to avoid tax, penalties and/or interest under Section 409A.

Section 6.        General Provisions.

(a)        Severability.  If any one or more of the provisions of this Policy shall, for any reason, be held or found by final judgment of a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, (i) that invalidity, illegality or unenforceability will not affect any other provisions of this Policy and (ii) this Policy will be construed as if such invalid, illegal or unenforceable provision had never been contained herein, provided, however that if the invalidity of any part or provision of this Policy shall deprive any party of the economic benefit intended to be conferred by this Policy, the Company shall in good-faith,  develop a structure, the economic effect of which is as close as possible to the economic effect of this Policy, without regard to such invalidity.

(b)        Nonexclusivity of Rights.  Nothing herein will prevent or limit the Participant’s continuing or future participation in any Compensation Plan or limit or otherwise affect such rights as the Participant may have under any other contract or agreement with the Company or rights under applicable mandatory health insurance continuation laws.  Vested benefits and other amounts to which the Participant is or becomes entitled to receive under any Compensation Plan on or after the Termination Date will be payable in accordance with such Compensation Plan.

(c)        Successors; Third Party Beneficiaries.

(i)        This Policy is personal to the Participant and, without the prior written consent of the Company, is not assignable by the Participant.  This Policy will inure to the benefit of and be enforceable by the Participant’s legal representatives (including any duly appointed guardian) acting in their capacities as such pursuant to applicable law.  Notwithstanding anything in this Policy to the contrary, in the event that an Eligible Participant dies during a given Profit Calculation Period, the Company shall pay the Eligible Participant’s heirs such Eligible Participant’s Pro Rata Profit Sharing Amount as if such Eligible Participant was Employed until the end of the Current Profit Calculation Period during which such Eligible Participant died.

(ii)        This Policy will inure to the benefit of and be binding on the Company and its successors and assigns.  The Company will be entitled to assign all of its obligations hereunder to any successor (direct or indirect and whether by purchase, merger, consolidation, share exchange or otherwise) to the business, properties and assets of the Company; provided, however, that the Company will remain liable for the full, timely performance of all the obligations so assigned as if such assignment had not been made.  

(iii)        The Company will require any successor (direct or indirect and whether by purchase, merger, consolidation, share exchange or otherwise) to the business, properties and assets of the Company substantially as an entirety expressly to assume and agree to perform this Policy in the same manner and to the same extent that the Company would have been required to perform it had no such succession taken place.

(iv)        Except as expressly provided in this Policy, this Policy is not intended, and shall not be construed, deemed or interpreted, to confer on any Person not a party hereto any rights or remedies hereunder.  

(d)        Amendments; Waivers.  This Policy may not be amended or modified except by a written agreement executed and delivered by the Company pursuant to the affirmative vote of one hundred percent (100%) of the Company’s voting Members acting in their capacities as such pursuant to applicable law or (ii) pursuant to the provisions of Section 6(a).  

(e)        Notices.  All notices and other communications required or permitted under this Policy must be in writing and will be deemed delivered and received (i) if personally delivered or if delivered by facsimile or courier service, when actually received by the party to whom the notice or communication is sent or (ii) if delivered by mail (whether actually received or not), at the close of business on the third (3rd) business day next following the day when placed in the mail, postage prepaid, certified or registered, if to the Company at the Company’s principal executive office, and if to a Participant at the address of such Participant as set forth in Company’s records (or at such other address as the Company may designate to the Participant or as a Participant may designate to the Company by written notice in accordance herewith).

(f)        No Waiver.  The failure of the Company or any Participant to insist on strict compliance with any provision of, or to assert any right under, this Policy will not be deemed a waiver of that provision or of any other provision of or right under this Policy.

(g)        Governing Law; Venue.  This Policy will be governed by, and construed in accordance with, the laws of the State of Washington, without reference to any principles of conflicts of laws that would cause the laws of any other jurisdiction to apply.  

(h)        Headings.  The headings of Sections and Subsections hereof are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Policy.

(i)        Tax Withholding.  Notwithstanding any other provision hereof, the Company may withhold from amounts payable hereunder all Federal, state, local and foreign taxes that applicable laws or regulations require it to withhold.

(j)        Entire Agreement.   This Policy supersedes all prior written and oral agreements among the parties with respect to the subject matter hereof.

[Signature Page Follows]

        IN WITNESS WHEREOF, the Company has executed this Policy below as of the date first above written.

UNDEAD LABS, LLC

By: ___________________________

William J. Strain

Title:        Manager

Copyright 2010 Undead Labs, LLC. All rights reserved.

Legal text developed by Stubbs Alderton & Markiles, LLP.

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